# Understanding the Fractional Reserve Banking System

When you put your money into a savings account or a checking account at a bank, the bank doesn’t just sock it away in a vault underground somewhere. Instead, it lends your money to other individuals and companies who need it.

Thanks to the magic of fractional banking, when your banks lends your money to other people, it is actually creating money.

### Fractional Reserve Banking

In our modern banking system, banks are only required to keep a small fraction of their deposits on reserve in case depositors wish to withdraw their deposits. But why? Why shouldn’t banks keep all of our money?

The Federal Reserve explains it this way:

The fact that banks are required to keep on hand only a fraction of the funds deposited with them is a function of the banking business. Banks borrow funds from their depositors (those with savings) and in turn lend those funds to the banks’ borrowers (those in need of funds). Banks make money by charging borrowers more for a loan (a higher percentage interest rate) than is paid to depositors for use of their money. If banks did not lend out their available funds after meeting their reserve requirements, depositors might have to pay banks to provide safekeeping services for their money. For the economy and the banking system as a whole, the practice of keeping only a fraction of deposits on hand has an important cumulative effect. Referred to as the fractional reserve system, it permits the banking system to “create” money.

### How Fractional Reserve Banking Works

When you put your money into a bank, the bank is required to keep a certain percentage, a fraction, of that money on reserve at the bank, but the bank can lend the rest out. For instance, if you deposit \$100,000 at the bank and the bank has a reserve requirement of 10 percent, the bank must keep \$10,000 of your money on reserve and can lend out the \$90,000.

In essence, the bank has taken \$100,000 and has turned it into \$190,000 by giving you a \$100,000 credit on your deposits and then lending the additional \$90,000 out to someone else.

Now, if you take this out a little further, you will see that your original \$100,000 can become \$ by the time it is all over. Here’s how:

 – You deposit \$100,000 Your bank loans someone else \$90,000 – That person deposits \$90,000 Their bank loans someone else \$81,000 – That person deposits \$81,000 Their bank loans someone else \$72,900 – That person deposits \$72,900 Their bank loans someone else \$65,610 – That person deposits \$65,610 Their bank loans someone else \$59,049 – That person deposits \$59,049 Their bank loans someone else \$53,144 – That person deposits \$53,144 Their bank loans someone else \$47,829 – And so on

Ultimately, your initial \$100,000 can grow into \$1,000,000 with a 10 percent reserve requirement.

To find out exactly how much money the fractional reserve banking system can theoretically create with your initial deposit, you can use the

equation:

–

### Total Money Created = Initial Deposit x (1 / Reserve Requirement)

For example, with the numbers we have used above, you equation would look like this:

– \$1,000,000 = \$100,000 x (1 / 0.10)

• The70th

Where does the money that is ultimately owed to the banks come from? In the example above, there is \$100,000 initially deposited – so, lets assume that this is a closed-loop system, and there is \$100,000 in the economy. But there are \$469,532 in outstanding debts at the end of the example (if you sum up all of the totals of all of the amounts loaned out). So, with only \$100,000 created at the beginning, I don’t understand where the other \$369,532 is supposed to come from – there is only \$100,000 of currency in the system! Sure, there can be up to \$469,532 worth of economic activity taking place in the system, but in the end all of those debters will have to repay the total \$469,532 back to the bank — that money doesn’t just ‘appear’ – customers aren’t given the money loaned out, in the system. I understand that that much economic activity can take place, but there isn’t that much currency available in the system! Where does that extra \$369,532 come from, to pay back the bank in the end?

• That’s not how fractional reserve banking works.
http://carl-random-thoughts.blogspot.com/

• Pingback: مَن يتحكم في ثروات العالم؟ – Ewan24()

• Geo Synchronous

Can someone help me out here. When did this Fractional reserve lending start ? 1900’s 1800’s or an exact year. Thanks.

• Ian Quinn

The practice of fractional reserve banking is as old as banking itself. According to wikipedia it was 1668 to 1700 that saw the establishing of central banks which could impose reserve requirements on private banks so as to prevent bank runs.

• Geo Synchronous

Thank you sir.

• Austin

This is amazing information! I would love to learn even more about this system, like detailed modeling and simulation (I’m a Mechanical Engineer). This elasticity in the system explains so much regarding the complexities of currencies.

I will study this further, but my current thought is this: The benefit of a fiat system is that it can be expanded and contracted freely to limit the currency supply to just what is required to facilitate trade. A few people can’t horde the gold and mess it up. It is a perfect method for facilitating trade, if managed correctly. But, that’s just fiat in general. Wouldn’t fractional reserve banking introduce instabilities? Since the supply of currency can effectively expand and contract itself, isn’t it much harder to control the amount of money in the economy? I have more studying to do.

Anyone know any good books? And, yes. I’m completely aware of the theories about the banking cartel. I don’t need or want information on that. I want to understand the complexities of the system. I want the differential equations! lol

• Ian Quinn

I’ve also noticed that there is something about money that is analogous to Capacitance (money is a store of value),
Inductance (the value of money does not exist in itself but in its transmission – the value of a certain activity is frequently determined by the money it can earn, money’s value is in its ability to induce others to either act or refrain from acting),
Resistance (the marginal value of an additional dollar tends to decrease as the the number of dollars increases) or (put another way the value of 10 dollars is greater to a broke person who will immediately use that money than it is to someone who has thousands of dollars already,
Charge, current and currency – just consider the words.
Money itself functions sort of like an impedance matching medium. How does one get potable spirits from wool fiber? Or obtain apples from oranges? By (buy) exchanging them for money. Whether the money is fiat currency or a currency of convenience/ custom (such as gold) is not crucial to its viability. Because gold is minable, its supply is subject to change. Fiat currency is theoretically capable of having a fixed supply, but regardless of the actual currency, the practice of fractional reserve lending is itself not unlike having a system which can be at resonance or dissonance. When it works, FRB is capable of enabling \$100 of actual money to store, carry, transmit \$1000 of value (assuming 10% reserve and maximum lending without interest and 100% efficiency). But when frequencies don’t synch up in harmony (or when obligations cannot be met, money borrowed by one and then lent is not returned in time to pay the first creditor, etc etc. This is dissonance – this is the system breaking down. The circuit overloads, or shorts out. The true problems arise when inequality and asymmetry become such that the have nots lose their basis for recognizing the legitimacy of the system and become inclined towards theft and violence. Raiding takes the place of trading.

But anyway, as to your simulations and models – I’ve yet to see anything that satisfies me. In college I sought to do a project for my thesis that involved creating a sociogram of the college itself which would show both the interactions of everyone (using an inverse square type equation (the more two people interacted (exchanged attention) in a time period, then the closer their nodes would be – my proposed sociogram would’ve also shown how much financial stake every person had (how much they paid or were paid) but the college refused too let me learn what every one was paid. Financial privacy (illusion that it is) prevents any genuine data from being gathered and studied. Its necessary to know this stuff if one is to develop a true econophysics type model. You are absolutely right in your intuition that this is fundamentally a physical system. For a time I pursued a different version of my project (the nodes would represent nations and the distances between them would correspond to the inverse root of their bilateral trade volumes) this project never went anywhere though – the distances I obtained for russia, mexico, canada, US, and japan resulted in distances that violated the triangle rule (the sum of any two sides must never be less than the remaining side) – so to depict the structure using cartesian coordinates required more than three dimensions (some of which were imaginary valued). Please let me know if you happen upon anything like what you are looking for.

• kabanda

General Idi Amin of Uganda was once asked about his education, according to the good general, Education is what you have left when you have forgotten all the useless info you learnt in school,The current education system is dumbed down and precisely designed to leave people like Tornado 171 puffed up yet they dont know s***t. we all know the federal reserve bank is neither federal ,nor is it a reserve nor is it a bank, it is a private cartel , unaudited ,owners unknown,It is steadily stealing the wealth of the world and transferring it into a few hands,the vast majority of people then turn into mindless serfs in one big open prison but blissfully unaware of their captivity.

• Zillah

Oh dear Tornado, so no such thing as endogenous money then?

• martynstrong

Help save the economy – use cash. Plastic is a big cash cow for
the banks. So why should they lend money in to the bad economy. If we
all went to cash the plastic cash cow would no longer exist and the
banks will have to start loaning again to have money for their big
bonuses and high salaries. In the old days (the 1950’s) banks did not
have plastic for income so they only made money on loans.

The
current economy has a shortage of money (M2 or whatever) and the main
source or money is independent bank loans (not fed activity). The
banks are not motivated to make loans when they can skim large sums of
money off the top of a lot of transactions all across the economy via
plastic.

• Well, that was a nice collection of myths and lies.

• Don

it appears corrupt because it is corrupt, wealth doesn’t come from more money it comes from more value, also we don’t use lawful money today we use legal tender aka federal reserve notes or promissory notes, which means there is an absence of money, to inquire about that look up the bankruptcy of the United States in March of 1933, the confiscation of value/gold by executive order and the eventual complete removal of lawful money, and replacement with fiat currency as a ponzi scheme. they weren’t done there they would then collect a portion of your earned credit/debt (income), in order to fund their scheme by issue and collection of their notes. There is something called the Uniform Commercial Code it provides remedy and recourse for any contract with Federal Reserve Notes,interestingly enough you are not taught it anywhere that I know of…. Banks know it the IRS knows about it corporations know, it codifies all your rights for the benefit of commerce and enforcing contracts. As I was seeking a remedy for an issue today, I was told by my claimant that all contracts that they write up are for their benefit only. I told him then it doesn’t make a valid contract as to be valid it needs lawful consideration as a benefit to both parties. College teaches you what they want you to know it is information for sure, its not always complete information.

• Michael Despott

Why is it that in nearly every chat room,blog or forum, there is always so much unnecessary conflict, banter and ego…opinions are opinions, they are unique individual personal perspectives and beliefs. Unless criticism, advise for feedback is constructive, it is more of a hindrance. In my time in finance and banking, I personally witnessed countless atrocities, outright criminal and inhuman practices…

Why should anyone person or entity be allowed to capitalise, create or exercise the use of a medium that allows the exploitation and enslavement of individuals, via the confiscation of their energy and time, via this medium we call money…especially in its more artificial form of debt and credit…

• Sherlock

If there was no money creation or inflation of the money supply I think prices would come down as the economy or economic activity expanded.example if an economy produced one car per year at say £10000 in order to produce and sell two surely the price would have to be £5000 each if there wasn’t some extra money pumped into the system I think.well something like that.

• Mac Forrester

For goodness sake don’t be hanging upside down. Fact, just go lie down.

• jack

Why does it say total money created is 100,000 x 1/.10. You started with \$100,000 so the money created is 1,000,000 – 100,000 = \$900,000

• It’s a trick question, no money was created.
Besides, that whole “money multiplier” spiel is a proven fiction that even the Fed has disavowed. Banks don’t need or use deposits to generate credit, all they need is the value of a capital asset. And “deposits” is a misnomer, there is nothing being held on “deposit”, they are all credited accounts, book keeping entries, they are all bank debt.

• ShaQ Blogs

This is a Power game!!!

Banking and fractional
reserve system along with ‘certain other factors’ (explained below), have created a highly monopolistic intellectual system where the power mongers are ensured that they continue to hold on to power.

Sadly most people do not understand the actual and complete system and hence a more accurate and complete understanding of the problem eludes them. They understand part of the problem or parts of the problem. But not the problem as a whole. Let me attempt to explain.

Key Points (Are Numbered):

1. Expansion of credit (or expansion of money supply) is absolutely essential for an economy to grow!!!!!!! I cannot emphasize how important this is! (Unless we come across a more efficient system that actually works).

2. Expansion of Money supply is essential for growth. The unavoidable side effect is Inflation. Inflation is a known and accepted compromise for expansion of credit. We have prioritized growth. Slow growth is something no one really wants.

But the problem occur when,

The idea of expansion of credit is used and twisted in a way such that the private bankers benefit!!! (Read that again and again and again and ….)

3. Central Planning – This is the least understood point.

They who create credit, have the power to decide in which direction the economy travels. If I create Money, then I decide where to lend (banks) or fund (governments) the money that I created.

In other words this is called, Central Planning!! If there is public money creation, there is central planning by the government because they then decide what to do with that newly created money, which creates new economic incentives in certain industries/sectors.
(Oh, no. “Central planning the by government is a failure”. Does that Sound familiar? So what’s the alternative? Central planning by the Private Banks! Demonize Central banking by the government, so the private banks can do it instead. Gotcha!).

We have central planning either way around. Central planning by the Private Banks for benefit of the primary benefit of private Bankers
or Central Planning by the government for benefit of public at large.

The question that really matters is the following,

Who creates this credit, and Who benefits?

If I (or you), are allowed to create credit, I become Powerful and hence rich. It is that simple! If I create credit AND THEN loan it at interest, I become Rich, Powerful and hence Rich!!

In the current system, Central bank public money “is bad and inflationary”, but if private banks do the same, it’s good for the economy.

This is a total and complete joke. Anyone with least amount of common sense will tell you, if money is created, it is inflationary irrespective of who creates it!

So when Private Banks create credit, what do they do? They typically loan it against “existing assets”.

4. Real Estate Boom, Boom, Boom.

One of the Primary assets that they “loan” against is Housing (Real Estate). Which is why, housing prices go up and up and up and up. They create new money and pump it into housing.
Housing is the key asset. Without it, business or individuals can’t run a
business or build a home. We can’t create one that floats on air. If we need to do anything productive in an economy, we need to approach the Rich and Powerful private bankers. Almost the entire economy is in debt to the private bankers.
To add on to it, by ensuring that they have grabbed and monopolized the process of money creation, they have also ensured that the beast in the room, The Government(s) is also in debt (Sounds familiar? Almost every government is in debt!).

Everybody is in debt, but to whom? The private international Bankers!!!

5. Taxation of Earned Income.

To compound this problem even more massively, the taxation system ensures that people who work hard are penalized (taxed), while those who earn money from certain monopolies such as housing are untaxed. At an economic level, taxation is directed towards ‘Earned Income’, while ‘Unearned Income’ is Untaxed. This ensures that it is much harder for the masses to get into housing, which ensures indirect dependency on the Private Bankers.

So it’s all a BIG MASSIVE Power game involving some of the richest and most powerful oligarchs on our planet! And we are all nothing but economic slaves, who have that sense of “self-proclaimed earning”.

To top it off, they insult and mock us with,
“Feed the horse enough and …”

• See Positive Money dot Org

The difference between central planning of the financial system by a combined government and separate & accountable body OR by the private banksters is that the latter enriches the financial elites betting on the stock market and contributing to our regular boom and bust cycles, whilst the former can spend money created into the REAL economy (infrastructure, etc), interest-free.

Government will no longer be in debt as it will have money created by a transparent body/committee at no interest, the latter of which also decides how much money is to be printed to be neither inflationary nor deflationary.

This means government won’t be under the thumb of private bankers (because of debt) or the multinationals (because of their lobbying power) but under the direct command of the people who through their votes will decide where the money is to be spent.

• Barney Rubble

This is absolutely and totally incorrect! Bank create money ex nillhio. They create deposits then look for reserves not the other way round…Also banks making money through their gains of seignorage…The Bank of England admits this, its time the FED catches on…backward Americans…sad times….

• thinkitover

So without fractional reserve banking we would have to pay the bank to keep our money on deposit. Pretty sure I already pay them to do this – or what the he double hockey sticks are my account fees on my savings for? I pay them somewhere in the neighborhood of a few hundred a year to keep my saving for me. Now with bail in, I will end up sacrificing a portion of that money when push comes to shove as it certainly will. What idiot thought we were too stupid to realize that bail out/bail in it all comes down to the average person getting screwed so banks can enrich a privileged few. Everyone was angry about the bail out so hey guess what no more bail outs, your tax dollars won’t be used, your after tax dollars will. Do they really think we are that dumb that we are sitting around saying, “hey great news about no more bail outs, about time they took the money from my bank account instead.” And regards the examples, no they did not turn \$100,000 they turned it into \$10,000 with a theoretical \$90,000 plus interest on the books. That all works great until it goes up in smoke and you lose the theoretical money in loan defaults and the actual money shrinks by whatever amount the bail in is and you are left having deposited \$100,000 and owning around 7,000. Of course this won’t hurt the CEO overmuch because he/she does their banking in the Caymans and whatever hit they might take, when you have been socking away millions yearly in an overseas account somehow you ride out the great depressions.

• TreeTrimmerJim

Without fractional banking if the bank was going to loan your deposit you would be required to sign a contract detailing the arrangement.

Without your deposit the bank would need other sources of funding to make loans.

Without fractional banking we could return to the gold standard. While on the gold standard the value of an ounce of gold remained approximately \$20 for over 100 years. 29 of the 30 richest people in United States history lived while our nation observed the gold standard.

• The Oscar Report

I made this short video to help people understand…
A Short History of Fractional Reserve Banking (& How Bankrolling Landlords Are Screwing Australia):

• Rudya

The Disease is the Monetary System.
This article outlines how most of the problems we are facing such as unemployment, foreclosures, environmental degradation, poverty etc are only SYMPTOMS of the real problem. The root cause is our monetary system.
http://www.marketoracle.co.uk/Article34891.html

• Pingback: What Happened To Your Wealth?()

• Harold Lindsay

The American Dollar being the World currency, I do blame the American Presidents since 1913 for not keeping Wall Street, the Central Banking System and Government Spending under Control. Not to worry, the Russians and the Chinese are about to return the favor.

• jackcouch

Thought you guys might have some thoughts on this video on capitalism? https://monchilla.zendesk.com/hc/en-us/articles/201785973

• Pingback: Simple: Fractional Banking » PushBack.us()

• Anonymous

My objection to F.R.B. is that you make consumption decisions based on the wrong amount of money.

Example: If I have \$1000 and I lend \$600 to my neighbour then I am left with just \$400. With just \$400 I won’t buy expensive goods like a new \$350 car. Because after buying that \$350 car I am just left with \$50, way too low to cover my daily expenses. However with F.R.B. I still think I have \$1000 on my account so I will happily buy that \$350 car because I am left with \$650, enough to do my daily expenses. So F.R.B. is wrong I.M.O.

• john

Well explained. The money system is corrupted.

• TreeTrimmerJim

The monetary system is working exactly as designed and allowed to be implemented by the voters. We the People have allowed our education system to dumb us down. It’s our ignorance that allows this kind of monetary system to exist.

Fix the K-12 compulsory education system by removing the compulsory part and soon we will have competition between teachers and schools for privilege of training our children to become parents. Educated parents are less likely to be so easily deceived as were our great grand parents fresh from other countries when the Federal Reserve System was put into law.

If you and I knew our US history we would know that central banking and fractional banking have failed three previous times in our nation’s short history We would know the flaws of the current central bank system, with its disguised name, Federal Reserve System. We would know that one of its flaws is it has no reserves.

Our nation is \$18 trillion in debt because the fractional bank system has taken our wealth and replaced it with counterfeit currency back by noting of intrinsic value. Our nation is broke and our schools have not trained children to be parents because parents would understand the laws of the land which include under standing the monetary system. Our schools use to accomplish this feat before students reached the age of 14…15 years old.

Our education system is in such a state of failure even our teachers can’t answer basic questions about our history.

When has our nation tried central banking and what happened each time?

The house of cards called our K-12 education system is dependent on one law in each state, a compulsory education law. When this German, Karl Marx era, origin law is repealed the level of education in the United States will returned to its former number one status in the world as it was in the 1800s.

Divide 35 cherries among Emma, Agnes, and Sarah, so that Agnes shall have twice and many as Emma, and Sarah twice as many as Agnes.

That is an example of a 1862 4th grade question from Chicago public schools.

• Mac Forrester

Ah,duh,ah,duh,au,duh Any fool would agree with you.

I’m not one though. You don’t want that fiat money, send it to me.

• TreeTrimmerJim

There is no such thing as fiat money. Fiat currency, yes.

The United States government can coin money but can not print currency according to the Constitution.

By the time the Constitution was written the United States has already experienced the first or three central bank failures caused by fiat currency. So the Constitution has a clause preventing the federal government from printing currency.

Politicians looking to line their pockets have found a way to get around the coinage clause by creating legislation to select a central bank and then having the selected bank issue currency. The fourth central bank failure, the Federal Reserve Bank System, is on the road to collapse as we speak and for the same reason as the first three failures, printing more currency than the money held in reserve, monetizing our debt.

• I think there’s a challenge with the above calculation. If the reserve is 10 to one it works, if it is 20 to one then it should show 20 times, not 5 times the amount.

• Mike, I’m guessing you plugged the wrong number in to the “Reserve Requirement” portion of the equation. If you are calculating what the total money created would be if there was a 20:1 ratio instead of a 10:1 ratio, you would use 0.05 (or 1/20) as the reserve requirement, not 0.20 (or 1/5).

• Frank Johnson

You may be confusing ratios with percentages.

• M@

and people wonder why the economy is in such bad shape, it’s not the president, it’s not the congress, it’s the god damn system!

It just appears corrupt becsuse you have no schooling. Money must expand as the wealth expands. Money is used for trade and if it does not grow wealth stagnates. Go to school and stop villifying things you do not understsnd

• Uneducated

Hey tornado 171. Let me guess..you are around 25-30 years old with a college education. Good for you! Now, before you call people names, it would be wise on your part to read one additional book. I believe that with your superior education and possibly unrivaled intellect, you will find it fascinating. Book title: The Creature From Jekyll Island. It’s merely 588 pages, so one night’s perusal will be sufficient for you to glean immense knowledge from this timely tome. The author is G.Edward Griffin, a highly educated man, which just about makes you kissing cousins. So, give it a read and let us know what you think. Oh to be young again! I once had my head up my ass, too! There’s hope for you.

Sorry about the uneducated thing. Name calling is not productive. I am 68and trained in banking with a concentration in weslth creation. Ok. What of my argument thst money must increase to keep up with commerce? I am a firm Keynesian. When the railroad was built a huge debt was created. But an asset was also created. Investment,debt, is part of wealth creation. The system works or haven’t you noticed. thingd are getting better. I love my new Lexus. Debt for war is not productive so myst be paid for by taxes. Any real arguement is sporeciated.

• TreeTrimmerJim

Trained and passing the test are two different things. Who certified the certifier?

We increase wealth by putting more wealth in the system. Labor creates wealth. Paper with numbers printed on it is just paper with numbers printed on it unless it represents labor.

Fractional banking creates paper with numbers, it does not create anything of value as labor does.

Do the fractional math, it’s third grade level math. Understanding the basics of monetary system is information 9 & 10 year old had mastered in school a century ago. Today we have 68 year olds who can not demonstrate the same skills.

• theft by another name

Legal fictions can’t create wealth. Silly educated idiot.

• Let’s look at this from the perspective of equity. Why should one group of people be able to create money out of thin air while others cannot? (Its called counterfeiting) Essentially, the ability to create money out of thin air is a National Resource. How much are these Fractional Reserve Banks paying for the license that allows them to create money out of thin air is the real question.

• Let the market set the price

The problem is that the creation of wealth from fiat money must eventually collapse in the end. Money that has it basis on product and production will last forever with a few bumps here and there unless acted upon by an outside force such as bank cartels lead by the federal reserve. Making rich people poorer does nothing to enhance the life of poor people. Free market capitalism and return of market forces to the market for interest and price rates shall set you free.

• SteveD

In a fiat currency system, taxes do not fund liabilities.

• Mac Forrester

You know what you’re talking about.

• Brent92037

Fractional reserve banking, in and of itself, is necessary for a functioning modern economy. So is equity funding. These are the functions investment banks used to perform but now this intermediary role is but mere sideline. In the last 30 – 40 years, investment banking changed radically. I would personally characterize that change as a move into corruption – but that’s just my moral judgement.
Investment banks today spend precious little time as the intermediary between investors and companies seeking expansion capital. These so-called banks are primarily vehicles for private “profiting” through secondary market “gambling”. Derivatives (e.g. CDO’s) do not link capital to expanding businesses. They, in fact, create nothing of substantive economic value. They simply provide a casino of sorts for a few very bright, self-absorbed, and wealth-obsessed individuals.
The corruption arises from the fact that these “derivatives” are packed, not with the money of these so-called “bankers”, but primarily with the savings the average Main Street citizens. When these Rube Goldberg financial vehicles go haywire, the so called little guy is the one who is most often the loser. If the losses are catastrophic as in 2008 – the tax payer pays – not the “bankers”. This creates a destructive moral hazard that renders the financial system “dysfunctional” to use a euphemism.
Although the days of honest fractional reserve banking and investment banks as honest intermediaries are perhaps not entirely gone. However, they are dwarfed by the modern day “self-dealing derivative banker”.

• Laurie

Great book; best on the subject. I think it should be required reading for every college freshman.

• Antonio Liles

I love that book. It should be required reading for every HIGH SCHOOL Freshman!

• kerri

Awesome. lol. And truth.

• Mac Forrester

I have tread the book! It’s bull s h i t!

• The70th

Do we simply increase the money supply, overall, so that there is enough money in the system to pay back that debt over time? I see that there is \$100,000 in the system at the beginning of this example, but if another \$500,000 is injected into the system through various methods, is that money flushed through so that the bank is able to recoup more than the initial \$100,000 it received in deposits? Wouldn’t that mean that we HAVE to continue to inject currency into the system, indefinitely, in order for fractional reserve banking to work?

• Laurie

You, tornado171, are the one who is uneducated. The Federal Reserve, which is NOT federal, but a PRIVATE BANKING CARTEL, just prints up money whenever it sees fit, when the oligarchs running it want to manipulate the economy. There is NOTHING backing it (we were supposed to go back to the gold standard and never did!) and then they loan it back to our nation as well as private individuals, and we ALL get deeper in debt. Except for these rich dudes who just keep getting richer, while the VALUE of our money steadily declines. But it doesn’t matter to them, because they are going to have ALL of the wealth in the end. That’s how this game plays out, following it to its logical conclusion. And we are getting pretty close to the end now. They have already nearly collapsed the markets, worldwide, and numerous times, because of their hubris. How can anyone NOT see that this corrupt system is nothing more than old rich dudes counterfeiting money, and then making everyone else PAY them to borrow their counterfeited paper? REALLY??? How stupid are we that we have continued to allow this, unchecked? It’s probably too late to do anything about it politically, because they control everything politically. The final nail in that coffin was Citizen’s United…the most inaptly named bill in our nation’s history. I guess as long as our “Economics” departments keep spreading the false myths of their pseudo-science (nothing more than the religion of the oligarchs) and universities keep conferring economics and business degrees that tell the world you have ‘drunk the koolaid’ and buy into their belief system, we’ll keep turning out more really “well-educated” people, like you, who don’t understand anything. And for the record, I’d stake my education against yours any day, Sweetie.

• Kenny Williamson

100% agree with this. And yes, federal reserve… don’t let the name fool you… it’s a private “reserve”. the article I came to this post about was how 68 people now own more than so many billion low end. I wonder, if we stop looking at individuals… in essence wealth creation is really “protection of wealth”, which is why laws made are soooo important.. and many of the ways to protect wealth is/are company/ trust, etc. etc. based… then who are the actual 68 most wealthy people.? Who are the men and women behind the masks and which corporations?

• Marco Polo

Tornado, if you are worth 100k and spent 1mil your asset is now 1M but your debt is 1M plus interest. If your cc borrowed interest @ 10% will only leave you money to pay the interest not the principal. Now you hoping your asset will rise more then 10% per year. Having bought new Lexus surely will not gain you any positive asset allocation at the end of year. People with that kind of thinking is how in america people end up with allow of negative assets and no money. Good luck to you.

• Mara Grace

Define “system”?

• Mara Grace

State law ALWAYS TRUMPS FEDERAL law. Remember that.

• Chester Davis

• Mac Forrester

It’s a great god damn system!

Also tells you what a pack of goddamn liars the republicans are.

• Bryan Bodner

If you cant destroy the system beat the system to your benefit. Play the game when it is only game to play. You don’t get anything when you just bitch.

• Morganxander

There is physical money and the total potential money supply.
The “money” put on the books by fractional reserve banks refers to neither physical money or potential money. In other words… during a bank run no bank will print you out an authorized piece of money.
If this was the case, a bank run would simply result in hyper inflation. Everyone would still get their money, it would simply be worth less.
But… no. If you actually know definitions of money, where it came from, why it exists. You would know the transactions being made with the records of fractional reserve banks are… doomed. lol. Only way to put it.
So who benefits? Obviously the banks. Its nuts.

• Jim Kaye

It’s why the the top income earners should never pay less than 90% tax rates to remove the inflation tied tot he dollar. So every dollar is worth the same!!!!

• FAIL_TR0LL

You’re a fool.

Why punish those that produce, and reward those that are lazy bastards?

• Focus Dude

Every person in the country could pay 100% income tax and the country would still be in debt. The reason is because the “money” you earn is really paper that was printed out of thin air LEANT to us at interest, so every \$1 in circulation will cost over \$1.30 to replace. The more money printed the more the debt climbs. All backed by one big Government IOU called a BOND. Also a valueless piece of paper printed out of thin air that says “We stand by this bond and if we default on it we guarantee we will tax every last penny out of you to pay it back”. Every penny of the income tax you already pay goes 100% to the Interest payments to the FED (A private corporation, its not a government agency, and neither is the IRS). And the grand total of all our income taxes combined dont even cover that. Roads and highways come from the Gas tax not income tax, and the education, welfare rolls, military industrial complex, and all the alphabet agencies’ funding comes 100% from the government borrowing more money from the Fed. Which in turn raises our tab to the Fed. It’s a cartel. The banks get to make money out of thin air and charge perpetual interest on nothing. The government in turn gets to create indefinite taxes to extort the productive results of your labor. If it all crashes (i.e. 2007) they just create a “bailout” using MORE of YOUR MONEY to pay off the banksters and to further transfer wealth of billions to the top .000000000001% wealthiest fucks on the planet (Rothschild, Rockefeller, Soros, Kissinger, etc) who are all tax exempt by the way..

Go get an education before you comment

• Focus Dude

clearly you are the one in need of an education. Everything Ive said comes from the Federal Reserve’s own explanation of fractional reserve banking. Read Creature from Jeckyll Island and stop making an ass out of yourself Troll

If the system does not work why sre jobs being created? Ehy does my new Lexus drive do well? Why is the dow so high? Ehat dystrm do you likr? Gold stsndard?

• TreeTrimmerJim

Why are jobs created? Products and services are created to solve an existing need. Their value is determined by how much a willing producer and willing buyer decide they are worth.

If you’re not solving a need or want, you don’t have a job.

Your Lexus functions as it does because a willing problem solver saw a need and provided a solution. You own a Lexus because you were willing to trade something of value you owned for something of value the Lexus provider owned, the Lexus.

You purchase is because you decided to buy and the seller decided to sell for what you offered of value. Had your labor not been turned into currency, your labor might have to be traded several times before arriving at what the Lexus provider was willing to trade for.

The fact that you were able to use currency means the seller believed the currency represented value. Counterfeit currency devalues currency in circulation and in savings. Fractional banking functions that same a counterfeiting. Your saving is diluted everyday.

\$32 in a savings account at 5% per year will buy less today than 55 years ago by about half.

Question of the day: A, B, and C have \$42: B has 1/2 as much as A, and C has 1/2 as B: how much has each?

Have you solved any of these yet?

• bfg

A \$24, B \$12 , C \$6 for today’s question and for earlier question 6 horses,18 cows, 36 sheep.

• TreeTrimmerJim

bfg… congratulation. For several years I have asked parents and teachers these questions which are intended for 9 &10 year olds in 1862 Chicago. You are the first person actually offer an answer.

• WAYNEBIZ

Now that money has evolved into nothing but paper air with no commodity backing we have to ask the question: when does it all collapse upon itself? Fractional lending is a huge ass Ponzi Scheme espoused by Keynesian academian economists that for the most part never produced anything but a term paper and a semi-chronic inflationary financial crisis – economic cycles are no longer market driven but manipulated by small groups of fiat money puppeteers that through some bizarrre random chaos have ended up in charge of monetary ‘policy’ – they are like the archetype Obama post turtles – they didn’t get there on their own because they couldn’t – and now that they’re up there they don’t have a clue what to do.

• A has \$24; B has \$12; and C has \$6, which totals \$42. Is this a fourth grade or fifth grade question? I performed poorly in both grades, but survive by my Libertarian wits. I am definitely not a Keynesian fan. Governments don”t create wealth – they confiscate it and give it to insiders. I don’t call what goes on in D.C. “waste”. I call it “fraud”. Actually the fraud is now so wide and astonishingly deep, it’s no longer even fraud. It’s now “economic policy”. The relationship between the Fed, related monopolies and our Federal government is a Fascist controlled money laundering system transferring Main Street wealth to the Elite and their friends, while paying the D.C. pawns handsomely to do the dirty work. The regulatory agencies and taxation prevent any possible competition from ever challenging the monopolies with rare explosive exceptions like Microsoft or Google, which are quickly swooped into the ranks of Elite pawns.

• Nick Grasslin

Unemployment rates have gone up since QE started actually. Inflation only keeps the system running temporarily. The system will collapse again and the same thing will have to be done. The question is, how many times can you inject life into the system before it dies for good?

Griffen is a quack from the john birch soviety. This is whete you get your info? No math just conjecture. Really? This guy is so anti american and just plain stupid. No real argument.

• TreeTrimmerJim

Facts are facts… name calling is rude. Back your facts.

• πανος

Don’t bother,my friend.Trolls are everywhere believing exactly the same things!They just talk in different language.If you could understand the greek language,I would propose you to follow a discussion of a similar theme in greek forums powered by DISCUS.You d be totally convised of my words.Evenmore,in a country which has been smushed down by this kind of banking in cooreration with deeply corrupted politicians and technocrats

• TreeTrimmerJim

Are you so sure that you can explain why gasoline is cheaper to produce, in labor and material costs, today and costs more in printed paper costs?

Why does our money buy less today than 10 years ago or 100 years ago?

Why did a 1909 Model T cost more than a 2014 mid priced car today, by nearly twice as much?

We are all victims of our K-12 compulsory education system. We are all still responsible for our own education.

Answer this historical question. When has central banking been tried in the United States and what happened each time?

On a farm there are 60 animals – horses, cows and sheep; for each horse there are 3 cows, and for each cow there are 2 sheep: how many animals of each kind?

• 6 horses, 18 cows & 36 sheep = 60 animals. Actually I must admit, I didn’t do all that well in fourth grade.

• Mac Forrester

If you ever see the light it will be a mirage.

Disclosures