Fractional Reserve System
If you plan to be a successful investor you will need a solid bank of knowledge regarding of how our economic and banking sectors are intertwined. Having studied the Federal Reserve Act of 1913 and its relationship to the now all pervasive Federal Reserve Bank and the fiat money creation fiasco that has investors rightly fearful of what is coming from an economic perspective.
There are two sides to this discussion. First the traditionalist establishment side which says that making interest bearing investments of all types, and focusing on dividend paying corporations is the way to go. Then on the other hand, you have the seemingly irrational “gold bugs” who believe the system is doomed and salvation lies in holding physical medals.
The traditional establishment explanation is:
The job of the banking business is to accept deposits and making loans. In the “old days” this is how most banks made their profits – and they were stable, reliable profits.
A bank would typically have two sides to their capital ledger. The “liability” side included deposits from their customers. Joe Depositor would have a savings account with enough capital to cover a few years’ worth of expenses. Local businesses would park their cash at the bank and be paid a reasonable interest rate.
The other side of the ledger – considered “assets” to the bank – was the lending business. The bank would offer mortgages, business loans and revolving credit to its customers after going through the underwriting process to determine if borrowers were creditworthy and likely to repay the loans.
Profits were made on the spread between interest rates. If the bank could charge Mary 6% on her mortgage, and pay Bob 4.5% on his savings account, there was a net profit and everyone was happy.”
This make perfect sense and is straight forward in nature. Through extensive bankers “propaganda” it is what most people believe and rely on in making their investment decisions. There is however another darker side to this picture that has rarely been told, and here it is.
The suggestion is that banks operate on margins similar to grocery stores, and if you believe that then explain to me how banks can set aside 100’s of millions of dollars against loan losses?
Bankers love to spread this piece of fiction that in simple terms banks lend out say 90% of their deposits and retain a 10% reserve. But realistically, besides the above question, how can you loan out a liability? Ownership of the funds does not change hands just because you make a deposit in a bank, it is still the depositors money and a LIABILITY of the bank. Now here is the perverse part, The Federal Reserve Act of 1913 does allow the banks to classify deposits as RESERVES, effectively turning reality on its head by converting a liability into an asset, but rather than allowing them to loan back out a percentage as the banker propaganda implies, and most people still believe, in actual fact the truth is even more shocking and disturbing.
What the “Bank Acts” in all countries who adopted the “Central Bank” model of the Federal Reserve actually sanctions, is a monopoly to CREATE (essentially out of thin air) hence the term “FIAT” each countries currency based solely on that governments “faith and credit” the reserves merely being the pretext for regulating the amount created, in most cases about 20X the reserves of the bank.
The most authoritative quote I can give you on this comes from the Canadian Central Bank Head in 1939, Graham Towers Governor of the Bank of Canada who in sworn testimony before Parliament stated the following: “every bank loan is a new creation of money, and when it is paid back it ceases to exist” and therein lies the explanation for our world wide economic malaise particularly the U.S. and Europe in particular.
It is all a matter of simple mathematics and the acknowledgment that our fractional reserve banking system is not only an unconstitutional monopoly, but also by its very nature a Ponzi scheme for which Bernie Madoff went too jail. The thing that many peple do not realize is the difference being that the Federal Reserve Act was cleverly written into law to sanction this well hidden Ponzi scheme that now negatively impacts every citizen on the globe.
It is effectively a “license to steal” and here is why! Through inflation a fiat currency loses purchasing power automatically, in the case of the U.S. dollar, about 97% since the Federal Reserve was established in 1913, which makes a total mockery of the designation of a dollar. In other words, what was originally BY LAW a specific weight of pure gold that has basically maintained its purchasing power for 5000 years of history, is now a basically worthless piece of paper that has retained about 3c in actual purchasing power yet is still called a DOLLAR, a deception worthy of the best illusionist or magician yet a total travesty of justice.
Now lets go back to Governor Graham Towers statement and do the mathematics. Lets say you went to your bank tomorrow and made an application for a $200,000 mortgage (French for death gamble) and according to your “traditional banking in the old days” they would do a check of your income, an appraisal of the home, and if you had an adequate down payment, (forgetting for the moment that those sound rules haven’t been followed for years) on approval and your signing of the collateral documents they would credit the $200,000 to your checking account for you to pay your broker, builder or real estate company, or they might insist on doing it directly.
Regardless, the key metric is that $200,000 gets injected into the economy with the stroke of a pen or a few strokes on a key board. But aren’t we forgetting about something? Haven’t you just signed a document, (debt slavery) that requires you to pay back at your hypothetical “6% mortgage loan” over 20-25 years, at least DOUBLE the amount of currency that was originally created out of thin air?
Where does that EXTRA currency that was not CREATED come from, you guessed it, it can only come from NEW and BIGGER LOANS that replaces both the interest and the principal being paid back, a recipe for PERPETUAL DEBT. By the way, I refuse to dignify these counterfeit paper I.O.U’s “MONEY” when it is by nature a DEBT instrument that can never effect final settlement between parties because “counter party risk” always remains and our bankers and politicians have PROVEN that they can not be trusted to retain the exchange value of their pieces of paper.
Though cleverly disguised, this Ponzi scheme, (see a dictionary definition) can only result in a growing PYRAMID of DEBT that just keeps getting rolled over and can NEVER result in a final settlement, only more I.O.U.s, which is why you have 100 year old houses still mortgaged to the hilt. This con game can only last until all the collateral against which loans can be safely made has been pledged, and then even when the interest rate is reduced to almost ZERO, there is no longer an incentive to SAVE, and people get out of the habit because it is so much easier to acquire any wants with easy credit, so with no savings, the banks have no more basis on which to lend. Any thing sounding familiar, or bells beginning to ring?
This explains so called “liars loans” sub prime mortgages, and teaser rates on credit cards. Banks MUST LEND or die and these violations of sound banking rules simply exposes the fact that the Ponzi scheme that is fractional reserve banking is a deck of stacked cards that is now in the process of tumbling into the dust bin of history.
The architects of this nefarious system KNOW its days are numbered, but in cahoots with self serving politicians they are in bed with, they are trying desperately to “buy time” by adding new layers to the DEBT PYRAMID to retain their control and outrageous profits at the expense of the average working man.
The framers of the Constitution would be rolling over in their graves if they could know that clever but unscrupulous men have sold our children and grandchildren into debt slavery by kicking the can down the road instead of FIXING the system.
How to do that is a whole new question and explanation, but the cause of our problems being STRUCTURA, as well as a moral and ethical problem that needs to be addressed, should now be self evident.
Mark Talbot is an editor for free-retirement-plan.com. The opinions expressed in the article “What Is The Fractional Reserve System” are those of the author and should not be used in place of advice from your own financial professional.
What Is The Fractional Reserve System is based on Modern Money Mechanics is a booklet produced and distributed free by the Public Information Center of the Federal Reserve Bank of Chicago.