Banks can currently use a deposit as a means to create and lend out 20 to 30 times new money. They take in $10, then lend out $9, and that $9, if deposited at the bank, becomes the basis for new $8, etc. This is called fractional reserve banking. I call it fractional reserving fraud.
A proposed UK banking bill would outlaw this practice. Here’s a comment I made on a post about people’s attitudes about fractional reserving.
People don’t mind that banks lend their deposits because they don’t know three things:
– every new loan creates new money and this new money devalues the original depositors money.
– depositors would earn a higher interest rate if banks couldn’t create money. Borrowers would bid up the interest rate on the fixed amount of money
– government banking insurance requires all taxpayers to support this fraudulent system, adding yet another financial penalty.
As Harry Browne pointed out, a depositor with 100 dollars in his account who expects to purchase two items for 50 dollars a piece could be outbid by someone offering 60 dollars for the item, and that someone borrowed the money that original person deposited. The bank funded the person’s competitor. That will make you think twice before giving your money to current banks!
Some might wonder whether the interest rate compensates higher prices. For the above scenario, the interest rate would need to be at least 20 percent to allow the person to buy two items, but the 20 percent would still only come at the end of one year.
For point number two, people also don’t realize they would earn a higher interest rate on their money if the bank could not create money. As many people always mention, bank credit would shrink without fractional reserving, but interest rates would rise and this would benefit savers. The NY times recently wrote an article about how low interest rates harm savers, especially retired individuals on fixed incomes.
The banking crooks created government bank deposit insurance to calm those who might be concerned about fractional reserving. Why worry about the bank lending out your money if the government is going to cover the deposit? People may or may not realize that they’re paying for the losses of other depositors.
One final point is that many people think it’s “neat” that banks can exist with only two percent reserves. They don’t realize the banks are stealing their purchasing power with every new loan.
If we can inform the public that fractional reserving devalues their paycheck and their savings, drives up prices, and reduces the interest paid on their savings, they will demand laws that prevent banks from creating new money.
See related post.