“The few who understand the system, will either be so interested in its profits, or so dependent on its favors, that there will be no opposition from that class. The great body of people, mentally incapable of comprehending the tremendous advantages, will bear its burden without complaint.“
- Lord Rothschild, European central banker
August 6, 2009
The below slides are meant to explain fractional reserve banking as simply as possible using pictures. The presentation itself can be found here, and a written description and documentation in “The Money Matrix – How the FED Works (PART 6/15)“.
The below demonstration assumes a reserve requirement of 10%, which is the figure typically given by the banking industry and financial experts. However, in Part 2 I will demonstrate there there is effectively NO set reserve requirement though the banking system obviously carry some level of cash reserves. I alluded to this previously in “Off a Cliff with No Airbags: The FED Banking System Quivers in Fright“.
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***** Part 2 is now available here!! Yes, Virginia, There are No Reserve Requirements
Jake Towne – The Problem With the Dollar (July 2009)
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Jake Towne is running for U.S. Congress in Pennsylvania’s 15th District in the 2010 election as a citizen unaffiliated with any political parties. Jake also writes at www.LibertyMaven.com and www.CampaignForLiberty.com. A master campaign presentation for internet viewing is available. A novel campaign website built by Raging Debate, TowneForCongress.com has recently opened. [Reach the Author Here!]
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We the People of the United States, in Order to form a more perfect Union, establish Justice, insure domestic Tranquility, provide for the common defence, promote the general Welfare, and secure the Blessings of Liberty to ourselves and our Posterity, do ordain and establish this Constitution for the United States of America.
As always, unlike the NFL, the author grants full permission to allow any accounts of, rebroadcasts, retransmissions, repostings of this article to your blog or anywhere else in order to promote the Restoration of our Republic.
Veritas numquam perit. Veritas odit moras. Veritas vincit. Truth never perishes. Truth hates delay. Truth conquers.
Tu ne cede malis sed contra audentior ito. Do not give in to evil but proceed ever more boldly against it.
Summary of Articles and Bibliography for Jake Towne, the Champion of the Constitution (7/2/2009)
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Also by the Author
Jake Towne’s Health Care Platform
Why Foreign Aid? An Open Letter to Congressman Dent from Jake Towne
Social Security’s $700,000 Resort Meeting and Our Future
Unlocking the Money Matrix – The Real Interest Rate (PART 12/15)
Unlocking the Money Matrix – The Summers Gold Price Suppression Scheme (PART 13/15)
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Other Articles on this subject by the Author
MY PROPHECY – The Federal Reserve Will End! A Money Matrix Addendum
R.I.P. – The London Gold Pool, 1961-1968
Ron Paul’s rEVOLution Versus the “One Ring” of the Federal Reserve
Silver and Gold ARE Money (PART 1/2)
The Money Matrix – How the FED Works (PART 6/15)
The Money Matrix – Who Owns the FED (UPDATED PART 7/15)
The Federal Reserve – A Good Company to Work For?
Bernanke’s Great Lie – The “Gold Standard” and the Great Depression (PART 2/2)
http://towneforcongress.com/economy/fractional-reserve-banking-in-pictures-part-12
Hi,
I have recently launched a new website on social credit. see link http://www.bleedingindebt.com
I would like to share this link with others to help educate this very important subject on the creation of money or rather the froudulent practice the banks use to create new money as debt.
The video link below is the best
I have seen in explaining this. Maybe you can use it on your site.
http://www.bleedingindebt.com/how-the-banks-create-money.html
Kind Regards,
Andrew Webb
Hi,
Examples of this are all over the net and almost all of them never continue and follow up on what happens when those loans are paid back. Will those banks make $900 + interest? (assuming all borrowers payback.
No banks make their profit from interest. So what happens to the $900 returned by the borrowers? Who owns them?
“Will those banks make $900 + interest? (assuming all borrowers payback.
No banks make their profit from interest.”
Yes. Though of course some loans are not paid back. In fact, if all the loans were attempted to be paid back at once, there would not be any dollars left due to the interest.
“So what happens to the $900 returned by the borrowers? Who owns them?”
Well, the $900 spent by the borrowers went into the economy for the purchase of goods, etc. If (another) $900 is paid back to the bank in full by the borrower, then banks owns the $900.
Thanks for your response.
It doesn’t add up. Money is created when banks make loans. Now when loans are paid back then money is destroyed. Please do the full accounting entries to illustrate the whole process and assume that all the loans are paid back in full.
Banks make money on interest only. What you’re saying though is that banks make money on interest as well as the entire loan amount. In other words,
bank profit = principal + interest.
That cannot be the case.For example, when a bank lends $500,000 at 5% to someone for buying a house then when the loan is paid back, say, in 15 years, that bank makes
bank’s profit = $500,000 + 375,000 = $875,000 (simple interest calc).
Does this make sense to you?
Thanks,
Cameron
Dear Cameron -
“Money is created when banks make loans.”
Most of the time this is a correct statement, when you account for the entire cycle of creating money described above. A (highly theoretical) exception would be if a loan came from a time deposit (like a CD). Check out Part 2 which goes into deposit reclassification. Again, keep in mind the money creation takes place by the banks cycling the money around the economy, and also from the FED itself.
“Please do the full accounting entries to illustrate the whole process and assume that all the loans are paid back in full.”
Instead just read the “Loan Banking” section here from page 33/164 onwards. http://mises.org/books/fed.pdf
I would if I had the time to show you
However, I’ll caution you that all loans can never be paid back in full because paying them back with the interest requires more paper dollars than currently exist. Once the borrower has spent the dollars, those dollars circulate btw banks and the money supply grows, roughly per the mechanism I wrote about above.
“Banks make money on interest only. What you’re saying though is that banks make money on interest as well as the entire loan amount.”
Not exactly. Yes banks turn a “profit” not just from interest but sometimes also from “loaning up.” However, it is certainly possible for individual banks to collapse from loaning out too much too poorly. The purpose of the FED is to bailout individual banks, which are part of the money-production cartel, if needed to keep the system afloat. Since the FED can print money, the only type of economic collapse the system is prone to is a massive systematic one, instead of smaller failures.
“In other words, bank profit = principal + interest.”
No, as I tried to explain above. Reading the entire book “The Case Against the FED” should clarify things more http://mises.org/books/fed.pdf
When a bank lends $500,000 at X interest % to someone for buying a house then when the loan is paid back, but still (falsely) claims to investors that it has the $500,000 in deposits they gave them, yes profit is made from the “interest.” However, more currency (and therefore more chances to “loan” out money) is created in the banking system by the loan.
Now, reality is that the banks are also investment firms, so they also leverage up on their “assets” – which are typically just debt.
Hopefully what I wrote helps, there are a bunch of article referenced off of this page that might assist you as well. http://towneforcongress.com/platform-issues/federal-reserve/