Fractional Reserve Banking Made Easy

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The paper bills
in our wallet are not money. And they are not Notes
as in "Federal Reserve Note" written on the top of the
bill. They are actually just Tokens. Federal Reserve Tokens,
if you like, is what should be written on top of the bills. They
are not redeemable for anything other than themselves. And they
represent only one thing: Your belief in their value. Hopefully,
your belief extends to the next person you try to give them to.

The only real
use for them is paying your taxes to either the state or federal
government. You can be sure, however, that both will stop accepting
them as payment even for taxes if you and I stop believing in the
paper bills.

Paper money,
or fiat, was originally accepted because you could redeem the paper
for gold upon request. When people got used to the paper they felt
more and more comfortable and were less likely to redeem it for
their gold. They knew that they could redeem it at any time and
the paper is lighter, more convenient and can be denominated in
much smaller increments so that everyday transactions are made more

By the time
the gold imparts this trust to the paper the people storing the
gold start using it for other purposes. The primary other purpose
is to start using the gold as someone else’s money in addition
to yours. When that happens the banker has now, in effect, doubled
the amount of gold in his vault and is only in trouble if you decide
to reclaim your gold. By that time many more people are storing
their gold with the banker and he found that only a small percentage
of people ever reclaimed their gold.

Now, at this
point in the story nothing wrong has happened as long as:

  • You are
    told that your gold deposit is being lent out.
  • You are
    paid for storing your gold.
  • Your are
    not charged under the guise of a storage fee because the gold
    is no longer being stored by the banker.
  • There is
    a 1-to-1 relationship between the gold you lent the banker
    and the gold the banker has lent out.

do not believe in charging interest to other Christians. But, even
the Bible describes the business of lending while warning that "The
borrower is a slave of the lender."

In the business
of lending the difference between what you receive for the use of
your gold and what the banker receives for lending it out is his
legitimate profit. After all, if you don’t want the banker
to lend it out then you can lend it out yourself and do all the
work associated. More importantly, the gold is not taken out of
circulation and can be used as legitimate capital for the borrower
to invest in his ideas to create even more value for everyone.

As you might
suspect, this is not how the story goes.

When the number
of people who were likely to reclaim their gold was discovered then
the banker could start to guess the amount of gold to keep on hand
to make all his depositors believe he was storing their gold. This
number becomes his required reserve ratio and fractional reserve
banking is born.

The banker
has used a combination of your gold, your trust in him and your
infrequent need to reclaim your gold to pretend he has many times
more money than the amount of gold that is actually stored with
him. And since he is most likely not fulfilling the four requirements,
above, he is probably charging you a storage fee, not paying you,
not telling you he’s lent it out and is lending out much more
gold than his depositors have deposited.

Even worse,
the banker lends out gold that doesn’t exist and charges interest
on the loan. The banker is now generating interest income on gold
that he doesn’t have and that doesn’t exist. Fractional
reserve lending is born. Here’s a video that describes
how money is loaned into existence in today’s world. Start
at 22:00 if you want to skip right to it:

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