We’ve posted a number of times on the public-private collusion that make up our monetary system through the Federal Reserve and the Department of the Treasury. You know that our dollar is not backed by anything but debt, and through this the federal government can make up for budgetary shortages by printing money out of nothing when high taxation would be political suicide and the American people will pay for it through inflation; increased prices on everything you buy every day. You now realize that the monetary system is rigged so that the first to get the money get the advantage (banks and the government) and the further down the chain you are from that first influx of new cash the more inflation you will see. You now realize that through this system the buying value of the 1913 dollar (when the Federal Reserve was created) now has the buying value of less than a nickel. A loaf of bread should not cost $2, it should cost 10 cents. That formula can apply to almost everything you buy, except that through technological innovation and increased productivity that loaf of bread should cost even less.
Another culprit that has been fought throughout history that we (through pressure from the banking system) now thoroughly embrace is the system of fractional reserve banking. Most people believe that when they deposit their paycheck into their bank that money (or digital representation of money) is stored in a vault, waiting for you to spend it. Perhaps you have a certificate of deposit (a CD) that allows the bank to loan your money to enterprising entrepreneurs to start or grow a business – but when you want to withdraw all of your money it will be ready for you. It’s a bank, and they hold your money for you – making loans to others to make money off of interest, and perhaps you get a percent or two of interest for you providing your money to them as capital.
This is not the case.
Fractional Reserve Banking does not work this way at all. Fractional Reserve Banking simply means that a bank must keep a “fraction” of your deposit at the bank betting against the unlikely event that everyone withdrew all their money at one time – what is known as a “bank run”. This would occur if the depositors lost faith in their bank, and demanded their money back all at one time. But if people simply withdraw their money from time to time in small amounts – to pay their bills for example, they can loan out the larger part of the fraction to people who wish to buy a car, buy a house, a new business or any other loan. The bank then begins to receive a profit from your money – it is earning interest on all of those loans. Everything works fine as long as everyone does not want all their money at once.
You may be surprised to learn that your bank in reality only has less than 10% of the money that you deposited really available for you to withdraw at any given time. If you withdraw 100% of your money, they will give it to you – using the cash from your fellow depositors at that bank. The system continues to work, and no one is the wiser.
The “fractional reserve rate” is set by the Federal Reserve (specifically the Board of Governors of the Federal Reserve System). In 2011 the formula was this:
A depository institution’s reserve requirements vary by the dollar amount of net transaction accounts held at that institution. Effective December 29, 2011, institutions with net transactions accounts:
- Of less than $12.4 million have no minimum reserve requirement;
- Between $12.4 million and $79.5 million must have a liquidity ratio of 3%;
- Exceeding $79.5 million must have a liquidity ratio of 10%.
Through the ages bankers have been trying to figure out how exactly they can make the most money out of banking – that should not come as a surprise. For good, sound banks throughout history they maintained 100% reserves – meaning they had 100% of every depositor’s money available if they wanted to withdraw it – every single depositor could take all of their money out at once and no one would get the short end of the stick. These banks charged their customers a service charge to hold their money each month.
If depositors would agree to time-based deposits – saying for example that you would deposit $10,000 and agree that it would not be available for withdrawal for 3 years and you would receive 3% interest on your deposit the bank could turn around and lend that money out. For example, the bank could loan someone your $10,000 for 3 years and charge them 5% interest (maybe for a car). The bank would make 2% profit on this arrangement – they would receive 5% interest on the loan from the borrower, pay you 3% of it and keep 2% to pay their employees and pay their bills and contribute to their bottom line. This is honest and profitable banking.
But for some bankers that wasn’t enough profit. They wanted a system where they could make more loans and receive even more interest and fractional reserve banking provides them with the mechanism to accomplish it. We’ll use our example above to demonstrate how this works:
You deposit your $10,000 in a regular checking or savings account – not a CD that keeps you from withdrawing it – you are told you may withdraw all of it at any time. We’ll say the fractional reserve rate for the bank is 10% (in reality the highest it could possibly be in the US, so this is the worst case scenario). That means the bank can lend $9,000 of your money in loans, and let’s say that it makes a single loan of $9,000 at 5% interest. The loan is made, and every month the borrower makes his loan payments, consisting early in the loan of mostly interest and a little bit of principal. We won’t go through the exact math, but let’s say that the first payment is $300. That money comes into the bank – and becomes part of their fractional reserve requirement. The bank now has $270 available to loan – because they only need to keep 10% (fractional reserve requirement =$30) and the remainder is available to make new loans. As you can see, this process happens over and over and over – on average about 9 times at a 10% fractional reserve requirement rate.
What you need to ask is where does this new money come from? Your $10,000 is actually only $1,000 in the bank (10% fractional reserve requirement) yet the bank has lent out $9,270 that it is making them interest and probably paying you nothing on your deposit, or a fraction of a percent? Fractional reserve banking allows banks to create new money by creating new debt – as long as their loans increase, their base of lendable money increases to infinity. Banks can truly become to big to fail, because they are not forced to hold their deposits in an honest way – to keep the money that depositors make on hand to be returned when demanded. As long as this cycle continues and not everyone (or a large percentage of people) want their money back at the same time they can continue the system and make money off of their interest – off of loans made on money created out of thin air.
If enough people wanted to test this theory they could organize all the depositors at a single bank and decide to withdraw all of their money on a given day. This “bank run” would close the bank immediately – the exact effect that the Federal Reserve Act was sold to us to keep from happening. But would the bank close? No. Banks could borrow from other banks and always have “the lender of last resort” – the Federal Reserve itself. If the bank could not borrow from other banks to continue operations it would turn to the Federal Reserve who, as we have learned, would create the money out of thin air, simultaneously inflating and deflating our currency and keeping a bank that no one trusted in business. “Too Big to Fail” is not a result of rampant free market capitalism, it is the result of fractional reserve banking and the Federal Reserve Bank cartel in collusion with a federal government that’s needs can no longer be satisfied to taxation. Our politicians are betting that the United States is too big to fail, and this same system will keep us from facing the results of our unbalanced budget and staggering $16 trillion dollar plus debt.
Fractional reserve banking has been attempted time and time again throughout history, and has failed every time – with the depositors suffering the brunt of the failure. To tie in our post of moral hazard the Federal Reserve Act also led to creation of the Federal Deposit Insurance Corporation, to “insure” your deposits up to $250,000. How can that work? Ironically the FDIC works of a fractional reserve method too – meaning they truly could not handle many bank failures, only a few. This reserve is made up of required payments by banks, but cannot truly insure. It is another method used to make you believe your money is truly safe. It, quite simply, is not.
The Liberty Amendment addresses this issue through making the practice of fractional reserve banking unconstitutional; not leaving it to politicians in Congress and the White House who receive staggering contributions from Wall Street. We further strengthen our financial system by requiring all money be backed by something of value such as gold or silver and not backed by debt. We require that the Federal Government shrink in size to the point it can operate based on it’s honest income – through state contributions, tariffs and other means, not just through a federal income tax (which we also hamper through repeal of the 16th Amendment). Finally with eliminating the “lender of last resort” – the Federal Reserve Banking System we require that banks operate honestly with your money and ensure our country is again positioned as the strongest, most innovative and freest economy in the world. We will lead through good example, and other countries will follow. We must fight for this – we must do it for our own futures but those of our children and future generations.