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Fractional-Reserve Banking: From Goldsmiths To Hedge Funds To... Chaos

Tyler Durden's picture


From Chapter 15 of The Money Bubble, by James Turk and John Rubino:

Banking didn’t start out as a reckless, parasitical plaything of a moneyed and politically-connected aristocracy. In the beginning, in fact, bankers weren’t even bankers. They were jewelers and goldsmiths who had to maintain their inventory with vaults, guards etc., and offered storage services to others with valuables to protect. So the original banks were, in effect, very safe warehouses.

Eventually some goldsmiths noticed that the paper receipts they gave to their customers to evidence the valuables left in storage began to circulate as currency alongside their countries’ coins. A shopkeeper accepting these receipts in payment knew that he could go to the goldsmith to redeem them for gold and silver, and also recognized that a paper receipt was more convenient to use as currency than were pieces of metal. Gradually these receipts became a widely-accepted form of payment, circulating among buyers to sellers and saved like other forms of wealth.

The goldsmiths then noticed something else about their new paper-money invention: Only a tiny fraction of their clients asked for the return of their valuables in any given period, which led to a bright – but legally and morally-dubious – idea. Why not start issuing receipts in excess of the gold and silver on hand? The goldsmiths could spend this currency themselves or lend it to others – thus inventing the business/consumer loan. Henceforth the total gold and silver in the vault (the goldsmith’s reserves) would equal only a fraction of the receipts circulating as currency.

“Fractional reserve banking” was thus born of deception if not outright fraud, because for the receipts to retain their value the goldsmiths had to pretend that those paper claims to gold and silver were backed by an equal amount of metal and were therefore of equivalent value. They were not, of course, because a tangible asset is more valuable than a promise to pay a tangible asset, particularly when the latter outnumbers the former.

The goldsmiths, having evolved into more-or-less recognizable bankers, then realized that more deposits equaled more profits. So they began paying people for deposits of gold and silver rather than charging for their storage, thus inventing the interest-bearing account.

The resulting system had some inherent dangers, most obviously that it tempted bankers to lend out ever-greater multiples of deposits, increasing the odds that they would be unable to meet withdrawal requests and collapse. This happened frequently early-on, eventually leading governments to regulate the amount that a given bank could lend against its capital.

For a sense of how this works, imagine a bank with $100 in capital that is required to hold a reserve equal to 20 percent of its loans outstanding – which based on experience is usually more than enough to satisfy a typical day’s withdrawal requests. In our example, the bank can lend 4/5ths of its depositors’ money, or $80, while 1/5th, or $20, remains in reserve. Now here’s where it gets interesting: When our hypothetical bank makes a loan, the recipient deposits the proceeds in another bank, which can lend out 4/5ths of that deposit. The recipients of those loans make deposits in other banks, and so on, until a huge multiple of the original deposit base has been turned into circulating currency.

The result is an “elastic” money supply. When borrowers are optimistic and want to increase their borrowing, banks in a fractional reserve system can in the aggregate offer them immense amounts of new credit. So the money supply, instead of being determined by the amount of gold, silver or other bank capital in the system, can expand dramatically to accommodate an energetic society’s demands.

But it can also contract dramatically. If an economy that has greatly increased its money supply through bank lending suddenly takes a downturn or is unnerved by an unexpected crisis, borrowers will pay off their loans or default on them and banks won’t replace them, while depositors seek the return of their cash. These actions cause the money supply to collapse, potentially all the way back to the level of base money in the system. The result of this fluctuation in the supply of circulating currency is a recurring series of booms and busts that wipe out businesses, individuals, and banks and frequently send the general economy into recession or depression.

Fractional reserve banking was, in fact, a major cause of the Great Depression. To condense a long, complex story into a single paragraph, the extra currency that was printed by the belligerents during World War I (which ended in 1918) was recycled through the fractional reserve banking system and massively amplified via the process we’ve just described. This tsunami of new credit caused the Roaring Twenties boom in asset prices – especially global equities – that popped in 1929, destroying the pseudo-wealth created in the previous decade. The collateral supposedly guaranteeing bank loans evaporated and sentiment turned negative, sending the fractional reserve credit machinery into reverse and collapsing both the banking system and the real economy.

Today’s situation is much, much worse. To see how, click here.


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Fri, 05/23/2014 - 20:32 | 4790169 TeamDepends
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But we have the FDIC today.

Fri, 05/23/2014 - 20:36 | 4790173 Dre4dwolf
Dre4dwolf's picture

Lets say you had 250,000 in the bank, and your bank among others failed.

By the time you get 250,000$ back from FDIC, after all these banks fail, do you think 250,000$ will be worth anything? . . . by the time you get it, it wont buy you bread, the people who had 20,000$ under the matress and spent it for gold/silver or something else are going to be on better footing than the guy who had 250k in the bank.

Fri, 05/23/2014 - 20:38 | 4790177 TeamDepends
TeamDepends's picture


Fri, 05/23/2014 - 20:54 | 4790196 Dre4dwolf
Dre4dwolf's picture

Its not sarcasm, these banks and governments are not going to sit there and fix the problem for your benefit, they are going to take advantage of the situation, just like they did in 2008, we will have bail-ins + bailouts for bankers, they will take your deposits, and promise you 50% of your money back over a year or two, at which point the economy is soo fucked, even if you had cash in the bank, it wouldn't do you much good.

FDIC is a confidence scam, its not a real solution, and in-fact only encourages banks to commit fraud (I say commit fraud, because what they do is NOT TAKE RISKS) the "risks" they take have nothing to do with gambling in the normal sense of the word, because the gambles they take are not on businesses (like lending money to a new business and hoping that it succeeds) its gambling on paper scams and garbage that no one understands because all the paper work is bifurcated, securitzed, chopped up, sent through a shredded duct taped back together and then digitized , sent to the trading floor and traded on as a derivative of something that no one even can keep track of for the simple fact that the paper work by definition on any common sense level is fraudulent.


FDIC only ENSURES that there will be a bank run in the future, by giving people a false sense of confidence leading to apathy and complacency (people don't withdraw their money from fraudulent banks, because they think they are protected) when in reality, they have never been more at risk.

Fri, 05/23/2014 - 21:00 | 4790208 Tinky
Tinky's picture

Wow. Even after he told you that he was being sarcastic (which shouldn't have been necessary in the first place), you continued to miss the point.

Quite a feat – in a sense.

Fri, 05/23/2014 - 21:01 | 4790212 Dre4dwolf
Dre4dwolf's picture

Wouldn't be the first time I glazzed over and continued a rant, probably wont be the last  . . .

Fri, 05/23/2014 - 21:09 | 4790232 Slave
Slave's picture

I love bankers. They help everybody reach their dreams. Specifically the American Dream!

Fri, 05/23/2014 - 21:31 | 4790284 SAT 800
SAT 800's picture

The reason they call it the "American Dream": is because you have to be asleep to believe it.----George Carlin. An excellent modern philosopher often mistaken for a comedian.

Fri, 05/23/2014 - 22:43 | 4790465 Tao 4 the Show
Tao 4 the Show's picture
Fractional-Reserve Banking: From Goldsmiths To Hedge Funds To... Profits from Thin Air
Sat, 05/24/2014 - 03:29 | 4790788 Theosebes Goodfellow
Theosebes Goodfellow's picture

Look, not to be the wet noodle here, but the sin of the banker isn't committed with fractional-reserve banking. The crime is something called "duration-mismatch". It's lending the money in demand deposits. for long loans. Kieth Weiner covers this quite well.

Adulteration of the currency is the other sin, but the writers of the post didn't bring that issue up. To a certain extent simply having bi-metalism can do it without even debasing your currency, (Gresham's Law).

Sat, 05/24/2014 - 09:16 | 4791038 Sean7k
Sean7k's picture

Fractional reserve banking encourages the borrowing of debt for the sole purpose of creating interest payments. When provided to government, the State can continue to borrow while only paying the interest. Thus, the debt is never retired, but carried on for generations- generations which never have representation nor opportunity to consent to this debt accumulation. 

This debt only being bound by the degree of faith the world places in it, could be potentially unlimited. Every dollar of debt requires the creation of a percentage of that dollar for interest, creating a constant need for more dollars. This only happens in a system that fails to pay down principle- FRACTIONAL RESERVE BANKING. 

Keith Weiner is a tool, but you should know that from his last name.

Fri, 05/23/2014 - 21:19 | 4790259 scatterbrains
scatterbrains's picture

Who loves you baby!   Rant on!!   You nailed it!  and hopefully helped ever more folks that are confused about what's going on understand a little clearer... great artical in my opinion by the way.

Sat, 05/24/2014 - 12:52 | 4791360 mojine
mojine's picture

1. (n.) The abyss between the creator of witticisms and the intended recipient who does not find the humor in it.

Fri, 05/23/2014 - 21:00 | 4790209 Dre4dwolf
Dre4dwolf's picture

Ahh I see you were being sarcastic about FDIC, I gota lay off the keyboard, too much of an anti-banker mood today for me.

Fri, 05/23/2014 - 21:20 | 4790263 UselessEater
UselessEater's picture

You wrote a nice summary though, IMO; pity such a succinct overview will mean nothing to those around us we are trying to warn. I guess its true, that it has to actually happen to people before they get it; no wonder we all get so damn exasperated and hit the keyboard!!

Fri, 05/23/2014 - 22:05 | 4790379 TeamDepends
TeamDepends's picture

Not a problem, did not junk you.  We feel not just your rage, but THE  rage.  For instance, why didn't gold shoot up 2-5% today after the manipulation news broke?  Is the average dope who reads that headline thinking, "whew, good thing I didn't buy into that rigged market"?

Fri, 05/23/2014 - 23:19 | 4790526 mvsjcl
mvsjcl's picture

"...why didn't gold shoot up 2-5% today after the manipulation news broke?"


The question frames its own answer.

Fri, 05/23/2014 - 21:29 | 4790280 SAT 800
SAT 800's picture

And "Depends", too. LOL. I do understand your despairing sarcasm and sympathize with it, of course.

Sat, 05/24/2014 - 07:45 | 4790979 williambanzai7
williambanzai7's picture

Fri, 05/23/2014 - 20:40 | 4790179 LetThemEatRand
LetThemEatRand's picture

A guillotine makes fractional reserve bankers.

Fri, 05/23/2014 - 21:04 | 4790216 813kml
813kml's picture

A little too civilized, I'm thinking of something more medieval like a good drawing and quartering.  Maybe throw in a blood eagle for variety.

Fri, 05/23/2014 - 23:36 | 4790551 Greenskeeper_Carl
Greenskeeper_Carl's picture

I somehow don't see any of them managing not to scream during the blood eagle. No Valhalla for Jamie. (That shit looked pretty fucked up)

Sat, 05/24/2014 - 12:10 | 4791278 Kirk2NCC1701
Kirk2NCC1701's picture

They give themselves things like OBE (Order of the British Empire),

When they deserve a different OBE:  Order of the Blood Eagle.  We need a Ragnar Lothbrok to clean the swine palace.

Fri, 05/23/2014 - 21:09 | 4790229 Dre4dwolf
Dre4dwolf's picture

Just remember to dispose of the left-overs properly, you don't want the vermin to repopulate like starfish ;P

Fri, 05/23/2014 - 21:39 | 4790299 813kml
813kml's picture

I would say there is a 50/50 split of gentile/Jew bankers. So, for maximum effect...

The gentile gets it first, fed to the pigs, butcher the hog, serve as last meal to next Jew banker.  

Rinse, repeat.

Sat, 05/24/2014 - 06:46 | 4790835 Anasteus
Anasteus's picture

As regards the fractional mechanism, the author didn't mention one important thing making the article a bit hard to understand.

The 4/5th of the $100 deposit, that is $80, is not a loan taken from the $100 deposit, because the loan is not deducted from the original deposit. Instead, the deposit serves just as a base (or a limit) for calculating a brand new amount the applicant account can be credited. The key point is, both accounts (the original deposit and the one just credited) still have access to full amount of their money as if nothing happened; so we now have $180 for immediate use and the overall money supply is thus increased. If new loans were merely deducted from deposits there would be no fractional banking at all, just an existing money redistribution.

So, the crafty operation of crediting one account while 'forgetting' to deduct the amount from deposits is what makes banks create credit out of thin air.

Fri, 05/23/2014 - 20:41 | 4790183 Duc888
Duc888's picture



Nonsense, I see nothing wrong with pulling vapor money out of ones ass.  I only wish I could do it too.

Fri, 05/23/2014 - 20:46 | 4790188 Reaper
Reaper's picture

Today we have powerful witch in DC, who generates endless currency upon which she casts a spell making all who possess it never doubt its value.

Fri, 05/23/2014 - 20:49 | 4790189 Dr Benway
Dr Benway's picture

Lol the banks don't lend a proportion of deposited money. Deposits are created by lending, money pulled from thin air.

Fri, 05/23/2014 - 21:15 | 4790246 Yes_Questions
Yes_Questions's picture



and then there's that. 

Fri, 05/23/2014 - 20:51 | 4790192 Slave
Slave's picture

This article was a pretty good explanation for noobs. We need these once in a while.

Fri, 05/23/2014 - 20:53 | 4790194 allgoodmen
allgoodmen's picture

I like the term fictional reserve, somebody here came up with that. I almost never use the actual name. And what else do you call a system using a dollar backed by nothing? Worse than the Dow which once had a divisor of 30 and is now something like .000001

Fri, 05/23/2014 - 21:16 | 4790249 El Vaquero
El Vaquero's picture

Backed by nothing you say? No, it's worse than that. It's a coercive ponzi. It's backed by oil, as oil is priced in dollars. It's backed by force. The ways in which this is true are numerous, but if you want to see a domestic example, remember that "This note is legal tender for all debts, public and private" on it, and then look up what a writ of execution is. And it's backed by debt. I can guarantee that you know many people who will take your FRN because they owe debts to others, and if they don't pay them, there is the potential for the creditor to get a judgment and then a writ of execution. The fact that it either requires periodic partial collapse or sustained real exponential growth tells you of its ponzi nature.

Welcome to planet, motherfucker.

Fri, 05/23/2014 - 23:22 | 4790530 mvsjcl
mvsjcl's picture

Welcome to planet Motherfucker?

Sat, 05/24/2014 - 09:26 | 4791048 Sean7k
Sean7k's picture

Or read the Constitution and see that congress can make no bill of credit a legal tender. That a dollar is 371 1/4 grains of pure silver and gold a ratio thereof. That Congress is required to meet regularly and make sure the ratios of all monies are in balance. Then price a paper dollar, a silver dollar, a $5 dollar gold piece, a nickel-copper dollar and all their various weights. 


Fri, 05/23/2014 - 20:55 | 4790200 q99x2
q99x2's picture

Any nations still out there that haven't been taken over. Listen, it will behove you to arrest Loyd Blankfein the first chance you get. He will get you if you don't arrest him first.

If you do get him then we will come rejoicing bringing in the thieves. Bringing in the thieves bringing in the thieves, we will come rejoicing bringing in the thieves.

Fri, 05/23/2014 - 21:07 | 4790225 Mr. Pickles
Mr. Pickles's picture

Mostly accurate, but the 4/5 example is actually the bank keeping the $100 as reserve, while loaning out $400 in fraudulent paper. Inflation results, bubbles form and pop, then a run begins on the bank for $500. There's your depression, folks.

Fri, 05/23/2014 - 21:19 | 4790260 Dr Benway
Dr Benway's picture

No, it's actually worse than that. The bank creates the deposit by making the loan. So if the bank lends you $1000, it creates it in your account, no prior deposits of any kind necessary. You can withdraw $800 and buy propellerhats, the bank will still be within its 20% requirement.

Fri, 05/23/2014 - 21:29 | 4790277 potato
potato's picture

Yes. money multiplier is 1/(required reserve ratio) which is in this case 1/(1/5) = 5

The money supply increases by a factor of five in a 20% RRR regime

Fri, 05/23/2014 - 21:08 | 4790228 HeavyShadow
HeavyShadow's picture

an appearance of the 4th kind... what appears to be, but is not

Fri, 05/23/2014 - 21:17 | 4790230 RaceToTheBottom
RaceToTheBottom's picture

The engineering equivalent to Fractional Reserve Banking is building a toll bridge that works most of the time.  It saves a shitload of money and provides a shitload of profits to the owners of the toll bridge.


The only problem occurs when a traffic jam occurs and more cars are on the bridge than it can take and it falls into the river.

Fractional Reserve banking exactly the same thing:  It relies on probabilities and federal backups to stop the runs that would occur and increasse the profits of the banksters.

If an engineer built a toll bridge like that, he would lawsuited to death,; instead banksters get bonused to heaven...


Fri, 05/23/2014 - 21:49 | 4790329 JR
JR's picture

Since it was created in 1913 the Federal Reserve System has presided over the crashes of 1921 and 1929, the Great Depression of 1929-1939, recessions in the years 1953, 1957, 1969, 1975 and 1981, a stock market Black Monday in 1987, the bursting of the dot-com bubble in 2000,  the collapse of the sub-prime housing market in 2007, the 2008-economic meltdown…and ZIRP beginning in late 2008 - devaluing Americans’ savings while inflating the money supply hand over fist for Wall Street beginning with QE in early 2009.

The Fed has been, and is, a destructive force of gigantic proportions, attacking at the heart of America’s economy and leaving in its wake these past 100 years the destruction of the estates and lives of countless businessmen, farmers, depositors in the 1000s of failed small banks inthe 20s and 30s, indebted students, retirees, displaced home owners, young working people, and America’s standard of living in general.

America was a land of hope and opportunity, laying foundations in the early 20th century for consistent unequaled growth until a concentration of power in the hands of the big New York banks, the money trust, took ownership of the money supply in 1913 under the moniker, Federal Reserve System, destroying free enterprise competition in partnership with the government, with the sole power to create money out of nothing, bail out their bank failures and tax via inflation.

G. Edward Griffin explains the enormity of this gigantic scam, a scam that most people don't even know is a scam: “We're talking about a river of unearned wealth that is so wide you can't even think of crossing it, flowing perpetually into the banking cartel. A dead shot across the productive element of society. Money being taken from people who are working hard providing the material and the labor. They don't even know that this is being taken from them and it's in this huge river of wealth flowing into the banking cartel. It's a staggering thought.”

And where is this river flowing?

“They are spending it to acquire control over the power centers of society. The power centers are those groups and institutions through which individuals live and act and rely on for their information. They are literally buying up the world but not the real estate and the hardware, they're buying control over the organizations, the groups and institutions that control people…This process has gone on not only to a marked degree in America and in the other industrialized nations of the world, but it has gone on in the so-called third world or underdeveloped nations to such a degree that I would say the process is now complete. They own these countries… These countries have been purchased because the politicians in those countries are now totally addicted to this money.” …

“What I'm trying to say is that the name of the game out there is not wealth, it is power.”

Sat, 05/24/2014 - 00:17 | 4790614 Radical Marijuana
Radical Marijuana's picture


That is well worth repeating:

“What I'm trying to say is that the name of the game out there is not wealth, it is power.”

The problem is that the source of that power is enforced frauds.

Backing up legalized lies with legalized violence NEVER makes those lies become true. Instead, the more successful the banksters become, the more insane the whole society is, because the more it is controlled by lies.

After at least a Century of the international banksters recapturing control over the American monetary system, the government of the USA has become more stark raving mad than we could actually comprehend, because its situation has devolved from debt slavery to debt insanity, which no longer has any mathematically possible way to be fixed within the established systems. There are no possible monetary "reforms" that could work ... Instead, we are being driven towards psychotic breakdowns, into some currently unimaginable phases of monetary "revolutions."

Sat, 05/24/2014 - 12:29 | 4791310 Kirk2NCC1701
Kirk2NCC1701's picture

As others have also pointed out, the variations on the FRB fraud have been around for millennia.

In fact, the New Testament documents this in the scene where Jesus has his only "meltdown" in a fit of Righteous Indignation*, when he overthrows the tables of the Money Changers.  They issued Temple Coins for Shekels, that were used to buy things in the Temple Store (doves, etc).  They paid the Temple Priests a percentage of the hefty profits.

I'd go so far as to claim that THIS was the real "unforgivable crime" that Jesus committed against the Priests, and what caused them to spring into action and why he "had to die".  Everything else was a smokescreen.  And don't forget that when the "Bible" was collated (into one volume, from a much larger collection of writings) at the Council of Nicaea, that the Roman Emperor Constantine sponsored the whole event of deciding what was "divinely inspired", what was not, and what was downright dangerous heresy.  Constantine wanted one national religion, whose leaders would mirror the hierarchy of the Roman military.  That would makes for very easy control of such a religion, by controlling or selecting its leadership.


* Most people confuse Rage with Righteous Indignation, and the MSM, public schools and HR people use only the former.  Rage is a purely emotional response, devoid of a rational component.  Righteous Indignation on the other hand, has a rational and moral basis of outrage -- that spills over into the emotional part also.  Big difference.

Fri, 05/23/2014 - 21:57 | 4790348 limacon
limacon's picture

Sigh . 

Fractional banking predates even money . 

See Celtic credit arrangements concerning cattle .

The Roman Empire copied all the good bits and the bad bits .

Gresham's Law struck , and the bad bits triumphed .

The Roman Banking System really worked the poor over to past penury .

Hence the early Christian and Islamic strictures against interest .

This is now about 1500  years on , and the same mistakes are repeated .


Greed and Stupidity are the hostlers of your penury and death by starvation .

See Ostrum systems how to avoid it .



Sat, 05/24/2014 - 00:31 | 4790629 Radical Marijuana
Radical Marijuana's picture

David Graeber, DEBT: The First 5,000 Years

The idea that "money" originally evolved from bartering is not completely correct, although it is wide-spread and seems to make common sense:

A Brief History of Money - By Deek Jackson

Anthropological studies show that social fiat currencies began with the dawn of time. For more details, see Charles Eisenstein & David Graeber, (video linked above) who say that "money" (as metal coins) was invented to finance war.

My definition is:


Fri, 05/23/2014 - 22:16 | 4790402 limacon
limacon's picture

Without Bankers nobody would be stupid enough to invest in Civilization .

Sat, 05/24/2014 - 00:07 | 4790596 Radical Marijuana
Radical Marijuana's picture


The paradoxes of the specialization of labour!

The benefits tend to be off-set by some specializing in being dishonest, and backing that up with violence. Thus, the advantages of most people being productively specialized tend towards eventually being canceled out by a few who get into their own specialized feedback loops of deceits, backed by destruction, whereby the production of destruction controls production.

After any group in society starts to get away with fraud, then they automatically become more wealthy and powerful, and so, even more able to get away with fraud. The tragic trajectory of the banksters is degeneration from acting like the top carnivores in the human systems, towards becoming parasites that are like a cancer killing its host organism. THE PARADOX IS INTENSE THAT WHAT ORIGINALLY MAKES CIVILIZATION LATER IS WHAT BREAKS IT.

Fri, 05/23/2014 - 22:25 | 4790428 limacon
limacon's picture

Banker's Ruins .

When they just walk away .

Like Maya

Like Detroit 

Like Angkor

The City has become too onerous .

Not worth it .

Humans just walk away .


Fri, 05/23/2014 - 23:31 | 4790545 MrBoompi
MrBoompi's picture

One huge reason things are much worse today is because of derivatives. For example, just a small upward tick in interest rates would easily wipe out all capital in certain banks and worse, since I'm sure the Fed would secretly have to bail them out with trillions more newly printed dollars. And just like the mortgage derivative schemes, there are ways to place bets and cause the very disaster you can then make enormous profits from.

Sat, 05/24/2014 - 07:15 | 4790962 AdvancingTime
AdvancingTime's picture

 The more and more I study derivatives it now appears the main goal of QE may have been to hold up the underlying value of assets that feed into and support the massive derivative market more than help the economy. QE has up to now stopped an implosion of derivatives and the resulting contagion and shock that would have spread throughout the financial system. 

The point of the article below is to call attention to the insanity of derivatives as an instrument or tool to add stability to our financial system and the huge risk this massive market presents. By stacking risk upon risk and transferring it off to another party who may not be able to preform or is over-leveraged you do not increase stability.

Fri, 05/23/2014 - 23:58 | 4790585 Radical Marijuana
Radical Marijuana's picture

The same points as presented in this article are shown in these entertaining animated videos:

Paul Grignon

Money As Debt

0ne of the best for beginners.

Money As Debt is MAD as in

"Mutual Assured Destruction."

Money As Debt-Full Length Documentary

Money As Debt II

The new Money As Debt III is at:

See also:

What the Heck is a Bailout?

Sat, 05/24/2014 - 12:04 | 4791267 Kirk2NCC1701
Kirk2NCC1701's picture

This is one of the best series on the history and the swindle of money.

It is good to know, but known to extremely few people that every time you use your "Credit" card, you are participating in this fraud, with a very limited power to create "money":  Using a Credit cards uses FRB to create money out of thin air.  Using Cash or a Debit card does not add to FRB.

Sat, 05/24/2014 - 02:43 | 4790755 AUD
AUD's picture

The premise of this article, that "the original banks were, in effect, very safe warehouses" is complete tosh. Banks monetise debt, always have, always will.

Fractional reserve is a red herring, what matters is that the quality of the debt being monetised is regulated. Since the gold standard was dumped, bad debt has been accumulating, now the most colossal Ponzi scheme in human history.

Sat, 05/24/2014 - 03:40 | 4790810 VWAndy
VWAndy's picture

 As it has allways been?



Sat, 05/24/2014 - 07:06 | 4790958 AdvancingTime
AdvancingTime's picture

The modern economy that has evolved over the last several decades is loaded with interwoven contracts reeking of contagion. If faith drops in these intangible "promises" and money suddenly flows into tangible goods seeking a safe haven inflation will soar. Never before has mankind diverted such a large percentage of wealth into intangible products or goods.  I contend this is the primary reason that inflation has not raised its ugly head or become a major economic issue. Like many of those who study the economy I worry about the massive debt being accumulated by governments and the rate that central banks have expanded the money supply.

The timetable on which economic events unfold is often quite uneven and this supports the possibility of an inflation scenario. A key issue being one of timing. If the price of gas jumps to $8 a gallon overnight do you buy gas and not make your car payment or stop driving the twenty miles to work? Answer, it could be months before your car is repossessed so you buy gas. It is important to remember that debts can go unpaid and promises be left unfilled. Is this possible and if so where would that leave us? Chaos and major disruption would result from such a scenario. As we have seen from the economic crisis of 2008 and following many other unsettling developments legal actions can continue to drag on for years.  More in the article below.

Sat, 05/24/2014 - 07:07 | 4790959 Optimusprime
Optimusprime's picture

Usury has been around for long before the quaint jeweler to banker scenario.  Hence the biblical prohibitions thereof.

Sat, 05/24/2014 - 07:36 | 4790970 Notsobadwlad
Notsobadwlad's picture

One might ask: "what makes an aristocracy?"

An Aristocracy is conspiracy between its members to control the population through force. In doing so, their ability to steal from the population and give to themselves is only limited by their creativity and cruelty. There is no inherent right for any parasitic group or conspiracy to steal and murder. Anyone who has read Machiavelli understands that those at the very top absolutely depend on the corruptability of the servant aristocrats. It is much easier to control through corruption than murder ... although murder is also a tool for those who would have power, but will not submit to membership in the conspiracy. (Look at Bill Gates. He purportedly did not want anything to do with the parasitic aristocracy ... and now he is apparently peddling sterilization of both mind and body through vaccines)

I personally believe that the current parasitic aristocracy has gotten too large for those at the top to control, especially in the event of a crisis. This is probably more dangerous for the conspiracy than the general population, which is for the most part peaceful, good and much more intelligent than the aristocrats given them credit for being.

Sat, 05/24/2014 - 16:24 | 4791724 Radical Marijuana
Radical Marijuana's picture

Excellent points, Notsobaldwlad!

Sat, 05/24/2014 - 09:18 | 4791041 OC Sure
OC Sure's picture



The simplest way to learn anything that is complex is to know the beginning for as Aristotle noted knowing the beginning is more than half of the knowing. Fractional Reserve banking is just another way of saying, "Hey look, we produce nothing but steal from you!"

"...What modern economics calls the banks' multiplier effect or leverage is not the production of money but instead the creation of counterfeit. That is it is not the representation of the measure of work performed. Instead it is the impersonation of work performed; it took no labor to produce the measure of the multiplier and leverage, all it took was a pen stroke or an enter key. It represents no productive work and is therefore not money but instead it is counterfeit. Money is the measure of work a person does to produce their product which satisfies the demands of other producers. Counterfeit is the impersonation of productive work done when actually none has been performed. The purpose of counterfeit then is to represent the illusion of trading something for something when in fact it is the trading of nothing for something. Whomever trades nothing for something is a thief..."


Sat, 05/24/2014 - 11:35 | 4791234 JR
JR's picture

The purpose of counterfeit then is to represent the illusion of trading something for something when in fact it is the trading of nothing for something…

Your full definition describes Fed shenanigans in a nutshell, OC Sure.

According to figures provided by Prudent Bear around 2009, the Fed was keeping about 1/4 of 1% in deposits as "fractional" reserve money in its system, i.e. 25 cents in receipts for every $100 of debt creation.  Mogambo Guru calculated that to be .00026% in reserves at the time—just enough, I suppose, for the Fed central bankers to say America is on a fractional-reserve system, albeit .99974% was thin air.  I doubt if even keeps 25 cents every $100 now.  After all, “saving” is hoarding, is it not? And, therefore, according to Fed oligarchs, deserves to be punished.

The Ludwig von Mises Institute fleshs out your definition with the details:

Criticism of fractional reserve banking |Ludwig von Mises Institute  

It begins: Critics of fractional reserve banking and the related fiat paper monetary system may refer to it by the term debt-based monetary system,[31][32][33] or credit-based monetary system.[34][35][36][37] They may also refer to money created in parallel with debt as debt money or endogenous money, reflecting the fact that virtually all new money is currently created by people or businesses or governments further indebting themselves to banks.[38][39] This monetary system is called "endogenous" because the money supply is flexible, expanding in parallel with the demand for debt and stalling or contracting when demand for debt declines.[40] Some consider this a perverse and dysfunctional way of introducing new money into the economy.[38]

NOTE: This scholarly paper has 864 references, including Zero Hedge, and ending with James Quinn’s “Americans Loving Their Servitude.” It also links with Zero Hedge among others, including above.


Founder of the so-called "New Austrian School", Professor Antal E. Fekete, has stated the following in relation to the current monetary system:[65]  (The Silver Saga)

The world economy, sagging as it is under the weight of its debt tower and fast depreciating irredeemable currencies, is clearly on its way to self-destruction. The forcible elimination of, first, silver and then a hundred years later of gold, from the monetary system removed the only ultimate extinguishers of debt we have. In consequence, total debt can only grow, never contract. The process is hidden since the unpaid and unpayable debt is accumulating as sovereign debt of governments. The world is deluding itself that sovereign debt can increase indefinitely as governments can extend its maturity indefinitely. In 2008 we had the wake-up call that it cannot. Unless we stop the proliferation of debt, the world is facing prolonged deflation, depression, continuing capital destruction, bankruptcies and unprecedented unemployment. It is leading to a breakdown of law and order. It could spell the end of our civilization.

Financial commentator Jim Willie has written the following regarding the current fiat money system:[67]  (Raging Gold Bull)

The West cannot solve its problems, hardly properly described as a financial crisis anymore, under the current framework bound to the fiat paper currencies. The global monetary war is heating up notably. The heavy liquidity has caused unfixable distortions in every conceivable bond market niche. The new and better debt devices have been exposed for their shams. The leading central bankers lost their credibility long ago. The weakness is as broad as it is deep, a reliance upon paper wealth and paper structures and paper contracts, during a time of zero bound interest rates and unfettered hyper monetary inflation to cover the debts. Almost no foreign USTreasury Bond buyers exist anymore. The US has become Weimar Amerika, a fascist enclave.

On 4 November 1999, Lord Sudeley stated in the House of Lords:

The only way in particular to stop inflation is to stop banks from creating credit. The supply of money should be removed from banks and should be assumed by governments, who should issue it on a debt-free basis. Such a view is supported by five disparate quarters: the noble Lord, Lord Beswick, in the debate which he introduced to this House in 1985, Disraeli, the Vatican under Pope Pius XI in his Encyclical Quadragesimo Anno in 1931, the Tsars of Russia in the last century, who prevented the setting up of a privately owned central bank, and, above all, Abraham Lincoln, who said that governments should create, issue, and circulate all currency and credits needed to satisfy the spending power of governments and the buying power of consumers.

By adopting those principles, the taxpayer would be saved immense sums of interest. Lincoln’s greenbacks were generally popular, and their existence let the genie out of the bottle with the public becoming accustomed to government-issued, debt-free money. The year after Lincoln’s assassination, Congress set to work at the bidding of the European central banking interests to retire the greenbacks from circulation and to ensure the reinstitution of a privately owned central bank under the usurers’ control.

During the history of the United States, the money power has gone back and forth between Congress and some privately owned central bank. The American people fought off four privately owned central banks before succumbing to a fifth privately owned central bank, at that time essential, owing to the period of weakness during the Civil War.

The founding fathers of the United States knew the evils of a privately owned central bank. They had seen how the Bank of England ran up the British national debt to such an extent that Parliament was forced to place unfair taxes on the American colonies, leading to their loss following, the American Revolution.

I now conclude. Once the fundamental decision is taken to prevent sterling from being debt-based, the Commonwealth could act as the right monetary union to use sterling debt-free as a genuine alternative to the dollar and the euro.

Sat, 05/24/2014 - 19:10 | 4791469 OC Sure
OC Sure's picture

Thank you, JR. Please tell 2 friends to tell to friends.

In the links and excerpts you have provided what jumps out at me the most as with everywhere else is the terms being used. They are not precise enough to be considered true definitions. and therefore they are advantageous to the tyranny of modern economics. By accepting tyranny's terms, the battle is half lost before a word is uttered.  

For example, to call it a "fiat paper monetary system" is rife with contradictions. Fiat means "by decree."  "Monetary," means of money. However, as Aristotle identifies money is the unit of measure that represents the equalization of disproportionate productive work. "Money" by decree does not represent productive work. Instead it represents the theft of productive work; therefore it is counterfeit and not money at all.

We exhcange currency and the current it conducts is either money (the result of productive work) or counterfeit (the result of theft). No matter what we call the currency, it then is a mixture of both work and theft.

Also, when the term inflation is tossed around we need to know inflation of what; money, which is good, or counterfeit, which is bad.

Modern economics intentially confuses the terms to confuse its victims. Thievery requires deception.


Sun, 05/25/2014 - 12:13 | 4793360 JR
JR's picture

OC, your explanation of Inflation or Deflation of Currency brought about by the arrival of the bankers on shore to debase the medium of exchange in their favor into economies that were trading with honest exchanges and with comparative advantage is outstanding.

 I hope to see many more posts from you here not only for my own edification but for others, as well: you have the expertise to make the difference in “this meeting of economies.” Thanks!

As you say:

Another way of asking the same question of where did the loss go is also to ask where did the gain arrive? For the answer, we must return to the beginning. It was the emissary from across the mountains that introduced the debased currency and said they traded their products elsewhere. They were the ones who received your products as if the currency were not debased. They received the full value of your product as if you traded it to them for only 50% of its value. The ones who debased the currency however walked away as if they exchanged with you 100% of their something, the currency, for 100% of your something, the product, but that is false; instead they exchanged with you only 50% for 100%. They stole from you right then and there 50% of the value of your work. You don't see this right away because of the deception. It is not until later when you go to spend the currency that you learn that you no longer have that extra 50% of its power to purchase and what you would have bought with it has already been stolen from you when you unintentionally exchanged your product for only 50% of its value.”


Sun, 05/25/2014 - 13:43 | 4793529 OC Sure
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Thank you, JR!

I am very pleased that it makes your senses.

Please tell 2 friends to tell 2 friends.

Sat, 05/24/2014 - 13:54 | 4791465 VWAndy
VWAndy's picture

I just dont see a metals based money system avoiding inflation. Gold and silver are finite. So the more people save the more scarcity will come into play. Scarcity of the coin would be a huge disaster destroying the value of all labor.

 All this has been about the theft of labor. So labor needs to be in control of the value of the coin. Only the productive could be trusted with this power. Because they earned it. If a person is able to produce they need not steal.

 The only good way I see is an energy based coin that can be made by all productive people. Unconcentrating power and control. Thus limiting the amount of power and control that any group could gain and or maintain. Its all about labors real value. It should be consistant over long timeframes.

 There must be a correcting ability controled by the labor of the productive.

Sat, 05/24/2014 - 14:12 | 4791503 OC Sure
OC Sure's picture

The currency agreed upon will always represent a unit of measure to be used as the means of equalizing disproportionate work. It is the work that the money represents. If one passes off the currency as if they did work, but did none, then the currency was created as an impersonation of one who performs work. It then is this exchange of non work, the counterfeit, for productive work, the money. The fact that the counterfeit is introduced into exchange is what lowers the purchasing power of the currency. There is more currency but less product.

So the "inflation" that you see does not come from what ever the currency is. It comes from the source of the currency and the question to answer is: Inflation of what? Work or theft?


Sat, 05/24/2014 - 17:10 | 4791766 Radical Marijuana
Radical Marijuana's picture

OC Sure, "theft" is a form of work. There are no fundamental dichotomies when the production of destruction controls production.

My general definition of "money" is measurement backed by murder.

There is no way to have a political economy except inside of a human ecology.

There is no way to have debt controls which are not inside of death controls.

People who want to have merely "monetary reforms" tend to want to deliberately ignore that the established systems of debt slavery have already gone irreversibly into debt insanities, which no longer have any possible mathematical ways to preserve the illusion of some sustainable debt slavery.

The points that I always emphasize with respect to articles like the one above are that the central crucial controls are the death controls. However, the history of the murder systems was the warfare that made civilization become what it is now, namely a system which is almost totally based on operating its real human ecology through the maximum possible deceits, and its political economy through the maximum possible frauds.

That emerged as the most expedient set of solutions to chronic political problems which are inherent in the nature of life. The vast majority of people who propose idealized better "monetary reforms" tend to be superficial in their analysis, by neither looking more realistically at how the banksters were able to apply the methods of organized crime to dominate the political processes, nor looking deeper into the chronic political problems, which absolutely require that there must be some death controls, as the lynch pin or keystone, that holds everything else together. My definition of "money is measurement backed by murder" is the only one that includes all of the relevant features. Of course, that is a definition that the overwhelmingly vast majority of people want to continue to deliberately ignore is the case.

This article correctly projects that runaway debt slavery is on the path towards debt insanities, which will provoke chaos, which I say will eventually manifest in the form of causing death insanities. However, generally speaking, the overwhelming vast majority of people prefer to continue to deliberately ignore those realities. Hence, instead, the few that do recognize the problem of private banks legally counterfeiting the public "money" supply then tend to promote impossible idealized "solutions" through various "monetary reforms," which avoid the central issue of the death controlling murder systems.

Given that we DO have globalized electronic frauds, backed by the force of atomic bombs, our problems ARE trillions of times worse than they have ever been before in known human history. Therefore, it is not possible to exaggerate the degree to which having a civilization dominated by enforced frauds is to be living inside of a civilization which has become criminally insane. The supreme paradoxes found in militarism, as the ideology of the murder system, are the main problems we face. The monetary problems are merely the symbolic segues from the military problems. Therefore, the pragmatic paradoxes are that almost all realistic resolutions to our problems are things that most people would regard as being criminally insane, because they are actually living inside of a criminally insane civilization, which they are taking for granted. From a sublime point of view, we need to go through the looking glass of our Bizarro Mirror World, to deal with the deeper chronic problems inherent in the nature of life, which our current civilization has developed sets of expedient solutions based upon the maximum possible deceits and frauds. Human beings have resolved their chronic political problems in ways which have become psychotic, which psychoses are the biggest obstacles towards understanding our real problems better, in order to develop better sets of solutions.

There are, IN FACT, combined money/murder systems, which operate through the maximum possible frauds and deceits, which makes any attempts at more rational public debates regarding those things practically impossible. WE SHOULD NOT CONTINUE TO EMPLOY FALSE FUNDAMENTAL DICHOTOMIES, TO DISTINGUISH THEFT FROM WORK. Theft is a form of work. We can not better understand how the production of destruction controls production unless we move past regarding those phenomena through false fundamental dichotomy concepts.

Sat, 05/24/2014 - 19:26 | 4792034 OC Sure
OC Sure's picture



Radical Marijuana, I know you're wrong for the following reason.

While I agree thieves are very,very hard workers, the fact is that they are not engaged in productive work.

That is they are not working to produce a product. Instead they are working to steal products already produced.

So while all workers exchange the same currency, only the productive worker earns or makes money while it is the thief that requires counterfeit to facilitate their theft by increasing the volume of currency as counterfeit. 

Lastly, you cannot have your definition of money any more then I can have mine. Money and counterfeit are what they are and can't be defined as something they are not. All I have done is identify what they are according to their being.  

Sun, 05/25/2014 - 10:12 | 4793059 Radical Marijuana
Radical Marijuana's picture

OC Sure, your view of "money" is too superficially human, and rather shallow in its perspective on humans at that. The meaning of  the world "money" has been inverted and perverted by the banksters during the previous few centuries. The reasons how and why they were able to get away with doing that need to be more directly addressed.

My view is that money should be seen as information, in the context of general energy systems. Nobody produces anything out of nothing, they only transform things which already existed into other forms, and nothing that they transformed disappears to nothing. The illusions of making "money" out of nothing cannot be understood unless one sees that universality of the methods of organized crime, from warfare, on through to the ways that civilization operates now. False fundamental dichotomies between robbers versus workers that produce things which they can voluntarily exchange (sublimating to become the nice ideas about "money" inside that context), leads to the sterile dead ends of impossible ideals.

"Money serves as a Valve which controls the downhill flow of energy,  which can do useful work as it flows downhill."

The "money valve" exists due to the "murder valve."

"MILITARY ETHICS" IS THE MOST EXTREME OF ALL CONTINUING ENTROPIC PUMP ACTIVITIES. Excluding the murder system from the money system makes it impossible to do anything more than propose superficial monetary reforms, which are not going to work, because they are too shallow.

Sun, 05/25/2014 - 11:48 | 4793305 VWAndy
VWAndy's picture

The death controls will allways exist as they have. Thats why we need a system of justice. That control system has been busted at all levels. Fixing the system that creates such massive corruption would be a great place to start.

 The bounderies of police/millitary actions are set thru funding. Shorten that leash. This can and must be done on a global scale. It can only happen thru accountability. That is not an impossible task. Fix the automated corruption system of fiat. Then we could put in a safty valve that is much more likely to work consistantly.

 It all comes down to accounability. The millitary folks like accountability and actually would in a normal non bizzaro world embrace it. Millitary leadership has been corrupted by the same fiat.

 Its the corruption of the worlds coin that generates the bizzaro factor that dominates all death controls.

 That said. One idea I have liked for a longtime is a grand jury sort of deal. Set above the supreme court. Take the ten best kids from the national spelling bee with the kids grandparents. Put them in the possition of final authority over all of the government.The kids vote helped by thier grandparents. It starts with the inocents of youth tempered with the knowledge of expeireance. Because no one is capable of fairly judging theselves. Take the IRS for instance. No one in government is without a conflict of interest because thier pay is derived from taxes. So the IRS operates without any leash.

 Im not saying this is the only way true accountability could be gained. But some sort of regulating system could be put in place if the automated corruption was gone.

Sun, 05/25/2014 - 13:48 | 4793541 OC Sure
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Sorry, Radical Marijuana. What I mean to convey is that it is not my view. It is what money is. Whether I view money or not cannot change what it is.

Sat, 05/24/2014 - 13:58 | 4791467 OC Sure
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