On my last blog post we talked about how easy it is for the Federal Reserve to create new money. That is only one piece of the puzzle. The fractional reserve banking system is expanding our money supply as we speak. This puts the power of inflation in the hands of private banks and makes it very hard to control.
The fractional reserve banking system basically works like this. When a deposit is made into bank, the bank is allowed to lend out that money to other people in the form of loans. Not all of the money, just 90% of the money. The required reserve rate is 10% in America so the banks are allowed to use 90% of your money to lend out to other people that must be repaid with interest.
Nothing seems too unusual yet, but let’s take a closer look. It would make sense that when a bank grants a new loan that the physical form of the 90% of your money (the amount of the new loan, let’s say) should be used as the basis for new loans. But what is really happening is a magic trick in itself. Once you make a deposit, 90% of your money is available as the basis for new loans. The problem is that they create an additional 90% of your money out of thin air just because there is a demand for such a loan. So if you deposit $100, $90 can now be loaned out, but due to creative book entries the bank still has your $100 and created credit for an additional $90, which they use for loans. Their reserves do not change. Here is a quote from the video I posted yesterday.
“As stated in “Modern Money Mechanics”: “Of course they” (the banks) “do not really pay out loans for 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 contracts) “in exchange for credits” (money) “to the borrowers transaction accounts.”
In other words the bank creates additional money and their reserves do not change when giving out loans. They are adding to the money supply and generating outrageous profits with literally no risk. Does that seem right? There have been a few court cases that have brought this information to light.
So why does it matter that our money supply is growing? Just take a look around and see how much faster prices are rising than minimum wage. Everyday inflation has the power to make the goods and services you require to live more expensive while your wages go unchanged. Here is a fun little fact
“One dollar in 1913 required $21.60 in 2007 to match value. That is a 96 percent devaluation since the Federal Reserve came into existence.”
Starting to make sense yet? Debt is used as a tool to control people and nations. With the actions of the Federal Reserve in combination with how the fractional reserve banking system works, our money supply is growing constantly. It is the FED’s job to control inflation, but it is a near impossible task because the system has gotten too far out of hand. Even after the great bail out of 2008 our required reserve rate is still only 10%. We need to start controlling inflation by raising the required reserve rate and limiting the fed’s ability to create money. You cannot solve the problems of inflation with more inflation.
“What is the advice that you generally get? And that is, inflate the currency. They don’t say: debase the currency. They don’t say: devalue the currency. They don’t say: cheat the people who are safe. They say: lower the interest rates. The real deception is when we distort the value of money. When we create money out of thin air, we have no savings. Yet there is so called “capital”. So, my question boils down to this: How in the world can we expect to solve the problems of inflation… That is: increase in the supply of money, with more inflation?” – Rep. of Texas, Ron Paul
Here is a video that tells you the history of the fractional reserve banking system. This is the first video in a series of five and the whole uncut film is 45 minutes and available on youtube.
What do you think? Please let me know by leaving a comment below.