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


Deposits

 Fractional Reserve Rate
Banks Create
$1,000

 20%
$4,000
$1,000

 10%
$9,000
$1,000

 5%
$19,000
$1,000

 2%
$49,000
$1,000

 1%
$99,000
$1,000

 0%
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.