Here’s another one that you probably didn’t learn in school.
It’s called fractional reserve banking and its how banks themselves create money out of nothing. And no you didn’t read that wrong. Banks make money out of thin air too.
But wait you say….. Isn’t it just supposed to be our Congress that creates the money?
The short answer to that is yes. The real answer, however, couldn’t possibly be further from the truth.
So here’s part five.
It ran on Gold World on October 18th 2006.
A Good Deal If You Can Get It
Author’s Note: This story is the fifth in a series of articles about the creation, the workings, and the ramifications of the Federal Reserve Bank-one of the least understood but most powerful institutions ever created. We hang on its every word and our financial markets rise and fall on its every decision. Even the value of the dollar itself is in its hands. Yet we know so little about it. . .
BALTIMORE, MD — As we learned last week, when Uncle Sam needs money for a war or two or simply needs some more cash for one of his famous bridges to nowhere, he doesn’t exactly have to panhandle. He simply heads down the street to the Federal Reserve Bank with an armload of fresh Treasury Notes and walks out of the bank with all the money he needs.
It’s a good deal if you can get it, and it’s all so simple. Uncle Sam hands over the notes that he printed himself and his best friend the central banker writes him a check using his magic checkbook.
What makes the checkbook magic, of course, is its amazing ability to create something from nothing-namely money.
Impossible, you say?
For you and me, yes-but in the world of collusion between the federal government and the nation’s banks created by the Federal Reserve Act, it’s not impossible at all. In fact, it’s standard operating procedure.
It’s called "monetizing the debt," and in the wink of an eye billions and billions of new dollars are added to the money supply.
And yes-like magic-they are created out of nothing.
Uncle Sam, naturally, loves this. After all, why bother getting people all upset with talk of raising taxes if you don’t have to?
And besides, since no one is really paying attention, it’s a heck of a lot easier.
But as good as this deal is for the federal government, it’s even better for the nation’s bankers.
Here’s why.
Once Uncle Sam receives his check, he spends it on all sorts of things-from contractors to retirees and everything in between. And once he does that, his newly created money eventually ends up on deposit somewhere in the nation’s banks.
This is where the nation’s banks are rewarded for their part in the deal, because not only do they get to earn interest on the newly created money, but they also get to actually create some money of their own.
And while that may sound a little odd, since it’s actually the Congress’s responsibility to create money, it is indeed true-commercial banks create money too.
They do so by a process called "fractional reserve banking" that allows them to lend out to borrowers as much as ten times the amount they actually have in deposits.
They do it, of course, with a magic checkbook of their own, which adds even more new money to the supply as they "monetize debt."
And it all starts with that original check written to and spent by Uncle Sam.
While it may sound crazy, it works like this.
Let’s say Uncle Sam receives a check in the amount $10 billion dollars from the Fed and promptly spends it.
And for the sake of argument, let’s say that every penny of that $10 billion gets deposited with Chase Manhattan Bank.
Chase, as you would guess, would be overjoyed by their good fortune, but not for the reasons that you might think.
You see, not only do they get the benefit of the original $10 billion dollars but, because of fractional reserve lending, they can now lend out nine times that amount-or $90 billion dollars.
In other words, fractional reserve lending allows commercial banks to create nine times more money than they have on deposit or in reserve. And in doing so they create money out of nothing, just like their friends at the central bank.
All of which is a sweet deal if you can get it.
Think about it.
The banks get to loan money they don’t have and they get to earn interest on it . . . a lot of interest.
Take that $10 billion dollars, for instance. Sure, Chase has to pay interest on it, but that pales in comparison to the 6% it earns on the $90 billion dollars it was subsequently able to loan out.
In fact, $90 billion dollars in loans at 6% interest yields the bank a whopping $5.4 billion dollars in interest every year.
Which kind of gives new meaning to the idea of the rich banker, doesn’t it?
But, while Uncle Sam and his banker friends make out like bandits in this deal, the rest of us are made to suffer. Because not only are we ultimately responsible for the national debt, but all of this newly created money also leads to inflation.
And since the creation of money is no longer in the hands of Congress and has been disconnected from limits like the gold standard, the value of our dollars has been eroded beyond recognition.
It’s the reason everything costs twice as much as it used to, and it’s the reason that all of us-both husbands and wives, for the most part-have to work harder and harder just to stay even.
Unless you’re a banker, which, as you see, is a good job . . . if you can get it.
And to think it all begins with debt. No wonder they are so eager to lend money. This is why, even if your credit rating stinks, you’re probably getting six or eight credit-card offers in the mail every week.
But hey, why complain? After all it’s good for the economy isn’t it?
We’ll talk about that more in the next episode.
