FRACTIONAL RESERVE BANKING SYSTEM

Dear Readers,

Yesterday's blog was about money creation and we went over the fact that most central banks in the world are private and that they land us money that actually belongs to us. Considering the money creation process described by the American central bank in the document released in 2007 known as "modern Money Mechanics", we deducted that money is debt and debt is money. Also, the money owed by us to the central banks does not physically exist as the central banks have the monopoly on money creation and distribution. Therefore, our national debts are made by the money plus interest that we, citizens of a nation, owe to the nation's central bank. Weird concept, I assume right? Wait for the fractional reserve banking system.

In yesterday's example we were at the point in which the government took the 100 million dollars from the Fed and deposited it in a bank. Now, once the money is in the bank, it becomes legal and usable. Now the best part comes! Once the deposit is made, according to "Modern Money Mechanics", the bank will hold usually 10% of that money as "necessary reserve" while the remaining 90% will be used as a basis of new loans A.K.A " excessive reserve". This means that, in our example, out of 100 million dollars deposited, 10 millions are held as the necessary reserve while 90 million will be used as the basis for new loans. It is logical to assume that the 90 million dollars used for loans would be the ones of the excessive reserve, right?Well, that's not the case! In fact, always according to "modern Money Mechanics" Banks create the 90 million dollars out of thin air. As Stated in Modern Money Mechanics, "Of course, they (banks) do not really pay out loans from the money they receive as deposits. If they did this, no additional money would be created. What they do when they make loans is to accept promissory notes (loan contract" in exchange for credits to the borrowers' transaction accounts(money)." So, this means, that after the government deposit the 100 million dollars in the bank, 90 million is created out of thin air and the money supply in the u.s is now 190 million dollars. The bank then would lend the 90 million dollars, let's say to you. you'd go and deposit the 90 million into the bank and the bank would hold 9 million dollars as necessary reserve, hold 81 million as excessive reserve as basis for new loans and now the money supply in the u.s is 271 million dollars. it is roughly calculated that for every amount deposited, banks can create out of thin air up to 9 times the initial amount. This means that in our example, from the initial deposit of the 100 million dollars, banks can create about 900 million dollars out of thin air and the money supply in the u.s would be 1 billion dollars(100 + 900 million dollars). However, as per the citation reported in this page from modern money mechanics, this is not the only consequence of the fractional reserve system. The fractional reserve system makes the loan contract that you sign when you buy a home for example illegal as the money that banks loaned do not really exist. this makes the contract unlawful and therefore, banks are not entitled to take your home away from you if you decide not to pay them back. however, people are too busy making money so they don't really think too much about this. i hope you will after reading this blog!

Another consequence of the fractional reserve banking system is inflation. Inflation, essentially, is not but a hidden tax on the public as money's value shouldn't be distorted but it is as a few private bankers control the money supply and expansions. since there's always more money then needed in circulation, money loses value and this is what economists call Inflation. But no one will tell you, besides for Ron Paul maybe, that inflation is a hidden tax on the public. The question though, after understanding a little bit about our monetary system is the following: why the heck did we allow this to happen? and why would they invent such a terrible monetary system? the answers will become clearer and clearer as we proceed in our logic.

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