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How the banks create money

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  • How the banks create money

    How the banks create money

    Fractional Reserve Banking

    A process that allows the banks to create money out of nothing.

    Central Banks apart from creating new money as debt control the ratio of deposits the Commercial banks can lend. This ratio is called fractional reserve banking. This practice allows banks to lend very large sums of money they do not have. Fractional reserve banking allows banks to keep only a fraction of deposits in reserve and lend out the remainder.

    For example if the reserve was set to twenty percent, $800 of a $1,000 deposit could be used to lend out to borrowers. This $800 lent out will then become a deposit in another bank. This other bank that receives this can lend out $640 of this $800 deposit as 20% is reserved.

    This process will continue untill it reaches its maximum. The maximum amount of total deposits that can be created this way at 20 percent is $5,000 and the maximum increase in the money supply is $4,000. At this rate the banks have fraudulently created $4,000 out of thin air using a $1,000 deposit.

    The graph below shows how much more the banks create when
    the fractional reserve rates are lower


    Fractional Reserve Rate

    Banks Create


















    No limit

    Over the years the ratio for fractional reserve banking has dropped, in most countries 3% or less is now the norm. This is a very deceitful and dangerous thing to do, as a run on the banks is very possible if large numbers of deposits are removed from banks. Although Central Banks can cover a certain number of withdrawals on behalf of some banks, it does however have a limit. A domino effect is a reality and can occur as banks do not have the money required because of very low fractional reserves. Banks will begin shutting down every where when this limit is passed.

    Not many countries have a fractional reserve rate over 3%, interestingly the United States has 10%, China over 20%. What should alarm the population in Australia and other countries apart from the obvious fraud of money is that the fractional reserve rate is less than 3 percent! When the run on the banks start and it will sometime in the future, less than 3% of the money people have deposited there will remain! And guess who is going to guarantee this money? That’s right, the poor tax payer! In Australia The Labour Party decided that Australian tax payers will guarantee the banks! This way the commercial banks will remain blissfully in operation to continue without risk to themselves to continue to deceive us and to keep us in debt.

    This action is most definitely a fraudulent practice and governments all over the world including Australia allow it to happen. It should be called fictional reserve banking. It should be banned! and replaced with Social Credit.

    More on Social Credit later.

  • #2
    Re: How the banks create money

    Thanks for the post, new poster. This is old hat here at iTulip; why don't you take a (long) cruise through past threads and familiarize yourself with the place?


    • #3
      Re: How the banks create money

      Not only is it old hat, a case can be made that the theory doesn't hold up. Reserve ratios are almost meaningless today. Commercial banks create as many loans as they want, then the central bank creates the reserves later.


      • #4
        Re: How the banks create money

        Originally posted by slippery
        Not only is it old hat, a case can be made that the theory doesn't hold up. Reserve ratios are almost meaningless today. Commercial banks create as many loans as they want, then the central bank creates the reserves later.
        Indeed. That basic theory above isn't wrong, but fails to describe what is really happening.

        And that is that there are several trends which lead to modern credit creation:

        1) Bank reserve ratios: there was a clear trend from the late '80s onward where the ratio of loans to cash/deposits in banks kept increasing. At its peak arguably these loan ratios were 10% or less even according to the then accounting regulations

        2) Glass Steagall: in the past, deposits were specifically to be kept at different institutions than the ones where capital was risked in speculation. Obviously a derivative bet, a stock market play, or any number of normal investment bankster machinations are different and higher risks than making commercial and residential loans, though both of the latter were also affected by the following point

        3) Securitization: instead of making a loan and holding it until maturity, securitization allowed a bank to get fees up front and then make another loan via MBS (mortgage backed securities). This construct in turn fed into the next point

        4) Derivatives - specifically CDO/CDS' which permitted banks to say that their exposure was hedged, when in fact the hedge was so poor quality and concentrated that in reality the hedges were just window dressing to increase leverage ratios


        • #5
          Re: How the banks create money

          Fractional reserve banking is still in existence today more notably in the United States. And yes you guys are correct the banks are using other so called methods to create money out of thin air. I have used fractional reserve banking here mainly for illustrative purposes. The banks are most definitely lending more money than they have, all guaranteed by the taxpayer. They expropriate everyone’s wealth and labor in the process of creating money from nothing, at no liability to themselves.


          • #6
            Re: How the banks create money

            As all new money created by the banks is created as debt, we have a major problem. We are now in an impossible position as the ability to pay both debt and interest is just not possible. There is just never enough money in the world to cover the combined debt with interest as the banks did not create the interest part. This leads to spiral debt. Economies around the world continue to borrow further to cover this missing sum of money over and over again. If they did not borrow more, the money supply would simply run out. To further make matters worse the money used to repay any loan is removed from the money supply. If we tried to repay all our debt with the money we have (Which is a lot less than what we owe) we would quickly run out of money, leaving nothing to run our economies. The banks monopoly of creating money as debt to the world, has put the world’s economies on very unstable foundation. This can only lead to Recessions or Depressions. The current Global Recession hitting the world now has stemmed from this.


            • #7
              Re: How the banks create money

              To those who still have difficulty in believing this fact that banks create money out of nothing please check this link below.

              The international banks have financed the world’s money supply with their ‘funny money’. They have created this money out of nothing, representing nothing of value. It is the seller of goods and services that actually puts any value into this money. The people have been tricked into risking their assets (real wealth) and future earnings as collateral in order to borrow this monopoly money. It is truly a confidence trick on the people.

              The banks have turned the financial state of the world’s economies into a house of cards. By controlling the world’s money supply, they control the parliaments of any nation and thus the people. Our sovereignty is at stake. We are told by economists that basically the debt problem is a production problem and that we can all get out of debt by increasing exports to other countries that will magically fix all our debt. Unfortunately this does not add up, as every nation is also told to do the same thing, export more and import less. All nations of the world - are trying to do the impossible; to BORROW their way out of DEBT!

              We are at the mercy of the banks and this must change. Reforms are badly needed that would remove the banks ability to fraudently create money. We urgently need to look into other ways. Social Credit is an example of what the world could use.
              Last edited by FRED; 05-07-11, 10:32 AM. Reason: See SPAM policy in FAQ


              • #8
                Re: How the banks create money

                The Guernsey Market House Scheme (A financial experiment)
                Over 100 years ago, an economic experiment known as the Guernsey Market House Scheme was implemented on a small island called Guernsey. This island was in an economic financial mess. All trade of Guernsey was steadily going to a stand still with unemployment rife. To make things worse the sea defenses were breaking down. There were practically no roads and most public buildings were in great disrepair. Above all, a new market house was urgently needed, where the islanders could exchange their produce.

                It was impossible for the Government to finance these necessary improvements out of its revenue as this entire amount was required for ordinary expenses and the interest charges incurred on previous debt. The Government did indeed try to raise a loan, but because of the poor state of the island's assets, interested financial institutions demanded the prohibitive rate of 17 per cent per annum. As such necessary finance could not be obtained by further borrowing.

                "Necessity is the mother of invention"; and in this case the idea put forward that the State should issue its own money, gained ground. It was argued that, as labour and materials were both available, it was absurd for improvements to be held up simply through lack of money. As conditions became even worse, this plan was soon seen by many as the only solution. Finally, after various setbacks and considerable opposition, the adherents of State money carried the day and in 1816, 4,000 notes of £1 each were printed by the Government and paid out for the most urgent repairs.

                By the success of this issue the principle was established and during the next 20 years the Government authorised notes to the extent of £80,000, which were utilised in building the new Market House, schools in every parish, roads all over the island, St. Elizabeth's Cottage, etc. These Government notes were redeemed, as the economic circumstances of the island justified, from earnings derived from the collection of market rents, customs duties, etc., and in 1836, when the scheme ended, there was a balance outstanding of £55,000 Government notes.

                During the First World War Australia also used this same principal to finance its massive costs of going to war. The People’s Bank was used to finance the war. The limiting factor was not credit; it was what the Australian people could do. If they needed to build a warship, these questions were asked. Is there enough steel? Is there a dry dock to build them? Are there enough engineers, do we have enough painters, do we have a crew to man these ships? The limiting factor is the materials, the know how and man power to do these things. Once it was shown that these recourses were available the money was immediately allocated without debt. In reality the war could have been financed this way many times over if they had to because they had so many reserves in materials. The real cost to Australia, was in the lives lost on the battlefield and the injuries sustained but it wasn’t a financial price.

                In peace time Australia continued to use Social Credit, instead of building worships they built schools and infrastructure.
                Is it inflationary to create money? Would we end up like Germany with hyper inflation? Obviously the creation of money must be regulated. It is vital that the supply of money is kept in check and in line with production of goods and services. The government elected by the people, should be the only body allowed to responsibly create money. It should not be created as debt!

                This is fundermentally what social credit is about.