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Fractional Reserve Banking
an Evil in the System

F. Earle Fox

One is not praised for using the word 'evil' of anything at all in our "be nice" and relative-truth culture.  But fractional reserve banking, right from the start, has been used to bilk the public by the bankers of the time. 

It is a matter not well understood, and given a pass because we want to "be nice" to our leaders, even our banking and financial leaders -- many of whom have steadily earned our contempt and most vigorous opposition. 

For more resources on these issues, see the Economics Library and Conspiracy in the Politics Library.  See especially two DVDs: The Money Masters by Bill Still, and From Freedom to Fascism by Aaron Russo.


Banking began with the coin dealers who had large and reasonably safe vaults in which to keep their gold, silver, and coins.  Rich people began to deposit their riches with the coin dealers for safe keeping, no doubt paying a rental fee.  But the coin dealers discovered that only a small percentage of those depositors ever came to remove their riches.  They just sat there.  So the coin dealers realized that they could loan out an amount of money, i.e., give credit, greater than that for which they had reserves.  They figured that they were safe if they kept within a reasonable limit and did not loan out more than what people might come in to reclaim.  And they could help each other out in a pinch if there was a run on one coin dealer.  

The problem, of course, was that if they miscalculated and there was a demand from customers for more than they had kept on reserve, they were in trouble and would have to deal with the wrath of their probably rich customers, not always a pretty picture. 

The coin-dealers, now become bankers, did not loan out real wealth to their customers, they would give a promissory note, because paper money was more convenient than metal money -- just as metal money had been more convenient than bartering actual goods.  Gold and silver had become a convenient medium of exchange, which was then superseded by paper money, i.e., promissory notes. 

Promissory notes, of course, had no intrinsic worth.  You could not eat them or wear them, or use them for beauty like jewelry.  They were worth only the trustworthiness of the giver of the note -- signifying that any time you were in need, you could come to the banker and get the real value in gold or silver or other object of intrinsic worth.  Bankers were generally thought to be trustworthy because they had so much at stake in being trusted.  They would want protect their reputations.  And the most reliable way to look good is to actually be good. 

Fractional reserve banking might in theory have worked well if it had been kept within very strict limits.  But temptation has powerful incentives by which to lure us down the primrose path to self-destruction.  Greed and lust for power got the best of the bankers, and they began to use fractional reserve banking to "get rich quick".  And so they did, they were very successful.  Their growing riches helped protect them because they could bribe politicians, sheriffs, and other people who might take exception to their practices. 

Fractional reserve banking as practiced in America under federal law requires banks to hold in reserve a certain percentage of the amount they have loaned out, typically around 10%.  That means that if they have loaned out $1 million, they must have $100 thousand in reserve. 

That 10% required reserve has been wrongly understood by some to mean that they loan out 90% of what people deposit into their banks, that if they have in their deposited funds a total of $100 thousand, then they can loan out 90% of that, i.e. $90,000.  If that were the case, it would be a very conservative banking institution indeed.  They would be keeping more in reserve than they had loaned out.  Because banks make much, maybe most, of their income in interest payments, they want to inflate the total loan figure as much as they can.  And so they do. 

What the law means (this is all, directly or indirectly, controlled by the banks) is that if they have $100 thousand in reserve, they can have loaned out $1 million, ten times the reserve.  The only way they can do such loans is by credit, promissory notes (because they do not have that much real, honest wealth), which are 90% unbacked by any reserve. 

They are again trusting that only a few of the depositors will want their money back at any given time.  With large banks and large numbers of depositors, that can average out fairly well and evenly over time.  But when economic conditions become disrupted, all bets are off.  Anything can happen, depositors can "panic", and head for the banks to get their money out. 

But 10% reserve means that banks which loan out $100-thousand-times-ten are in effect loaning out $1 million.  Let us suppose an interest rate of 8% per year.   They are raking in 10 times that, i.e., 80% ($80 thousand) on their investment of merely $100 thousand.  Where else in the world, apart from crooked banks, can you get that kind of return on your investment? 

But, assuming all goes well, no panic, a stable economy, then the banks can "safely" loan out, not 90% of their deposits, but 1000% -- $1 million, which is ten times the value held in the bank, leaving only 10% of total loans covered by deposits. 

If there had been 100% reserve required for floating credit to customers, and if there had then been a run on the bank, the bank would have in its reserves sufficient funds to pay their depositors.  That is honest banking.  The federal government has tried to paper over the deception by creating insurance for customers, insuring their deposits up to a specific amount -- as if the risk were an unavoidable matter of economics, and the customer needed that protection.  That means that we, the people, the tax-payers, pay for the failures of the crooked banking system.  That is not criminal abuse of the public? 

It is not a natural part of economic history, it is a deliberately concocted scheme to siphon wealth off the top cream of the economy.   Insurance is just a part of the scam to keep customers ignorant and quiet about what is being done to them.  The only way to stabilize the banking system is to require 100% reserve. 

So, what is "being done" to the customer? 

First of all, the wealth of the customer is being put at risk by being loaned out in a foolish way, perhaps without his knowledge or permission.  If the borrow defaults, who pays the bill? 

Secondly, the horrendous inflation of the economy, caused by fractional reserve banking, causes the money in the pockets of the customers to lose value steadily over time.  The bankers are stealing wealth from the economy, pocketing what they pick from the man-on-the-street's pockets.  They know exactly what they are doing.  

The fabulous river of money flowing into banks explains why they often have the biggest buildings in town.  As Bill Still, narrator of The Money Masters DVD, says, wealth does not disappear, it goes into someone else's coffers.  The wealth which "disappeared" during the Great Depression did not stop existing.  It disappeared from the pockets of the people only to reappear in the pockets of the bankers and their cronies.   That is fraud and theft, not banking, and should be prosecuted as such. 

For starters, review the quotations from well-known persons well-positioned to know the facts.  Then, repent for ourselves, we, the people, for being so stupid to allow this to happen, and cowardly for so long.  Then pray for the repentance of the financiers.    

NOTE: this is just part of the case against the Federal Reserve, the biggest participant in American fractional reserve banking, an institution among the most evil in history.  

See especially two DVDs: The Money Masters by Bill Still, and From Freedom to Fascism by Aaron Russo.  Go to www.realityzone.com, G. Edward Griffin, for his DVD or book, The Creature from Jekyll Island, on how the Fed. got put together.  Review other materials at http://www.theroadtoemmaus.org/RdLb/21PbAr/Pl/00Pol.htm#Federal_Reserve

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Date Posted - 08/14/2010   -   Date Last Edited - 07/07/2012