Difficult to summarize the question in just a few words, so let me elaborate here. I am currently reading the Financial Times Guide to Banking by Glen Arnold, section Money creation, and there is something I cannot wrap my head around. The section of the book is explaining how goldsmiths were effectively acting as primitive banks in storing gold deposits once upon a time, and giving paper money in return:
The borrowers of the money from goldsmiths were usually content to take a piece of paper - call it a bank note - instead of taking coins out of the bank. They could then use that as currency to buy things. The goldsmiths could just create these pieces of paper off their own bat. Thus, a goldsmith bank might have a total of, say, £1,000 deposited, but hand out £500 of the coin as loans and issue another £5,000 or £6,000 or new paper money to borrowers.
[...] if you are working off a deposit base of £1,000 and you lend £4,000, and then 30% of your borrowers are unable to pay, you are bankrupt.
Why would you be bankrupt? If you are creating money that does not exist (in this case, money that you don't physically have since it is not backed up by actual gold), and someone does not pay you back, what would you be losing exactly, since you did not spend anything in the first place?
Assuming that you have £1,000, that you lend out £4,000, and that 30% of this (£1,200) is lost, would you not still get back the other £2,800 from the other loans, thus making you richer anyway?