The Origins of Fractional Reserve Banking

That means if A deposited £10 worth of gold and had in his possession a receipt he could settle his debt with it. That receipt, actually a promissory note, became money. The person who took it in payment could either use it as is, or at some later point retrieve the gold in the goldsmith’s keeping.
At the same time B borrows £10 worth of gold from the goldsmith but receives a promissory note. He settles his debt to C with that note. Now there are two notes in circulation for one amount of gold. The goldsmith being smart realizes that these notes can actually be in circulation for quite some time, several years even. He issues further notes knowing that all claims would not have to be honored at the same time.
According to contemporary economical calculations he can safely lend at least ten times the amounts deposited. If there is a run of two or more people who suddenly wish to retrieve their gold he can also rely on the fact that he has debtors who owe him gold, although they originally received nothing but a piece of paper. They have to pay him in gold. And should they default he could seize whatever possessions they had, sell these, buy gold and settle the claims. I might add that the goldsmith of course lent out promissory notes for non-existent gold at interest.
Today’s banks do the same:
“Because of the ‘fractional’ reserve system, banks, as a whole, can expand our money supply several times, by making loans and investments”(Federal Reserve Bank, New York: The Story of Banks, p.5).
Simply put every loan given is a deposit. You go to the bank, ask for a loan of say $1000 and they open and account for you to that amount. If you ask for it in cash to settle a debt someone else will eventually deposit that amount. You of course still owe your bank that money, which was created out of nothing the moment you opened your mouth. The money created is debt to which they add interest.
It’s a scam. But, does it bother you?
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thanks, jc!
great stuff! a must read!
What a terrible system. Why aren't people up in arms about this? Why doesn't anyone even realize?
"Why doesn't anyone even realize?"
In 2005, the government spent over $380 billion in interest on US Treasury bonds, and paid less than $75 billion on education.
Also, we have the mainstream media to thank for keeping the public perpetually distracted with sensational news and wedges issues.
It's up to those who know and care to get the word out.
I have made it my job to inform everyone I can about this. As should everyone else who reads it.
Here are some links to pass around the net.
http://youtube.com/watch?v=YH0XdNLUsYM&mode=related&search=
http://youtube.com/watch?v=7tQMG_NJyUk&mode=related&search=
I'd like to point out that the above links to what I'm sure was incriminatingly informative video are dead, youtube stating that: "This video has been removed due to terms of use violation."
FRB bothers me it is a form of swindling, but what bothers me more is that we are charged compound interest (usury) on credit created out of thin air by banks. We let that happen because it is legal, applies to all and must be fair.
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Even more of a scam IMHO is the federal reserves creation of money (where I get no real or tangible benefit unlike borrowing from a banker)and we the tax payers must pay interest on this "monopoly money"
I'm struggling a bit with the implications of FRB.
If I go to my bank and borrow $2,000 for a car, the bank effectively 'creates' the loan out of nothing. If I then default and can't pay back the loan, why does it matter? Why can't the bank just write it off, as they created it in the first place... from nothing back to nothing?
Taking it further. When the sub-primers all started defaulting, why couldn't the banks just write it off and create some new money?
I know this is stupid but don't know why!
it's not a stupid question! it's perfectly legitimate.
the whole thing is a scam.
You're absolutely right that the money that was created from thin air could just as easily be written off.
But, in the process of writing off the debt, they would wipe out their obscene profit, which they are unwilling to do.
That's why Bush and gang are running to the rescue right now. So the poor little banksters don't have to "pay" for the bad debts.
Bush and gang are going to suck it out of our blood instead.
Yes the whole thing is a gigantic fraud and gives the bankers power as long as we go along with it. We must stop this scam and go back to the Gold Standard and making it law that the banks can only loan money they actually have. No inflation, no deflation no super rich robber barons.
Banks can not loan 10 times their deposits. They can loan out 0.9 times their deposits. Banks loan out the money you deposit, and pay you interest. But they are *not* allowed to loan out more money than they have in deposits. They are required to reserve a fraction of the deposits, 10%. The other 90% that are allowed to loan out for interest. That how the fractional-reserve banking works. Because you have pooled you money with many other people, with the complete understanding that you money is not going into a vault, the banks must keep some money in reserve. This way, if you want to withdraw all you money you can. As long as everyone does not withdraw their money at once (called a bank run) then it's OK. The banks get interest on you money, and pay some to you. If you don't like it, you can hide your money under you mattress.
civbert- I have to clearify for you that "theoretically" the bank can loan nearly ten times as much as their deposits.Say joe deposits $1000, the bank must keep 10% in reserve (as currently dictated by the FED)The bank now loans the $900 that's left of joes' deposit to Tim. Tim buys a used car from Bob for $900. Bob deposits the $900 in the bank. Now the bank sets 10% of that $900 in reserve and has $810 now to loan out to someone else and Bob still owes for the $900 he borrowed plus interest. This goes on and on and the banks collect and collect. See how it works?
Now days i thank my lucky stars for people like you....the veil is lifted like a weight of unknowing.....poetic stuff....Wow! thanks to you guys for making me aware of "Fractional Reserve Banking Systems........What a scam!!......It is just too......lost for words........Those who i have made aware are equally gratefull.....My GOD.....no it's not sport.....i religiously like to search for the truth......thanks again...My specialty is in common domestic showers of all things.....yes yes!...my site watersavingshower.comn is about this research and i hope to give some truth back to the world in return for that which i have allready learned......We need luck as well.....see yah in a better world...oh yeah!, i wonder if any one has seen "banking blow" by the author of "money as debt"??
Great post, simplifying something that is too often presented as being very complex.
hello nice topic
so the goldsmith was a greedy bastard and was betting that people will just leave the money and never pick it back up. when will the world realize this is another bubble and burst it like all the other scams over the past 10 yrs.
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What a bad description of Fractional Reserve Banking.
People read this and go around saying that the banks can create money out of nothing, still completely failing to understand how the system works. Then someone askes, why do the banks need money from the government, when they can create money out of nothing and your reader just looks stupid because he does not know.
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Thanx. A New Year rezzie for 2012 is to try to understand the global banking system. Easier said than done, I think! However, I've made a start.
The whole thing sounds like a bubble, and what happens if it goes pop!
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We cannot ignore the magic associated with numbers and hence banking. How are the banks able to get away with such daylight robbery? It is witchcraft and the bankers are magicians. The cast a spell on the borrower. The get a thrill out of deceiving the masses including government leaders. Judgment day is coming however.
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