History records that the money changers have used every
form of abuse, intrigue, deceit, and violent means possible to maintain their
control over governments by controlling money and its issuance. - James
The Goldsmiths were the first bankers in early England. Primarily
because people left their gold with the goldsmiths for safekeeping. The first
paper money were "Receipts" for the gold deposits. These represented the gold
in storage. These were easier to carry around, and safer, thus making paper
money more popular.
The goldsmiths realized, after a while, that few
people ever came back to trade in their "receipts" for the gold at any one
time. It was at this time that Goldsmiths realized they could issue more paper
than they had Gold to back it up, thus leading the way to a cheated system.
Then they could loan out more money than they had, and collect interest on it,
This was the beginning of "Fractional Reserve Banking", or
loaning out more money than there is in assets on deposit. This way nobody ever
noticed their wealth accumulation.
Do Not Try This At Home
If you're anyone other than a
member bank of the Federal Reserve, you'll
will likely be prosecuted and sent to jail for doing this. Fractional Reserve
Banking is one huge Ponzi Scheme that allows an increase in the supply of
currency available to make loans to purchase investment capital, without
increasing the quantity of investment capital or real savings. The quantity of
loans will be higher than the actual supply of saved resources available for
investment. Investors will assume that the quantity of loans available
represents real savings. This misinformation leads investors to misallocate
capital, borrowing and investing too much in long-term projects for which there
is insufficient demand and real savings. As investors spend borrowed currency,
segments of the economy will boom. Later investors will find the prices of
their outputs falling and their costs rising, leading to the failure of new
projects and a bust.
Fractional-reserve banking refers to the common banking practice
of issuing more credit than the bank holds as reserves, when loaned money is
used and then deposited in the same bank or a different bank. Through this
process, banks in modern economies typically loan their customers many times
the sum of the credit reserves they hold.
If the reserve requirement is
10%, for example, a bank that receives a $100 deposit may lend out $90 of that
deposit. If the borrower then writes a check to someone who deposits the $90,
the bank receiving that deposit can lend out $81. As the process continues, the
banking system can expand the initial deposit of $100 into a maximum of $1,000
of money ($100 + $90 + 81 + $72.90 + ... = $1,000).
Here is how the
Central Bank, the Federal Reserve creates new money out of thin air (as
explained by the creators of
The Money Masters)
and sets up the Boom-Bust business cycle. The Fed conjures up an amount of
money that does not exist, which it then spends, usually to buy Treasury Bonds
from private owners such as banks who had purchased them from the Treasury
Department. These bonds were initially sold to the public to fund
Banks are then
permitted to loan out 90% of this new Fed-created money once it is deposited by
the sellers of the bonds. That would not be a problem, except for the fact that
the borrowers almost always redeposit the money (or the people they pay with
their loan proceeds do). Once re-deposited, the banks can lend it out again.
This re-loan, redeposit, re-loan, redeposit, etc. scheme, authorized by the
Federal Reserve Act of 1913, allows banks each time to retain just 10% of the
re-deposited loan proceeds as a reserve, ultimately allowing banks to lend out
9 times the original amount deposited, and to charge interest on it as many
times as it was loaned. So instead of an interest rate of, for example, 6%, the
banks may be collectively receiving a total of 54% interest per year (6% x 9;
usually it is somewhat less due to the lack of qualified borrowers).
Once the economy is flooded with the bank-created money 9 times in
excess of the money originally created by the Fed, an expansion that increases
the money supply, which reduces the purchasing power of already-existing money
(including wages and savings), interest rates begin to drop (as there is more
money to lend) and prices rise (inflation). The dollar begins to fall relative
to the money of other countries not in this same stage of money expansion.
Money begins to flow out of US Treasury bonds (due to lower interest rates and
the lessening purchasing power of the dollar due to inflation). Thus ends the
expansionary or "boom" part of this artificial "business cycle." To combat
rising inflation and the falling dollar, the Fed begins raising interest
Then the money supply, having been stretched to the maximum,
begins its contraction, usually initiated by rising interest rates reaching a
point that begins to inhibit borrowing and also inflation. The economic "bust"
part of the cycle begins. Loans dwindle as interest rates rise and credit terms
tighten. Various segments of the economy, accustomed to easy credit, begin to
contract due to higher interest rates; loans become harder to get. Home prices
fall, businesses begin to fail, bankruptcies increase. This "bust" part of the
cycle continues, and worsens, until inflation is "tamed," prices stabilize, and
the dollar rises relative to other currencies. Eventually, the higher interest
rates begin to attract foreign money, and the Treasury then is able to borrow
what it needs at lower and lower interest rates. Interest rates fall. The
artificial cycle then begins anew.
This boom-bust economic cycle is the fundamental cause of the
inherent instability in our economy with the
inevitable results such as the mortgage crisis in 2007-2008 and
subsequent government bailout of banks. It is due to too-rapid increases in the
money supply due to deficit spending and then the multiplier effect of
fractional reserve banking and to lenders greedy to take advantage of such a
system that rewards lending with more and more interest revenue; followed by a
too-rapid contraction of the money supply, necessary to combat the inflationary
effects of the former phase
Fractional-reserve banking allows for the possibility of a bank
run in which the demand depositors and note holders collectively attempt to
withdraw more money than the bank has in reserves, causing the bank to default.
The bank then would be liquidated and the creditors of the bank would suffer a
loss if the proceeds from the bank's assets were insufficient.
The major banks of this country - the ones the government is
lending your money to, and from which the
Bailout Bill proposes to buy their bad assets, are busily
swallowing up the banks in trouble in this latest bust. As after all prior bust
cycles, they will emerge larger and more powerful, and fewer in number.
JPMorgan Chase bought up Bear Stearns and Washington Mutual. Bank of America
picked up Countrywide Financial and Merrill Lynch. Wells Fargo added Wachovia.
Wealth will be even more concentrated under their control, which they will use
in the next bust to further this process, until eventually no one will own
© Copyright 1999-2008 Jeremiah Project