What’s Wrong With the Banking System?
What are They Doing With Our Money?
Most people don't understand the world's monetary system or banking. According to Henry Ford that's probably a good thing, since he believed that if they were made to understand it there would be a revolution the following morning. He was probably right, but let's lift the veil and see what's under there anyway.
Most people like to think of a bank as a warehouse for money. They like to think of it as a place where they deposit money and then assume that the money is stored in a secure vault so that they could, if they so chose, go to the bank and ask for the money in cash and the bank would be obliged to give it to them. That's the way banking should work. It is not the the way, however, that it does work — not by a long shot.
Imagine that you have several very valuable Persian carpets that you need to store. You might look for a reputable warehouse facility with good security and a climate controlled environment where you could store them. If you return to the warehouse some time later to get your rugs, you would rightly be alarmed if the proprietor told you that the rugs are no longer there because he leased them out to a hotel for the rest of the year. If that were to happen, you would call the police immediately and have the warehouse owner arrested. No doubt he would be charged with either theft or embezzlement. He would be tried and quite possibly sent to prison. In addition, you would probably file suit to try to recover your carpets or at least their value from his business or personal assets. I don't suspect that many would argue that it should be otherwise. The area of law that covers this type of relationship is called a bailment. You as the owner of the carpets are the bailor and the warehouseman, in this case, is referred to as the bailee. This contractual relationship transfers possession of the carpets, but not the ownership of them. Further, under ordinary circumstances, the bailee is not entitled to use the goods that are in his possession. Yet when it comes to depositing your money in a bank, things do not work this way — far from it.
Unlike a warehouse, where you still hold title to the goods you have stored and those items are expected to be delivered into your possession upon request, banks are not governed by the same laws. The money that you deposit into a bank becomes an asset of the bank. The bank is then considered to owe you the amount that you deposited, as though you made a loan to the bank. By law, banks are only required to hold in reserve a fraction of the money deposited and are free to loan out the rest. This system is called "fractional reserve" banking and is now common throughout the world.
The amount of money that has been deposited in a bank, plus the amount they have on their books as accounts receivable is called their Net Transaction Accounts (NTA). The percentage of the NTA that must be held in reserve depends on the amount of money that the bank has on its books. For banks that have NTA values of from $0 to $9.3 million dollars they are allowed to hold 0% of the money in reserve. Banks that have over $9.3 million but less than $43.9 million must hold 3% of their depositors' money in reserve. Banks that have over $43.9 million must hold 10% of their depositors' money in reserve. Even these reserve funds are not kept in the bank. A bank's reserves are actually a checking account that is kept with the Federal Reserve. When compared with the laws that govern warehousing and pawn brokers, the banks actions amount can be viewed as legalized embezzlement, on the one hand, or the moral equivalent of counterfeiting on the other.
The underlying theory behind this legalized embezzlement scheme is that not all of their depositors are likely to show up at the same time and ask for their money. Normally, this is the case, which is why they continue getting away with it year after year. However, when large numbers of depositors do show up and ask for their money, it's called a "run on the bank" and the bank will either close its doors to try to avoid paying money out, or the bank will quickly fail, since only a small fraction of the money deposited in the bank is actually available. The rest of the money has been loaned out to borrowers. In fact, banks generally try to loan out as much as they are legally allowed to loan and when they can loan no more, the bank is said to be "loaned up."
But the trail doesn't end there. When someone borrows money from a bank they are generally issued a check which they then deposit in their own bank. That money goes onto the books of that bank as an asset and, assuming it is a large bank, it may in turn loan out 90% (remember that 10% must be held in reserve for large banks) of the amount deposited from the first loan. Then that money is loaned and deposited in another bank and the cycle continues until the amount has been carved down to nothing.
While this pyramid embezzling scheme would be bad enough in its own right, recall that I likened it to counterfeiting as well. Let's look at why this is so. It turns out that about $9,000 worth of loans (if we follow the money trail through a series of banks) will be granted for each $1,000 deposited. So where did the other $8,000.00 come from? It didn't come from anywhere, it is money created, literally, from thin air. The act of granting the loan creates the money, which is, in fact, just an entry in a banks ledger. Creating money from thin air, does however increase the number of dollars in circulation. When you hear the phrase "increasing the money supply," this is what is meant. When you increase the money supply, you create inflation, which appears to the common person as rising prices, but is, in reality, loss of value in each individual unit of money.
Money, as it turns out, is simply a commodity like any other and when the supply of anything, whether it is wheat, cotton, silver or money is increased, its value is reduced. The only difference is that when you reduce the price of other commodities, it is a boon to the consumer and serves to raise the standard of living. When you devalue the dollar through inflation, it is a curse that appears to be rising costs of literally everything and consequently lowers the standard of living.
In summary, through fractional reserve banking, banks are legally allowed to embezzle the money of their depositors, to lend that money to others in order to profit themselves, to create money in a way that is the moral equivalent of counterfeiting, and to increase inflation, thereby lowering the standard of living for all Americans.
The practice of fractional banking should be outlawed, once and for all, and banks should be required to maintain 100% of their depositors' money in reserve. They could earn a profit by charging storage fees, exactly as the warehouseman does and by selling other products such as checks. Bank runs would then be unnecessary, since people would be certain that their money could be requested on demand, bank failures would cease, the money supply would not be increased through the practice of loaning up, and the resulting inflation that it causes would cease.
While fractional banking is morally equivelant to counterfeiting, ordinary banks do not literally print dollar bills. For that you need the biggest of all banks, the Federal Reserve. That will be the topic of a future article.
