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The one thing nobody’s talking about…


September 7, 2012
Cape Town, South Africa

One of the unequivocal laws of the universe is that governments tend to screw up everything they try to do. When life gives them lemonade, they make lemon laws. Even if grounded in good intentions, all they know how to do is blow other people’s money and pass destructive new regulations.

In fact, I can only think of two institutions on this planet that have a more dismal long-term track record than government. The first is whoever ends up playing the Harlem Globetrotters. The other is central banks.

Presumably, the role of a central bank is to manage a nation’s money supply in order to smooth out booms and busts, and maintain a sound currency. But one need only look as far as the European Central Bank’s short 14-year history to get a sense of this massive failure.

The single currency is now being crushed by Himalayan mountains of debt. The ECB’s solution? Conjure hundreds of billions of euros out of thin air to buy this debt, from which they’ll most likely take a huge loss. In doing so, they enable the most indebted eurozone nations to go even deeper into debt, more conveniently, at lower interest rates.

This is like dousing yourself with gasoline before running into a burning nursing home so that you can deliver a noose to a terminal, comatose patient. It’s genius!

Yet in comparison to the ECB’s remarkable stupidity, one must truly stand in awe of the US Federal Reserve. No other organization in the history of the modern world has been such a serial failure at fulfilling its missions of (1) maximum employment and (2) stable prices.

Since the Fed’s creation nearly a century ago, the dollar has lost over 95% of its value, and the US has experienced an almost uninterrupted period of asset bubbles, market crashes, bailouts, bank runs, recessions, depressions, and other financial panics.

Unsurprisingly, there is a growing movement to End the Fed. This is a great idea, and it would be a moral victory. But the Fed is only one pathogen in a much larger monetary disease. I’ll explain–

Any run of the mill storage facility has a simple mission: store people’s stuff. Simple. If you bring them your bedroom set to store for a few months, they have to keep it safe and secure. They’re not allowed to rent it out to someone else on the side. If they do, this constitutes fraud, and it’s illegal. Yet this is exactly what banks do.

When you deposit funds at your bank, they don’t actually hold on to your money. They only keep a very small percentage of it (called the reserve), and then loan out the rest.

Let’s assume you deposit $100 at the only bank in town. The bank will hold a $5 reserve, then make a $95 loan to someone else. That guy ends up depositing the funds right back in the bank. But there’s a problem here: the bank now has deposits worth $195, but only the original $100 in cash. They’ve effectively ‘created’ $95 that doesn’t exist.

Like our furniture example, this is also fraud. But in the world of finance, they call it ‘fractional reserve banking’. And it’s completely legal, thanks to the Federal Reserve Act of 1913. Before this, banks were obliged to, you know, actually hold on to their customers’ deposits.

As such, because of fractional reserve banking, the commercial banks have enormous influence in distorting the money supply. It’s not just the Fed. So doing away with central banks, or even going back to the gold standard, won’t really solve the problem.

To really attack the root cause, you’d have to eliminate all the vestigial institutions like the FDIC that underpin this fraud of fractional reserve banking… plus the concept of fractional reserve banking itself.

But as you’re probably aware, nobody is talking about this idea, which means that there is no realistic hope of a sound currency on the horizon. That’s why it’s so important to gradually accumulate precious metals– turn those pieces of paper into something they can’t conjure out of thin air.

Our goal is simple: To help you achieve personal liberty and financial prosperity no matter what happens.

If you liked this post, please click the box below. You can watch a compelling video you’ll find very interesting.

Will you be prepared when everything we take for granted changes overnight?

Just think about this for a couple of minutes. What if the U.S. Dollar wasn’t the world’s reserve currency? Ponder that… what if…

Empires Rise, they peak, they decline, they collapse, this is the cycle of history.

This historical pattern has formed and is already underway in many parts of the world, including the United States.

Don’t be one of the millions of people who gets their savings, retirement, and investments wiped out.

Click the button below to watch the video.

About the author: Simon Black is an international investor, entrepreneur, permanent traveler, free man, and founder of Sovereign Man. His free daily e-letter and crash course is about using the experiences from his life and travels to help you achieve more freedom.

Comments on this entry are closed.

  • Jeremy Howie

    Thanks for the post Simon…great value and very eye opening.

    I do not trust the banks or the government. I convert some of my federal reserve notes in to silver numismatic assets every month. If you or your readers would like to ensure some of their ‘money’ with real money with the Silver Premier Club, feel free to contact me.

    Thanks for speaking the truth.

  • MensaWASP

    The Zeitgeist Film Series (and hence The Zeitgeist Movement) have been talking about fractional reserve banking for the last few years.

    • Nathan Hopkins

      Zeitgeist has a communist socialist agenda they want communal living it’s in their video.

      • MensaWASP

        In reference to the title of this article (and regardless of how you feel about their “agenda”), I was simply mentioning the ONLY other source I have come across that talks about fractional reserve banking (besides Sovereign Man, of course).

      • Tbnyc

        Read the creature from jeckel island it really covers the topic

  • Alan Brown

    Loaning your money out is not fraud if they tell you “We’ll be loaning your money out”.

    There’s no money created in the scenario. There’s just a ledger entry. It does not increase the money supply. Its not competing with other money to buy things,

    To see this more clearly, imagine if there were no reserve at all. Loan the money now and have the borrower deposit it in a bank. Have that cycle repeat a billion times. What the heck, do it an infinite number of times. The money supply should expand to infinity and the currency should be worthless. That’s a powerful $100.

    Do it with a penny instead. Same result.

    No, fractional reserve banking is NOT the cause of inflation.

    Loaning money to a friend and then have it leant to every human being on the planet would not create more money either. Banks just write it all down. And there’s the reserve requirement to muddle things.

  • Anon

    “One of the unequivocal laws of the universe is that governments tend to
    screw up everything they try to do. When life gives them lemonade, they
    make lemon laws. Even if grounded in good intentions, all they know how
    to do is blow other people’s money and pass destructive new regulations.” THIS is why people need to stop encouraging politicians, by “voting”, and simply become as self-reliant as possible – across the board. Eventually, politicians would become largely irrelevant.

  • Archcommander

    If you want true enlightenment on the Fed, fractional reserve banking and what the ultimate agenda is, read “The Creature from Jekyll Island” by G. Edward Griffin. A fascinating read on world finances from past to present to future.

  • Brianna Aubin

    There’s nothing inherently wrong with a bank loaning out a fraction of their reserves… provided that you know in advance they’re going to do it and agree to it. There are several free market ways to compensate for the possibility of a bank run. One is to agree not to withdraw your money for a stated period of time. Another is to agree that when you withdraw your money, the bank has X amount of time to give it to you. A third is to have an agreement that if the bank cannot provide your money immediately, then you have to wait X amount of time, but will get a certain amount extra in exchange for the inconvenience. Yes banks would still fail sometimes, but you wouldn’t get systemic failure or widespread panic whenever an individual bank failed, and it’s hard to feel cheated when you agreed to the conditions in advance.

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