The Origins Of Fractional Reserve Banking

The Origins of Fractional Reserve Banking In XVIth century England people who had gold would deposit it with goldsmiths for safekeeping. In exchange they got a signed receipt guaranteeing that they could retrieve it. The value assigned to that note backed by the gold in the goldsmith’s vault made it possible for one to use it in payment. 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 nonexistent 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? posted by yusuf chun@ Tuesday, December 27, 2005 33 comments 33 Comments: At Tuesday, December 27, 2005, qrswave said... thanks, jc! great stuff! a must read! At Wednesday, December 28, 2005, Albion Moonlight said... What a terrible system. Why aren't people up in arms about this? Why doesn't anyone even realize? At Wednesday, December 28, 2005, qrswave said... "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. At Monday, January 15, 2007, Anonymous said... 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= At Friday, March 30, 2007, drift said... 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." At Tuesday, May 29, 2007, Isis07 said... 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. Quotes on money & banking http://www.seek2know.net/money.html Join discussion http://seek2know.zaadz.com/conscious_capitalism At Saturday, July 19, 2008, Joe said... 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" At Friday, September 19, 2008, Charlie said... 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! At Friday, September 19, 2008, qrswave said... 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. At Wednesday, October 01, 2008, cadmar said... 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. At Thursday, October 02, 2008, Civbert said... 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.

At Thursday, October 09, 2008, mrfixdit said... 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?

“Banking was conceived in iniquity and was born in sin. The bankers own the earth. Take it away from them, but leave them the power to create money, and with the flick of the pen they will create enough deposits to buy it back again. However, take it away from them, and all the great fortunes like mine will disappear and they ought to disappear, for this would be a happier and better world to live in. But, if you wish to remain the slaves of bankers and pay the cost of your own slavery, let them continue to create money."

Sir Josiah Stamp, Director of the Bank of England (appointed 1928). Reputed to be the 2nd wealthiest man in England at that time.