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Saturday, 7 May 2011

The Con-Trick Which is Our Fractional Reserve Banking and Money-System

The Con-Trick Which is Our Banking and Money-System PDF Print E-mail
Written by Mark Haynes   originally publish at
sad-bank-cat_120_x_134In light of the Con-Dem coalition’s planned imposition of austerity measures, meaning severe public spending cuts and tax rises, and the consequent destruction and damage to many of the British people’s lives and living standards, I thought we should examine our banking/money-system and it’s history, which has lead our nation to such a ruinous state of affairs.
We have in this country (and much of the world), a debt-based money-system built on the fractional reserve lending principle, where banks are allowed to lend usually up to ten times the amount it has on deposit in loans. The history of this system can be traced back to medieval times, when in some fateful moment a moneylender realised that the essence of any viable money-system is confidence, and that once this confidence had been established, a very lucrative magical money-trick could be performed.
Goldsmiths dealt with precious metals, and out of necessity provided safe storage for this treasure, which people out of fear of robbery would deposit with the goldsmith. (2) The goldsmith’s started to charge a fee for this safe-keeping service, and to loan out coin and bullion to the community. They became moneylenders who realised that once they established trust in the community and a reputation for integrity and honesty they could issue promises to pay on paper backed by the real wealth in their vaults, these Goldsmith’s notes were the next stage in banking development when the paper receipts for coin/bullion deposits began to be used as the medium of exchange and means of payment. The goldsmith/moneylender next discovered that as long as the people believed in the convertibility of their promises to pay into gold or silver, such promises could be issued far in excess of any actual physical holding of precious metal. Experience taught the moneylender that only one in ten of his clients at any one time would actually come to demand payment in their physical gold or silver money. This being the case the moneylender could make loans totalling ten times the value of the coin and bullion reserves in his vaults, charging interest on these loans, safe in the knowledge he would not have to produce the physical coin/bullion to his clients.
With this discovery the fractional reserve banking system was born, whilst it lead to an unprecedented economic expansion, it also gave control over this expansionary credit system to the bankers/financiers
(1)The numbers in your own bank account were all created, essentially out of nothing, not by the Bank of England or the Royal Mint, but by commercial banks.
(2)The banks are able to create this ‘number money’ through the accounting process that they use to make loans, using a business model known as ‘fractional reserve banking’. Rather than taking money from a saver and lending it to a borrower (as per the common understanding of banking), they simply write new numbers into the bank account of a borrower – effectively creating new money.
Without seeing the process in action, it can be a little hard to believe, so below are a few quotes ‘straight from the horse’s mouth’ which confirm this amazing fact:
“…by far the largest role in creating broad money is played by the banking sector… when banks make loans they create additional deposits for those that have borrowed the money.” – Bank of England Quarterly Bulletin, 2007 Q3
Subject only but crucially to confidence in their soundness, banks extend credit by simply increasing the borrowing customer’s current account, which can be paid away to wherever the borrower wants by the bank ‘writing a cheque on itself’. That is, banks extend credit by creating money.” – Paul Tucker, Deputy Governor of the Bank of England & member of the Monetary Policy Committee
… changes in the money stock primarily reflect developments in bank lending as new deposits are created.” – Bank of England Quarterly Bulletin 2007 Q3, p378
“…the banking sector plays such an important role in the creation of money. Changes in the terms for deposits will affect the demand for money, while changes in the terms for loans will affect the amount of bank lending and hence money supply.” – Bank of England Quarterly Bulletin 2007 Q3, p383
The money-creating sector in the United Kingdom consists of resident banks (including the Bank of England) and building societies.” – Quarterly Bulletin 2007 Q3, p405
Bank deposits (the numbers in your bank account) now make up 97.4% of the total quantity of money in the economy[1].
By volume of payments, bank deposits are used for 99.91% of transactions and transfers5, with cash being used for just 0.09% of transfers [2].
Consequently, the physical currency issued by the state has been almost entirely replaced by a digital currency issued by private companies. The UK’s money has been privatised.
The ‘Rules of Money’
Under a fractional reserve banking system, there are two ‘rules of money’:
When a bank makes a loan, it increases the amount of money in the hands of the public8 (by increasing the total quantity of digital bank deposits). When a member of the public repays a loan, it reduces the amount of money in the hands of the public (by decreasing the total quantity of digital bank deposits)
Consequently, through excessive lending between 2000 and 2008, banks were able to double the money supply in just 7 years – an increase in the total money supply from £884 billion to £1,674 billion [1].
All the ‘Money’ in your bank account represents someone else’s debt since all the number money in your account was created by banks making loans, this means that for every pound in your bank account, someone else is in debt by an equal amount. In fact, due to compound interest, the public’s debts are now greater than all the money that exists in the economy.
According to Bank of England figures, if the UK public collectively took all the money in our bank accounts and used it to pay down our debts, we would end up with no money at all and still owe £306billion (plus interest) to the banks! [3]
In other words, we now have a debt-based money supply issued entirely by private, profit-seeking companies. Our money supply has been effectively privatised. The damaging effects of this system to the economy and society are numerous and severe.
Implications of Fractional-Reserve Banking
There are two important implications of fractional reserve banking that affect everything that happens in our economy and society:
Banks have the power to shape Britain’s economy through their monopoly on the supply of money to the public and to businesses. If they invest wisely in productive businesses, they can help the economy to grow, but if they choose to pump the money (bank deposits) that they create into housing and commercial real estate, we get destabilising asset price bubbles and a severe financial crisis.
Judging by their track record, should we entrust this huge power and responsibility to an industry concerned solely with short term profit, rather than the health of the wider economy?
As the sole suppliers of money to the public, if banks lend, the economy functions. If they don’t, it grinds to a halt (as in the credit crunch). Our economy is completely without a stable, permanent money supply, and entirely dependent on the mood of the banking sector.
Who Should We Blame?
Many people are angry at the banks, or individual bankers. But the truth is that it is the government who sets that ‘rules of play’, and successive governments have failed to reform the banking system at the right time. Instead, after every crisis, the government and authorities focus on getting back to business as usual. They focus on ‘getting banks lending again’ without questioning why we are all so dependent on bank debt to keep the economy functioning.
So we should blame all those successive governments who have repeatedly failed to fix the banking system, but the pressing concern is to do something about it. But we also need to make sure that they don’t make the same mistake again. We need to make sure everyone understands how the banking system really works, how money is created, and how we can fix the system.
When British Freedom comes to power it should take back from the private banking cartel the sovereign right of a duly elected government to create the nation’s money-supply, issuing it debt-free into the economy.
It should end the taxpayer subsidy of this corrupt, fraudulent banking system built on debt and usury.