Wednesday, January 12, 2005

The Shocking Truth About Our Banking System

If you deposit $100 cash in a bank, how much money can the bank turn around and lend out?

You might think the bank would be able to take your $100 and lend out $90 but the true answer is they can lend out $900 !!!

What!? How is it possible for them to lend out more than they take in? It's called fractional reserve banking. They are lending money that doesn't exist. It's phantom money. It's unethical and unhealthy for any economy.

Banks have a long history of unethical behavior in this regard. In the early days, a bank was just a secure warehouse to safeguard your gold. People would place their gold in the bank and get a receipt. People started trading receipts rather than running back to the warehouse to get the actual gold. The banks realized they could print some phony receipts to buy land and buildings and no one would be the wiser as long as not all the customers came asking for their gold at the same time.

That's how it got started but how does it work today? Currently, there is a 10% reserve requirement for banks in the federal reserve system (virtually all banks of any significance). This means if you deposit $100 in cash into your checking account, the bank can lend out $900 because they will have cash on hand equal to 10% of loans outstanding. If you then write a check to someone for $100 who happens to use your same bank and who deposits your check into their account at the same bank, all is good from the perspective of the bank. Nothing happened except a little accounting entry in the computer. What if you withdraw $100 of cash from the ATM or the person to whom you wrote the check does their banking at a different bank than you? Your bank will have to turn over actual cash but then they are no longer meeting their reserve requirement. They will have to borrow cash somewhere to cover their 10% reserve requirement. That's what inter-bank borrowing and the federal funds rate is all about.

Does it sound a little flakey? That's because it is flakey. It's the world's largest pyramid scheme. Wouldn't you love to be able to loan money you don't have and charge interest on money that doesn't exist?

How does it affect us? It gives us wild inflation, deflation, recessions, depressions and economic instability. Inflation is entirely created by the banking system with the Federal Reserve in the driver's seat. Inflation results from increasing the money supply and only banks, especially the Federal Reserve, can increase the money supply. The Fed and the banks create phantom money which increases the money supply which causes inflation. This is the ONLY source of inflation. If you ever hear the Federal Reserve or banking executives claim to be fighting inflation, don't believe it. They are the sole creators of inflation.

Believe it or not, the Federal Reserve is not entirely a government entity. It is mostly a private entity with little accountability to our elected government officials. The accountability of the Federal Reserve really boils down to just two things: 1) Quarterly reports to Congress; 2) Congress created the Federal Reserve via legislation and can eliminate the Federal Reserve just as easily. If it weren't for the fact that Congress could eliminate the Federal Reserve or change the laws governing its operation, the Federal Reserve would truly be an evil rogue operation.

What should we expect in the future? We currently have a national debt of around 7 trillion dollars, nearly $25,000 for every man woman and child in America. Unless there is another technology boom like the internet boom of the 90's to increase taxes taken in by the government, there is only one way our government can pay back this enormous debt: by expanding the money supply thereby devaluing the money and creating inflation. The Federal Reserve can do this with the wave of a pen. You can expect your money to become considerably less valuable in the near future, i.e., you can expect some serious inflation, possibly another great depression.

How can we fix this problem? There are lots of good ways to fix this problem. One way is to simply eliminate the Federal Reserve and require all banks to have a 100% reserve. A 100% reserve means that if you deposit $100, the bank can turn around and loan out $100 but no more. They cannot loan money that was never deposited and doesn't exist. But how should we control the size of the money supply? Milton Friedman suggested that we simply increase the money supply by 3 percent each year every year. Increasing the money supply 3% per year would lead to a much more stable economy. We would still have highs and lows but they would be milder and shorter than we get under Federal Reserve. Remember, the Federal Reserve was created in 1913 and the Great Depression occurred in 1929. One repercussion of this fix is that our economy wouldn't grow as fast in boom times but by the same token, it wouldn't crash as hard in bust times. The economy and prices in general would be much more stable over time and economic growth would be steady and predictable.

What can we as consumers do to protect ourselves from the rigged money and the resulting inflation? Some suggest purchasing collectible gold coins - collectible because if the government once again outlaws private ownership of gold collectible gold coins would probably be exempted. Another good option is investing in the stock market.

Here are some books on this topic. These are the best books I've found so far on this topic but I'm still hoping to find better books. If you know of better books, please let me know.


At 6/27/2005 12:26:00 PM, Blogger Just Another Boy Named Sue said...

Your post was interesting, but begs a question: What can I do, as an individual, about it? I can lobby my Congressmen and Senators about it, and encourage others to do so, but I expect the banks, considering the fact that they have more money than I do, can lobby a lot "louder." If I keep my money in a pickle jar on top of my refrigerator, so to speak, I run the risk of it being stolen by a burglar, and it still loses value due to inflation. So what can I do?

At 6/27/2005 01:39:00 PM, Blogger David said...

Good question.

To begin with, you can invest your money in stocks and collectible gold coins. Collectible coins rather than just gold because if America outlaws gold again, collectible coins would probably be exempted again as they were before.

Both of these things do a decent job of keeping their value regardless of inflation.

The next thing to do is to try and raise awareness on this issue. Someday, maybe we can fix the problem. Post a link to this or write about it on your blog. Feel free to copy and paste anything you like.


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