Fractional Reserve Banking: The Biggest Bubble Of All Time

When this bubble pops, all economies will end

by Russell D.Longcore

Every day we hear talking heads talk about, or we read about, the various “bubbles” occurring in the world.

Here in America, we’ve had the Savings and Loan bubble of the 80s, the Internet “Dot-Com” bubble of the 90s, the real estate/mortgage bubble of the last decade, and now the credit/debt bubble. But there is a worldwide Super Monster Bubble that is the cause of all of the rest of the bubbles that have occurred for the last 100 years.

That bubble is the fiat “money” that is created by Fractional Reserve Banking.

Fractional Reserve Banking (FRB) is the legal system of counterfeiting that all banks worldwide utilize. In a world where 100% reserve banking was practiced, there would be no credit/debt bubble. There would also be no inflation. Here is the definition of FRB from Wikipedia:

Fractional-reserve banking is the banking practice in which only a fraction of a bank’s deposits are kept as reserves (cash and other highly liquid assets) available for withdrawal. The bank lends out some or most of the deposited funds, while still allowing all deposits to be withdrawn upon demand. Fractional reserve banking is practiced by all modern commercial banks.

When cash is deposited with a bank, only a fraction is retained as reserves and the remainder can be loaned out (or spent by the bank to buy securities). The money lent or spent in this way is subsequently deposited with another bank, creating new deposits and enabling new lending. The lending, re-depositing and re-lending of funds expands the money supply (cash and demand deposits) of a country. Due to the prevalence of fractional reserve banking, the broad money supply of most countries is a multiple larger than the amount of base money created by the country’s central bank. This multiple (called the money multiplier) is limited by the reserve requirement or other financial ratio requirements imposed by financial regulators.

Central banks usually require commercial banks to keep a minimum fraction of their customers on demand deposits as reserves. These reserve requirements help limit the amount of money creation that occurs in the commercial banking system, and help to ensure that banks are able to provide enough ready cash to meet normal demand for withdrawals. Problems can arise, however, when depositors seek withdrawal of a large proportion of deposits at the same time; this can cause a bank run or, when problems are extreme and widespread, a systemic crisis. To mitigate these problems, central banks (or other government institutions) generally regulate and oversee commercial banks, act as lender of last resort to commercial banks, and also insure the deposits of the commercial banks’ customers.

Do you see the con job? The central bank, in conjunction with the private banks, conspires to create giant amounts of “fiat money”…currency with no assets that back them. They keep depositing currency in each other’s banks over and over, and each time it creates new money from thin air.

Fiat money completely distorts the economic system, no matter what economic system is in place. Instead of the money supply having a concrete value, its value floats from day to day. That is another way to describe inflation. The value of the money becomes whatever any two entities agree on at any given moment in time.

Inflation is the method that governments and their central banks use to steal property from the populace. And I don’t mean they steal land or assets. They steal the value of our money, which is a component of our property rights as free men.

Here is the way an honest bank is formed, and how an honest bank does business when the money is either precious metals coins, or is an electronic currency backed by coins or another hard asset:

The investors/owners form a legal entity called a bank. The investors/owners put their own money into the new bank as their investment in the enterprise. That provides the new bank with capital. The capital allows the bank to fund operations, and a portion of the capital can be loaned to credit-worthy customers. When the bank loans its own capital to customers, it earns interest, and hopefully makes a profit. Those profits can be accumulated, invested in other non-loan assets (securities, land, etc.) or can be loaned out again.

But the bank can also act as a depository. Customers may place their money on deposit in savings or checking. The bank may charge a fee for this service, which would be customary.

The bank would be required to maintain 100% reserves, meaning that any money under management by the bank (checking or non-interest savings) would have to be kept at the bank and always 100% available for withdrawal. Money borrowed from depositors (interest-bearing savings, Certificates of Deposit, etc.) would not be subject to the reserves requirement, since the bank and depositor have a side contract. Money in safe deposit is not considered under management, since the bank is basically renting storage space in a secure vault for a fee.

A savings account passbook is equal to a receipt for money stored at the bank. Money simply stored would not earn interest, but would be much like money stored in a safe deposit box. But the depositor could enter into contract with the bank to make the deposits into an interest-earning account. In this account, the depositor in essence loans the bank his money for a period of time and earns interest. During that period of time, the bank may use that money to loan to others at a higher interest rate, thereby earning income for the bank. The bank could only loan out the depositor’s money for an amount of time less than the period of deposit. For example, if the depositor made a deposit for 90 days, the bank could only loan out the money for a period of time less than that length of deposit. If the term of the loan went beyond 90 days, the bank would have committed fraud, since they have a legal bailee duty to return the deposit to the depositor at the end of the 90 days.

A checking account allows a depositor to write paper IOUs…checks… against his account for any amount up to and including the account balance. The bearer of the the check may present the check at the bank and receive the amount of the check in hard money or electronic money. Banks customarily charge a fee to the depositor to manage a checking account, which is in essence a bookkeeping fee. If the depositor writes checks in excess of his account balance, he has committed fraud against the bearer.

A bank could issue paper currency of its own, kind of like a checking account IOU note, and based upon the bank’s assets. These are called “bank notes.” But at a 100% reserve requirement, it could only issue bank notes equal to the amount of its own hard assets, not including the deposits of its customers. Issuing bank notes in excess of its assets would constitute fraud and debasement of money.

If you look at the top of a piece of Federal Reserve currency, it will say “Federal Reserve Note.” The earliest Federal Reserve notes, like the Silver Certificate, actually could be redeemed for the underlying silver coins. But a Federal Reserve note is no longer a promissory note, since the only thing you would receive if you presented the note at a Federal Reserve bank would be more Federal Reserve notes. Just because today’s currency is called a note doesn’t make it so.

Banks may perform other services for customers for a fee, or a bank could decide to perform certain services for free. That pretty much sums up what a bank may do without committing fraud.

After reading this article sofar, you may have surmised that if the banking systems of the world operated in a legal manner, worldwide levels of credit would be only a very tiny percentage of how much credit and debt exists in today’s world. And you would be correct. The world banks have been throwing gasoline on the world’s economic fire for a century by creating fiat money. The economic activity worldwide has been wildly distorted by easy credit and massive debt. But easy credit and massive debt is what happens when money created from thin air is infused into the world economic system.

So, the governments of the entire world have conspired to defraud the entire population of the planet, and steal the value of their money by issuing fiat currencies. A state of bankruptcy exists when one’s liabilities exceed one’s assets, and one has no way to pay off the liabilities. The governments and banking systems of the entire planet are fundamentally bankrupt, sustained only by the power to create money out of thin air.

The thin air of worldwide monetary policy, its fractional reserve banking and fiat currencies, is what has inflated the Super Monster Bubble to its bursting point. Soon the bubble will burst, and all of the world’s economic systems will melt down simultaneously.

Around the globe, two groups will emerge. The first group contains the worldwide governments and their central banks who will simply invent another fiat system and fractional banking system, and try to convince the world that this new system will work.

The second group will be those that insist on hard money and honest banking. These people will be found in isolated geographic areas, like small nations…perhaps nations fresh from secession from the United States of America. They will have learned their lessons when the economic meltdown occurs and will return to those thrilling days of yesteryear when hard money meant true prosperity and inflation was what you did to a balloon.

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© Copyright 2011, Russell D. Longcore. Permission to reprint in whole or in part is gladly granted, provided full credit is given.