Why Fractional Reserve Banking is Fraudulent

In essence, fractional reserve banking is using a depositor's money which can legally be accessed by demand, but is borrowed out in a way that the money can't be asked to be returned on demand.

Money can be lent out in the form of a credit card loan or maybe a commercial loan. In both cases the money is tied up, yet is promised to be returned at the request of the depositor. The carrot offered is the fixed interest rate the bank promises in return for the money being parked there.

In the case of credit card loans, the money is tied up indefinitely. So while legally a depositor can ask for immediate return of their money, the reality the money is gone in the form of a loan of some type. What fractional reserve banking does is allow two IOUs on the same money deposited in the bank.

How banks are empowered to do this is by a central bank or government allowing the banks to set aside only a small percentage of money, or reserves. In other words, banks don't have to keep 100 percent of the on-demand deposit on hand; only a fraction of it, hence the name 'fractional reserve.'

To better understand, think of someone depositing $100 in a bank. Using a reserve requirement of 10 percent, the bank would send $10 of that to the central bank on reserve.

The rest of the money, in this case $90.00, can be used to lend out. Here's where it gets interesting. When the original bank where the money was deposited spends the $90.00, the bank receiving the money can then set aside $9 of that, and spend $81.00. That can go on until the original $100.00 deposit ends up being $900.00.

That of course assumes all banks spend the money they are legally allowed to. This is a fraudulent system that is in fact a ponzi scheme.

The reason why it's fraudulent is the bank has promised to pay back the deposit whenever the customer requests it. Yet the money has been lent out for a long term, which effectively ties it up. Banks get away with this because under normal economic conditions, the majority of people don't request their money, and leave it in the bank (usually with the exception of their checking account).

So banks get away with what can be described no other way than a lie, by making promises that can't be kept when enough people at a time want their money out of the bank. That's what bank runs are all about, and why banks will close their doors; whether physically or digitally, when that happens. When you hear about bank runs in Europe recently, or anywhere, this is what is happening. And this is just one of the implications related to fractional reserve banking.

Central banks like the quasi-private Federal Reserve in the United States, are the ultimate enabler in this ponzi scheme. They can created money out of thin air and borrow it at whatever rate they choose to safe whatever banks they want.

During the Great Depression, and recently in the Western nations, the bigger, so-called too-big-to-fail banks were bailed out in this fashion, while the small banks, again, as in the Great Depression, were allowed to fail.

This is socialist, central planning at its worst, and nothing to do with real capitalism.

The Federal Reserve and other central banks are those who determine who goes under and who doesn't, or who gets taken over by another financial institution.

Central banks are there to make sure the largest banks survive. Instead, those banks should be allowed to collapse and the better run banks allowed to take them over. That cleans the rubble out and would make for a healthier economy. But it would also undermine central banking, which is fiercely opposed by those in power.

Other than the obvious, potential consequences to the individual or corporate depositor in a weak bank, there are other significant consequences in relationship to fractional reserve banking.

The major one is how it fogs the reality of what is really happening in any economy, and forces us to make decisions with the equivalent of one arm tied behind our back.

How this happens is the endless number of decisions made by individuals is substituted by these central planners, skewing the market.

What that means is the accurate measure of information as related to the market is prices. Prices can only be set by the response of businesses or consumers to real, living, up to date situations.

When those attempting to centrally plan an economy do it, they do it with impunity, as it doesn't matter what the general population says, as they aren't accountable to anyone. This is why Ron Paul, and others, have called for an audit of the Federal Reserve, so we can bring out into the light what has been shrouded in mystery for decades.

In the end, it has always and only been the market which should determine prices. When that is interfered with, all sorts of problems emerge, which the vast majority of people, including trained economists, are clueless about as to the source of the problem and how to deal with it.

The combination of central banking and fractional reserve banking is the source to the endless cycle of booms and busts we must endure around the world.

This comes from the reckless inflating of the money supply which creates all sorts of anomalies and artificial economic situations which make it almost impossible for those in business to make accurate assessments of the future.

That's why they don't borrow during times like these, and many banks don't lend; they are flying in a fog, and they have no idea when it will clear, and what the circumstances will be when it does.