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Zeitgeist: Addendum - What is Fractional Reserve Banking? (Snippet)

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A number of years ago, the central bank of the United States, the Federal Reserve, produced a document entitled "Modern Money Mechanics". This publication detailed the institutionalized practice of money creation as utilized by the Federal Reserve and the web of global commercial banks it supports. On the opening page the document states its objective: "The purpose of this booklet is to describe the basic process of money creation in a 'fractional reserve' banking system." It then proceeds to describe this fractional reserve process through various banking terminology. A translation of which goes something like this: The United States government decides it needs some money. So it calls up the Federal Reserve and requests, say, 10 billion dollars. The FED replies saying: "Sure, we'll buy ten billion in government bonds from you". So the government takes some pieces of paper, paints some official looking designs on them and calls them treasury bonds. Then it puts a value on these bonds to the sum of 10 billion dollars, and sends them over to the FED. In turn, the people of the FED draw up a bunch of impressive pieces of papers themselves, only this time, calling them "Federal Reserve notes", also designating a value of ten billion dollars to the set. The FED than takes these notes and trades them for the bonds. Once this exchange is complete, the government then takes the ten billion in federal reserve notes, and deposits it into an bank account. And, upon this deposit, the paper notes officially become legal tender money, adding ten billion to the US money supply. And there it is, ten billion in new money has been created. Of course, this example is a generalization. For, in reality, this transaction would occur electronically, with no paper used at all. In fact, only 3% of the US money supply exists in physical currency. The other 97 percent essentially exists in computers alone. Now, government bonds are by design instruments of debt. And when the FED purchases these bonds, with money it essentially created out of thin air, the government is actually promising to pay back that money to the FED. In other words, the money was created out of debt. This mind numbing paradox, of how money or value can be created out of debt or a liability, will become more clear as we further this exercise. So, the exchange has been made, and now ten billion dollars sits in a commercial bank account. Here is where it gets really interesting. For, as based on the fractional reserve practice, that ten billion dollar deposit instantly becomes part of the bank's reserves, just as all deposits do. And, regarding reserve requirements, as stated in "Modern Money Mechanics": "A bank must maintain legally required reserves equal to a prescribed percentage of its deposits". It then quantifies this by stating: "Under current regulations the reserve requirement against most transaction accounts is 10%". This means that with a ten billion dollar deposit, 10%, or one billion, is held as the required reserve, while the other nine billion is considered an excessive reserve, and can be used as the basis for new loans. Now, it is logical to assume, that this nine billion is literally coming out of the existing ten billion dollar deposit. However, this is actually not the case. What really happens, is that the nine billion is simply created out of thin air on top of the existing 10 billion dollar deposit. This is how the money supply is expanded. As stated in "Modern Money Mechanics": "Of course they" -the banks- "do not really pay out loans for the money they receive as deposits. If they did this, no additional money would be created. What they do when they make loans is to accept promissory notes" -loan contracts- "in exchange for credits" -money- "to the borrowers' transaction accounts." In other words, the nine billion can be created out of nothing, simply because there is a demand for such a loan, and that there is a 10 billion dollar deposit to satisfy the reserve requirements. Now, let's assume that somebody walks into this bank and borrows the newly available nine billion dollars. They will then most likely take that money and deposit it into their own bank account. The process then repeats. For that deposit becomes part of the bank's reserves. 10% is isolated and in turn 90% of the nine billion, or 8.1 billion, is now available as newly created money for more loans. And, of course, that 8.1 can be loaned out and redeposited creating an additional 7.2 billion. To 6.5 billion... to 5.9 billion... etc. This deposit money creation loan cycle can technically go on to infinity. The average mathematical result is that about 90 billion dollars can be created on top of the original 10 billion. In other words, for every deposit that ever occurs in the banking system, about nine times that amount can be created out of thin air. Money-Jitters. Ask the obliging Bank of America for a jar of soothing instant money. M-O-N-E-Y in the form of a convenient personal loan. So, now that we understand how money is created by this fractional reserve banking system, a logical yet illusive question might come to mind: What is actually giving this newly created money value? The answer: the money that already exists. The new money essentially steals value from the existing money supply. For the total pool of money is being increased irrespective to demand for goods and services. And, as supply and demand finds equilibrium, prices rise, diminishing the purchasing power of each individual dollar. This is generally referred to as inflation. And inflation is essentially a hidden tax on the public. What is the advice that you generally get? And that is, inflate the currency. They don't say: debase the currency. They don't say: devalue the currency. They don't say: cheat the people who are safe. They say: lower the interest rates. The real deception is when we distort the value of money. When we create money out of thin air, we have no savings. Yet there's so called "capital". So, my question boils down to this: How in the world can we expect to solve the problems of inflation? That is: the increase in the supply of money, with more inflation." Of course, it can't. The fractional reserve system of monetary expansion is inherently inflationary. For the act of expanding the money supply, without there being a proportional expansion of goods and services in the economy, will always debase a currency. In fact, a quick glance at the historical values of the US dollar, versus the money supply, reflects this point definitively for inverse relationship is obvious. One dollar in 1913 required $21.60 in 2007 to match value. That is a 96% devaluation since the Federal Reserve came into existence. Now, if this reality of inherent and perpetual inflation seems absurd and economically self defeating, hold that thought, for absurdity is an understatement in regard to how our financial system really operates. For in our financial system money is debt, and debt is money. Here is a chart of the US money supply from 1950 to 2006. Here is a chart of the US national debt for the same period. How interesting it is that the trends are virtually the same. For the more money there is, the more debt there is. The more debt there is, the more money there is. To put it a different way, every single dollar in your wallet is owed to somebody by somebody. For remember: The only way the money can come into existence is from loans. Therefore, if everyone in the country were able to pay off all debts, including the government, there would not be one dollar in circulation. "If there were no debts in our money system, there wouldn't be any money." -Marriner Eccles- Governor of the Federal Reserve September 30th, 1941 In fact, the last time in American history the national debt was completely paid off was in 1835 after president Andrew Jackson shut down the central bank that preceded the Federal Reserve. In fact, Jackson's entire political platform essentially revolved around his commitment to shut down the central bank. Stating at one point: "The bold efforts the present bank has made to control the government are but premonitions of the fate that awaits the American people should they be deluded into a perpetuation of this institution or the establishment of another like it." Unfortunately his message was short lived, and the international bankers succeeded to install another central bank in 1913, the Federal Reserve. And as long as this institution exists, perpetual debt is guaranteed. Now, so far we have discussed the reality that money is created out of debt through loans. These loans are based on a bank's reserves, and reserves are derived from deposits. And through this fractional reserve system, any one deposit can create 9 times its original value. In turn, debasing the existing money supply, raising prices in society. And, since all this money is created out of debt, and circulated randomly through commerce, people become detached from their original debt, and a disequilibrium exists where people are forced to compete for labor in order to pull enough money out of the money supply to cover their costs of living. As dysfunctional and backwards as all of this might seem, there is still one thing we have omitted from this equation. And it is this element of the structure which reveals the truly fraudulent nature of the system itself. The application of interest. When the government borrows money from the FED, or when a person borrows money from a bank, it almost always has to be paid back with a crude interest. In other words, almost every single dollar that exists must be eventually returned to a bank with interest paid as well. But, if all money is borrowed from the Central Bank, and is expanded by commercial banks through loans, only what would be referred to as the "principal" is been created in the money supply. So then, where is the money to cover all of the interest that is charged? Nowhere. It doesn't exist. The ramifications of this are staggering, for the amount of money owed back to the banks will always exceed the amount of money that is available in circulation. This is why inflation is a constant in the economy, for new money is always needed to help cover the perpetual deficit built into the system, caused by the need to pay the interest. What this also means, is that mathematically, defaults and bankruptcy are literally built into this system, and there will always be poor pockets of society that get the short end of the stick. An analogy would be a game of musical chairs, for the once music stops, somebody is left out to dry. And that's the point. It invariably transfers true wealth from the individual to the banks. For, if you are unable to pay for your mortgage, they will take your property. This is particularly enraging when you realize that not only is such a default inevitable, due to the fractional reserve practice, but also because of the fact that the money that the bank loaned to you didn't even legally exist in the first place.

Video Details

Duration: 12 minutes and 27 seconds
Year: 2008
Country: United States
Language: English
Producer: Peter Joseph
Director: Peter Joseph
Views: 475
Posted by: tzmgermany on Apr 26, 2012

This video features a short segment of the movie Zeitgeist: Addendum, which you can watch here:

More information on the zeitgeist movies can be found here: Repository-Location:

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