Fractional reserve banking…what is it? Plainly put, fractional reserve banking is the process of a bank lending capital that it does not hold. To illistrate how the process works, we must gaze truthfully into the belly of the animal. All over the earth there are secret enterprises called central banks. Yes, that is accurate, secretive organizations. In the United States, the exclusively owned central bank is called the Federal Reserve Bank. It is significant to grasp that this financial institution is not a government entity, but has shareholders and is in big business for financial gain.
When the United States government desires money it makes treasurey notes. These notes contain an interest rate that the government required pay on top of the principle, just like a mortgage or credit card. The Treasury sends these treasury notes to the Federal Reserve Bank, and the Federal Reserve then “prints” currency and dispatchs it to the Treasury as in exchange for the notes. Hold on, it gets worse…
Let’s apply an illustration. Let’s imagine the United Sates government is in need of $10,000,000. The Treasury will issue the treasury notes and the Federal Reserve will make federal reserve notes. The Treasury and the Federal Reserve then exchange the notes with one another, thereby giving the Federal Reserve assets and the government gets debt. The treasury will then place the $10,000,000 into a commercial bank account. No big thing, right? This is where it gets wild:
The bank maintaining the funds is required to maintain 10% ($1,000,000) of the currency in reserves and can loan out the additional 90%. So in our example, we’ll say that a contractor borrows $9,000,000 from the financial institution for his project. The $9,000,000 is deposited into the contractor’s bank account and the bank can now loan 90% of that currency, securing the 10% in required reserves and the procedure duplicates itself over and over again (take into account, the contractor’s bank account nevertheless shows a balance of $9,000,000 and the government’s checking account still bares a balance of $10,000,000). As a consequence, more money is conceived and goes into the market through lending. Each of the loans is obligated to be paid back with interest, so regardless if all of the money were given back to the banks, there would nonetheless be debt.
Makes you think twice in regards to using that credit card, doesn’t it? When individuals stop using their credit cards and commence paying them back, there is deflation as the cash supply disappears from the markets. This sets off the Federal Reserve to panic and they tell the representatives in our government that the cash supply has to be inflated to avoid a new great depression. So the government scrounges, and the Federal Reserve provides. So what occurs if too much money is created all at once? That is called inflation, which sets off the cost of goods and services to swell, as the money is loosing value.
The Federal Reserve has a technique to regulate inflation, however. They named it the Internal Revenue Service (IRS). The IRS, like the Federal Reserve, is a privileged creature which is in essence the Federal Reserve’s debt collector. As soon as you shell out income tax on your hard earned wages, that money goes toward the interest on the government debt to the Federal Reserve (bear in mind those treasury notes that we talked of). In the meantime, you get no benefits from your government, your roads and bridges fall apart, and the municipal schools instruct your kids on how to becomse excellent taxpayers. They demonstrate nil regarding fractional reserve banking or economic literacy. Why doesn’t the Treasury issue it’s own funds instead of borrowing issued cash from a privileged bank? Or perhaps a better inquiry is, why doesn’t the government be a devotee of the Constitution?