LIVE Gold Prices $  | E-Mail Subscriptions | Update GoldSeek | GoldSeek Radio 

Commentary : Gold Review : Markets : News Wire : Quotes : Silver : Stocks - Main Page 

 GoldSeek.com >> News >> Story  Disclaimer 
 
Latest Headlines

COT Gold, Silver and US Dollar Index Report - August 23, 2019
By: GoldSeek.com

Gold Mid-Tiersí Q2í19 Fundamentals
By: Adam Hamilton, Zeal Research

Trump Floats Payroll & Capital Gains Tax Cues to Forestall Recession
By: Mike Gleason

Howís That Recession Coming, Dave?
By: David Haggith

Precious Metals Update Video: Jackson Hole Powell's Speech in focus today, Gold bias is up
By: Ira Epstein

Seven Key Words That Explain "Stupidly High" Prices
By: Daniel R. Amerman

Gold, Silver, Mining Stocks: Get Ready For A Huge Ride Higher
By: Dave Kranzler

On The Job Training
By: Ted Butler

Precious Metals Update Video: FOMC minutes: What's going on?
By: Ira Epstein

Economist Lays Out the Next Step to Wonderland for the Fed
By: Gary Tanashian

 
Search

GoldSeek Web

 
Fractional Reserve Banking Made Easy

By: Terence Gillespie


-- Posted Wednesday, 30 September 2009 | Digg This ArticleDigg It! | | Source: GoldSeek.com

The paper bills in our wallet are not money. And they are not Notes as in "Federal Reserve Note" written on the top of the bill. They are actually just Tokens. Federal Reserve Tokens, if you like, is what should be written on top of the bills. They are not redeemable for anything other than themselves. And they represent only one thing: Your belief in their value. Hopefully, your belief extends to the next person you try to give them to.

The only real use for them is paying your taxes to either the state or federal government. You can be sure, however, that both will stop accepting them as payment even for taxes if you and I stop believing in the paper bills.

Paper money, or fiat, was originally accepted because you could redeem the paper for gold upon request. When people got used to the paper they felt more and more comfortable and were less likely to redeem it for their gold. They knew that they could redeem it at any time and the paper is lighter, more convenient and can be denominated in much smaller increments so that everyday transactions are made more practical.

By the time the gold imparts this trust to the paper the people storing the gold start using it for other purposes. The primary other purpose is to start using the gold as someone elseís money in addition to yours. When that happens the banker has now, in effect, doubled the amount of gold in his vault and is only in trouble if you decide to reclaim your gold. By that time many more people are storing their gold with the banker and he found that only a small percentage of people ever reclaimed their gold.

Now, at this point in the story nothing wrong has happened as long as:

  • You are told that your gold deposit is being lent out.
  • You are paid for storing your gold.
  • Your are not charged under the guise of a storage fee because the gold is no longer being stored by the banker.
  • There is a 1-to-1 relationship between the gold you lent the banker and the gold the banker has lent out.

Christians do not believe in charging interest to other Christians. But, even the Bible describes the business of lending while warning that "The borrower is a slave of the lender."

In the business of lending the difference between what you receive for the use of your gold and what the banker receives for lending it out is his legitimate profit. After all, if you donít want the banker to lend it out then you can lend it out yourself and do all the work associated. More importantly, the gold is not taken out of circulation and can be used as legitimate capital for the borrower to invest in his ideas to create even more value for everyone.

As you might suspect, this is not how the story goes.

When the number of people who were likely to reclaim their gold was discovered then the banker could start to guess the amount of gold to keep on hand to make all his depositors believe he was storing their gold. This number becomes his required reserve ratio and fractional reserve banking is born.

The banker has used a combination of your gold, your trust in him and your infrequent need to reclaim your gold to pretend he has many times more money than the amount of gold that is actually stored with him. And since he is most likely not fulfilling the four requirements, above, he is probably charging you a storage fee, not paying you, not telling you heís lent it out and is lending out much more gold than his depositors have deposited.

Even worse, the banker lends out gold that doesnít exist and charges interest on the loan. The banker is now generating interest income on gold that he doesnít have and that doesnít exist. Fractional reserve lending is born. Hereís a video that describes how money is loaned into existence in todayís world. Start at 22:00 if you want to skip right to it:

There are three major problems with fractional reserve lending. The first problem is when the banker lends money that doesnít exist to people who then use that money to purchase real goods then the money actually does now exist. The banker has loaned into existence new currency. The banker used to have to at least go to the trouble of printing up the actual paper bills. But, with computers he can even bypass that unpleasant task. This would be impossible if the banker had to attempt to fabricate the actual gold.

And that leads to the second major problem with fractional reserve lending: There is no longer any gold in the bankers vault. The "money" is just blips on a computer screen that can be typed in and deleted, as needed, to adhere to an extremely low, but legal, reserve requirement.

The third major problem with fractional reserve lending is that most of the deposits donít come from people who received the money by creating real value. The majority of the deposits come from other loans that came from either the Federal government or the loaned out portion of another fractional reserve lending bank.

This leads back to the original point of this article: There is nothing backing the paper bills in our wallet but our belief in them. They are mere tokens redeemable for nothing and backed by nothing.

Although it may be convenient for the US, and the entire world, to continue believing in the US dollar there is actually no historical basis for the success of any fiat currency. Thatís because no fiat currency has EVER survived in the history of the world. You read that correctly: It's not a matter of studying the good ones and seeing what they did right or wrong to make them succeed. None of them has ever survived.

Since the probability of any paper fiat currency collapsing is 100% then we can switch our focus on trying to guess when, not if it will fail.

For more on Fractional Reserve Banking and Lending and the history of many currencies around the world check out Larry Parks on YouTube or go to his website.

September 30, 2009

Terence Gillespie [send him mail] has worked at IBM, played jazz piano on cruise ships, is an instrument rated pilot, songwriter, and is attempting to optimize every aspect of life one article at a time on his blog at YourOptimal.com.

Copyright © 2009 by LewRockwell.com. Permission to reprint in whole or in part is gladly granted, provided full credit is given.


-- Posted Wednesday, 30 September 2009 | Digg This Article | Source: GoldSeek.com


-- Visit LewRockwell.com



 



Increase Text SizeDecrease Text SizeE-mail Link of Current PagePrinter Friendly PageReturn to GoldSeek.com

 news.goldseek.com >> Story

E-mail Page  | Print  | Disclaimer 


© 1995 - 2019



GoldSeek.com Supports Kiva.org

© GoldSeek.com, Gold Seek LLC

The content on this site is protected by U.S. and international copyright laws and is the property of GoldSeek.com and/or the providers of the content under license. By "content" we mean any information, mode of expression, or other materials and services found on GoldSeek.com. This includes editorials, news, our writings, graphics, and any and all other features found on the site. Please contact us for any further information.

Live GoldSeek Visitor Map | Disclaimer


Map

The views contained here may not represent the views of GoldSeek.com, Gold Seek LLC, its affiliates or advertisers. GoldSeek.com, Gold Seek LLC makes no representation, warranty or guarantee as to the accuracy or completeness of the information (including news, editorials, prices, statistics, analyses and the like) provided through its service. Any copying, reproduction and/or redistribution of any of the documents, data, content or materials contained on or within this website, without the express written consent of GoldSeek.com, Gold Seek LLC, is strictly prohibited. In no event shall GoldSeek.com, Gold Seek LLC or its affiliates be liable to any person for any decision made or action taken in reliance upon the information provided herein.