To Flint et al, a primer for understanding Fractional Reserve Bankingl : LUSENET : TimeBomb 2000 (Y2000) : One Thread


The State governments may very properly authorize corporate bank ing to any extent they please; but no constitutional power remains with them to authorize the creation of currency in any form whatever; and there is no more reason why bankers should issue fictitious credits, whether in handbooks under the name of "deposit," or in notes, than that an insurance office, or a trust company, or pawnbroker, or any individual trader should do the same thing. Whenever a bank discounts a bill or security that forms the fund out of which it is itself discounted, the transaction is not banking but currency-making; and it is a cheat, for there is no such value in existence as such currency pretends to be or to represent. It is simply a fictitious credit, and it makes not a particle of difference in principle or effect whether the credit thus created is circulated in checks, or notes, or in money itself. For instance, suppose A obtains a credit of this character from his bank for $10,000; he has then $10,000 o{theoretical "money" more than he had before at the debit of his cash account, and the bank holds so much more of theoretical "deposit." If he draws the whole sum in specie, the net liabilities of the bank contain the augmentation, its assets and liabilities being reduced alike - and, unless the specie is exported, the volume of national currency also contains the augmentation of $10,000; it will appear probably on deposit in other banks. If this check is answered in bank notes, the effect will be the same; the deposit will appear in other banks; or, if he merely passes his check to another bank, it goes to somebody's credit and there as an additional deposit. In any event but that of exporting the coin the national currency is augmented; and if the bank currency be convertible at par, the local value of money is degraded $10,000 by the fictitious deposit, whether it appear in the accounts of banks or in the hands of the people or the government. Or, if it be convertible at a discount, the net sum that can be obtained for it in gold is the measure of the degradation of the value of money.



The process by which a portion of each deposit into the banking system is held as required reserves by the commercial bank and the remainder is loaned to other agents in the economy.

In a fractional reserve banking system, the central bank (the Federal Reserve in the United States) specifies what percentage of each deposit must be held as required reserves (this is called the required reserve ratio). The bank can loan out the remainder [(1-rrr) * deposit] which ultimately is redeposited into a commercial bank which continues the process.

The maximum amount of money that can be "created" in a fractional reserve banking system is the new deposit * (1/rrr).

For enough numbers to make your head hurt, see and htm

You are a bank. I deposit $1000 with you. You loan the next guy $900. He deposits it. Bingo. You now have the basis for another loan. So, you loan the *next* guy $810. He deposits it. Like magic, you're now able to lend someone else $729. Then, he deposits it, and...

Repeat until yonder cows come home.

Now, at any given point, *all* of the "money" continues to "exist". The initial $1000 deposit has *grown*. It has *multiplied*.

For the definitive read buy "And the truth shall set you free" by David Icke.

Explains the above plus the Governmental Y2K agenda.

-- Andy (, February 08, 1999


A true PONZI scheme !! When we went off the gold standard The politicians had their meal ticket to create the grandest credit bubble in the history of the world.


-- Ray (, February 08, 1999.

Can the "Ponzi" scheme still persist if the global "debt bubble" is reduced? Put another way, does the US deficit continue to grow because "they" can't balance the budget, or is it impossible to pay off the debt without causing a collapse? Or maybe both?

-- Anonymous99 (, February 08, 1999.

-- Anonymous99 ( commented:

"Can the "Ponzi" scheme still persist if the global "debt bubble" is reduced? Put another way, does the US deficit continue to grow because "they" can't balance the budget, or is it impossible to pay off the debt without causing a collapse? Or maybe both? "

Japan's bubble has been bursting for about 9 years. Their economy is in a shambles. Their banks are for the most part bankrupt.

There is much more here than the US government debt and deficit. We also have company debt and consumer debt. Our economy has begun to deflate without too many discomforts to date. At some point the Fed will be required to pull in the credit horns and this massive bubble will burst. Paying off the debt may be possible but the politicians do not have the guts to implement the changes required to do so. They have constituents to coddle and care for.


-- Ray (, February 08, 1999.

Yes, yes, we have had this all out before. Just what, pray tell, would you replace the current system with? Bear in mind, that if you value gold at $300 per ounce, then you need three and a third million ounces to convert one billion dollars. Ignoring troy measures for the moment, that is one thousand six hundred tons. You are going to run out of gold long before you run out of money. So you will have to inflate the price of gold, and shrink the size of the coin. Now I would be pretty uncomfortable carrying very many half/dollar sized $300 coins, I don't even want to think about $3000 dollar coins. And you would need more than that, or let a lot of people do without money. And how do you make change? A dollar gold coin would be tiny at a three hundredth of an ounce, at a three thousandth of an ounce it would be invisible. And silver can't be used for a monetary metal in this way - it is far to important to various industries to inflate in this fashion. For that matter, quite a bit of gold is used by industry now - after jewelery and printing the semiconductor industry is a pretty big consumer.

Gold for money worked when you had a population small enough for such a system to work. We have had a huge population increase in this century - the gold supply has not increased by any such margin.

-- Paul Davis (, February 08, 1999.

Paul Davis commented:

"Yes, yes, we have had this all out before. Just what, pray tell, would you replace the current system with?"

Therein lies the problem. The solution has always been .... deflation, painful as it has been and will be!


-- Ray (, February 08, 1999.

I find myself confounded by Paul's answer, much as I was confounded by Sen. Byrd's comments about Clinton. Neither of them makes any sense. The gold standard is of no use because of population increases. Good grief.

-- Vic (, February 08, 1999.

I'm convinced that Paul-y-anna Davis just dreams up this stuff on the back of cocktail napkins, in a stupor. It NEVER makes any sense!!

-- King of Spain (, February 08, 1999.

OK, let me just start out by saying that fractional reserve banking is not an ideal way of running a financial system.

Having said that, let me present an example of the financial world back in the "good ole days" when there was a gold standard, and before 1913 when the Federal Reserve came into existence. Is this system better of worse than what we have now?

"Panic of 1893"

Your comments, please...

-- Kevin (, February 08, 1999.

Excellent read, Kevin. too bad they don't give the failure figures in terms of percentages of banks. It would be MUCH MORE impressive (depressing/alarming) then the raw numbers.


(unfortunately, I don't have the %'s off the top of my head)

-- Chuck, night driver (, February 08, 1999.

Kevin commented:

" Is this system better of worse than what we have now? "

Only time will tell.


-- Ray (, February 08, 1999.

Foreign money has financed the consumption and debt of America. The U.S. is the world's largest debtor nation and Japan is the world's largest creditor nation. Deficits are year-to-year and debt is cumulative. If the U.S. tried to pay off its debt, the cost would be catastrophic for Japan, the U.S. and Europe.

The U.S. market to consume goods would dry up and the stock market would no longer produce real or paper earnings. The Japanese and European banks and governments would have barrels of U.S currency but Japanese and European companies would have only domestic markets to sell to. A short-lived time, flush with devaluing paper and a substantially reduced market to continue commerce. It would be like burning through your savings with no income potential for the rest of your life.

The Japanese could sell their holdings of U.S. T-Bills and solve their current financial crisis very quickly. Why haven't they? The net effect would only decimate the global market for a generation. The world relies on Americans to spend all their money, borrow even more and live in the fast lane of consumption.

The U.S. has a net negative savings rate. You are spending your salaries and then spending some of your savings every month. Perhaps you personally are not, but America on average is. That is a frightening statistic because the U.S. savings rate is already low. Imagine for a moment that the U.S. bubble burst. How long would the average American family be able to live off their savings? How long would you last?

One reason Japan is still floating is that the average Japanese family has almost $100,000 in savings. And a lot of it is sitting in their house, not a fraction of it theoretically sitting in a bank. Most Americans will be sizzling, dried up dust remnents of burnt toast when the bubble bursts...

You cannot get off the ride on the fractional reserve train. It's moving faster every day and is beyond the speed that you could have jumped off without killing yourself. Gold is a commodity and anyone talking about returning to the gold standard is either trying to manipulate the price as any pork belly trader would do for hogs, or does not understand how the world of money.

-- PNG (, February 08, 1999.

-- PNG (, February 08, 1999.


The world's central banks' vaults contain few, if any, pork bellies.

-- Nathan (, February 08, 1999.

I have yet to understand the logic of a process whereby the national government, wearing its "Dept. of the Treasury" hat, prints currency and mints coins, which it then hands over to commercial banks. Following which generosity, the government borrows that same money from those same banks and pays interest to them for the privilege. This inexplicable act of folly is then labeled "fiscal policy."

-- Tom Carey (, February 08, 1999.


Since at least 1913, the orientation of our monetary system ceased functioning as a store of wealth. In that year, our monetary system was purposely and secretively switched to an arrangement of indirectly creating public debt for the purpose of forcibly extracting maximum involuntary interest payments from the general public.

This was accomplished firstly by the creation of the privately owned and controlled Federal Reserve System, which created the entire debt of our Federal Government out of nothing, and secondly by the establishment of the Internal Revenue Service, which collects the interest payments on that debt. The Constitutionality of both of these criminal actions against the People has been fiercely debated in the courts ever since, to no avail.

The Federal Reserve System and our currency are both direct violations of the Articles of the Constitution. Interestingly, Senator Nelson Aldrich, Nelson Rockefellers grandfather, was instrumental in passing the legislation that established the Federal Reserve System.

The IRS, enabled (sort of) by the 16 Amendment, is thought to be among the most supremely unconstitutional paradoxes. On the one hand, the system is openly declared to be "voluntary". This is a total lie due to the punitively severe "enforcer" facets of the system. By being indirectly and overpoweringly forced to "volunteer" one's total financial activities annually via a signed 1040 statement, we are all, in fact, being forced, against our consent and our will, to yield up our 5th Amendment rights. The courts actually know all this, but they prefer to ignore the Facts, the Truth, and the Law of the Land.

Apparently, this whole sordid arrangement has something to do with the Chase Manhattan Rockefellers, the Warburgs, the partners in Goldman Sachs, and a few others hidden in a dozen layers of assorted holding companies, coming up short on the immense amounts of wealth and power they incessantly and increasingly require....

-- Nathan (, February 09, 1999.

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