Who Changed The Bank Of Canada’s Policies In 1974 And Why?

April 5th, 2012

With great efforts by the Canadian Action Party, institutions like COMER, and a host of alternative news outlets in Canada. Many Canadians are becoming more and more aware about the the biggest robbery in Canadian history. A robbery that still continues to this very day, with 170 million dollars being stolen from us everyday.

The crime has been and is being perpetrated right under our very noses. It lies in the creation of the Canadian dollar. For those of you who are still unaware of this crime, here is a great video explaining the robbery.

Over the past 4 years, the Canadian people have paid $137.4 billion in interest on money borrowed from private banks whereas the Bank of Canada could legally print the public’s money into existence rather than borrowing it at interest. “They’ve paid out this huge sum because our government has failed to abide by the law.” Abram, a retired high school teacher and activist on Vancouver Island, B.C., explicates the trick of fractional reserve banking (part 1 of a series; snowshoefilms yoryevrah

COMER – Committee on Monetary and Economic Reform, in 2011 filed a lawsuit against the Bank Of Canada and the finance minister.

Rocco Galati explains the lawsuit against the Bank Of Canada and the Finance minister. Apologies for video quality and shakiness, When I got there and started setting up the camera, it literally died [not the battery but the camera itself] right there on the spot. Got what I could on cell phone camera. Full press release: Canadian constitutional lawyer, Rocco Galati, on behalf of Canadians William Krehm, and Ann Emmett, and COMER (Committee for Monetary and Economic Reform) on December 12th, 2011 filed an action in Federal Court, to restore the use of the Bank of Canada to its original purpose, by exercising its public statutory duty and responsibility. That purpose includes making interest free loans to municipal/provincial/federal governments for “human capital” expenditures (education, health, other social services) and /or infrastructure expenditures. The action also constitutionally challenges the government’s fallacious accounting methods in its tabling of the budget by not calculating nor revealing the true and total revenues of the nation before transferring back “tax credits” to corporations and other taxpayers. The Plaintiffs state that since 1974 there has been a gradual but sure slide into the reality that the Bank of Canada and Canada’s monetary and financial policy are dictated by private foreign banks and financial interests contrary to the Bank of Canada Act. The Plaintiffs state that the Bank of International Settlements (BIS), the Financial Stability Forum (FSF) and the International Monetary Fund (IMF) were all created with the cognizant intent of keeping poorer nations in their place which has now expanded to all nations in that these financial institutions largely succeed in over-riding governments and constitutional orders in countries such as Canada over which they exert financial control. The Plaintiffs state that the meetings of the BIS and Financial Stability Board (FSB) (successor of FSF), their minutes, their discussions and deliberations are secret and not available nor accountable to Parliament, the executive, nor the Canadian public notwithstanding that the Bank of Canada policies directly emanate from these meetings. These organizations are essentially private, foreign entities controlling Canada’s banking system and socio-economic policies. The Plaintiffs state that the defendants (officials) are unwittingly and /or wittingly, in varying degrees, knowledge and intent engaged in a conspiracy, along with the BIS, FSB, IMF to render impotent the Bank of Canada Act as well as Canadian sovereignty over financial, monetary, and socio-economic policy, and bypass the sovereign rule of Canada through its Parliament by means of banking and financial systems.

One of the biggest questions I encounter when talking about restoring the Bank of Canada, is who changed the policy in 1974? And who is responsible for the billion dollar robbery since then?

First we must look at who was in political power at the time and who held the key positions.

Prime Minister: Pierre Trudeau
Minister of Finance: John Turner
Governor of the Bank of Canada: Gerald Bouey

Pierre Elliot Trudeau, like many other Canadian prime ministers attended the Bilderberg group meetings before being elected. Trudeau also served in the mid-1990s on Power Corp.’s international advisory board.

Gerald Bouey was a member of David Rockefeller’s Trilateral Commission. Rockefeller is also a chairman of the Bilderberg group.

Both the trilateral commission and Bilderberg group are very well known for promoting a global government or what others have called a “new world order”.

“Some even believe we (the Rockefeller family) are part of a secret cabal working against the best interests of the United States, characterizing my family and me as ‘internationalists’ and of conspiring with others around the world to build a more integrated global political and economic structure – one world, if you will. If that’s the charge, I stand guilty, and I am proud of it.”
– David Rockefeller, Memoirs, page 405

David Rockefeller Sept. 23, 1994 “This present window of opportunity, during which a truly peaceful and interdependent world order might be built, will not be open for too long — We are on the verge of a global transformation. All we need is the right major crisis and the nations will accept the New World Order.”

With everyday that passes a global economic collapse seems to be only a matter of time. Mainly due to the massive amounts of debt. Could this be the the right major crisis that he spoke of?

Because of the changes to the Bank of Canada in 1974 our national debt has skyrocketed from 18 billion to nearly 600 billion. Which is owed to private banks like CIBC, TD Bank, the Royal bank, and Scotia bank. Everyone of these banks have Bilderberg attendee’s on a regular basis.

And secondly, what was the reasoning for the change in policy?

The change in policy came, to help the Canadian economy recover from what the government billed as a major recession. When in reality the recession was small at best, as seen in this graph.

As the figure shows, Canada had two very deep and prolonged recessions from 1961 to 2007 and a third that began in 2008 (the broken line represents my forecast to 2010).

So to put it simply. The changes to the Bank of Canada where made under the false pretenses of a major recession. By a group of globalist who openly admit their goals of creating a one world government.

Why hasn’t the media reported on this?

Why would Bilderberg members report on themselves? Peter Mansbridge and countless others in Canadian media have attended Bilderberg.

And as David Rockefeller was quoted in 1991 about American media:

“We are grateful to the Washington Post, the New York Times, Time Magazine and other great publications whose directors have attended our meetings and respected their promises of discretion for almost forty years.”

It seems that even until this very day, Canadian media are remaining silent on the issue. I have been sending the video of the lawsuit against the Bank of Canada to all of the main stream outlets repeatedly for months. But have not even received a email response back yet. I have also sent it to MP’s from every party. Same thing, zero responses.

Politicians routinely laugh at the idea of restoring the Bank of Canada, and label those who raise questions as “conspiracy theorists”.

A friend of mine, Jamie Scott in British Columbia got the oppertunity to meet the new leader of the NDP Thomas Mulcaire today, and asked him about the debt-based monetary system. Here is what was said.

I asked him about the Debt-Based Monetary System.

“I have not studied that, no”. He says the idea that the chartered banks being able to create currency through loans is “conspiracy theory” and told me if I wanted the Bank of Canada to issue all our loot to “go start your own party”

I kept peppering him and the crowd turned on me quick. He said, “Excuse me, but I was a Finance Minister in Quebec for 5 years” (cheers) to which I said “then its all the more startling that you have no idea what I’m talking about.” Boos (jeers?) then rained down.
He said “I’m the only one who will stand up to Stephen Harper”. I said ‘big deal. That’s not hard. He’s a weak, unpopular leader with a fake majority. Anyone can stand up to Steve. We need someone who will stand up to the banks.

“Go start your own party then.”

Please watch this video to find out who Jamie Scott is.

The bought and paid for media, and politicians in Canada are not going to correct this problem. They are part of it. We the Canadian people MUST take action now, or forever be indebted to the global bankers and loose what little sovereignty we have left.

Stephen Harper said the true reality that we face, at the Toronto G20 in 2010!

” I know some people don’t like it. It is a loss of national sovereignty, but it is reality.”

“As I constantly remind Canadians, there isn’t really a Canadian economy anymore. It is a global economy.”

Stephen Harper at a news conference in Toronto. At the end of the G20 summit. Here are the two quotes Harper should be remembered by: ” I know some people don’t like it. It is a loss of national sovereignty, but it is reality.” “As I constantly remind Canadians, there isnt really a Canadian economy anymore. It is a global economy.”

Article By Terry Wilson – Canadian Awareness Network




There Criminal Currency is called FIAT CURRENCY It is used in every country under the IMF-World Bank System of the Cabal

FIAT Currency Is a Debt Based Currency

All It creates is Debt,Debt,and more Debt

Hence Canada’s Skyrocketing Debt to which we have never defaulted on but instead of our national debt going down it just keeps going up

It’s a Debt that can never be fully repaid. Why because when new money-debt is created into the system through LOANS-Debt the interest on that Debt-Loans is not created and therefore leaving the money system always short on cash.


Lets investigate FIAT CURRENCY and see it for what it is a Complete FRAUD

FIAT CURRENCY and FRACTIONAL RESERVE BANKING go hand in hand and are both Criminal one is basically a PYRAMID SCHEME and the other COUNTERFEITING.



15 Fundamental Problems with Fiat Currencies

BY RON HERA03/26/2012

Value Subjectivism and Monetary Instability

Subjectivism is the philosophy that reality is what we perceive to be real and that no underlying, true reality exists independent of human perception. In other words, the nature of reality for an individual person is dependent on that individual’s own consciousness. It follows that each person experiences their own reality that is not shared with others. What is true and what seems moral to one person may not be true or moral for another person, i.e., truth and morality are relative. In contrast, objectivism is the philosophy that reality exists independent of human consciousness; that human beings have direct contact with reality through sense perception; and that objective knowledge of reality can be obtained through perception, evidence and logic, e.g., through scientific methods.

A subjectivist might view the stock market as a perpetual bubble floating on the hopes and dreams of entrepreneurs and investors who invest in stocks in the same way that gamblers place chips on a craps table in a casino, without any concept of an objective economic reality outside of the game. A subjectivist might view technical analysis, which is based purely on trading activity in the stock market, as the ideal tool to understand financial markets, despite the fact that is has no direct connection to the objective economic realities of the companies that stocks represent. In contrast, an objectivist might view the stock market as a venue for participation in business ownership where stocks have value as a function of the particular businesses that they represent and because of the goods and services that the businesses provide in the objective world. A subjectivist might say that “everything is relative” (although the statement is self contradictory), while an objectivist might say that they “…believe in justification, not by faith, but by verification” (Thomas H. Huxley 1825-1895). Although they may not know it, Keynesian economists, bankers and day traders are often philosophical subjectivists while Austrian economists, advocates of the gold standard and value investors are often philosophical objectivists.

An objectivist interpretation of morality is that morality flows naturally from people pursuing their own interests and that immorality results from coercion. For the vast majority of individuals, “self interest” includes supporting their own family and community, simply because human beings are social animals. Parents naturally care for their own children, for example. Morality is a natural phenomenon, not a product of coercion. Human beings naturally live peacefully together in communities and the vast majority of individuals experience empathy. Both charity and resistance to coercion occur naturally and voluntarily in human communities. Those who do not experience empathy (sociopaths) and who disregard the interests of their fellow human beings or act in ways that harm the community are extremely rare. Philosopher Ayn Rand wrote “Force and mind are opposites; morality ends where a gun begins.” Human beings do not act morally because they are being watched by police or because a gun is held to their heads. In all cultures and at all times and places throughout recorded history, and certainly before, what is immoral is initiating violent force or coercion without cause, most especially when it harms the community. Although particular rules vary from one culture to another, morality is neither subjective nor relative.

Ironically, the objectivist view of morality has been widely misconstrued as a sanction for selfishness. Selfishness typically results in the deprivation or coercion of others. In contrast, pursuing their own self interest is what human beings naturally and voluntarily do in the absence of coercion. In fact, the idea that what is moral arises in a natural way based on the freedom to pursue one’s own self interest, i.e., freedom from coercion, is precisely the moral doctrine of the 1776 American Declaration of Independence:

“We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness.”

Where money is concerned, there are two fundamentally different concepts of “value”, one rooted in subjectivism and one rooted in objectivism. In a monetary context, value subjectivism means that money has value simply because people believe that it does and that whatever people can be persuaded or coerced into using as money, such as a piece of paper bearing a government stamp, therefore has “value”. In other words, value subjectivism is the view that the only “value” that exists resides in the minds of human beings as a concept or belief and that, therefore, “value” can be created ex nihilo by persuasion or coercion, i.e., by influencing or controlling (through coercion or fear of coercion) the minds of human beings. Value objectivism means that money has value because it contains the resources and labor required to produce it in the same way that clothing or shelter have value for the survival requirements of human life.

Of course, subjective value, e.g., the value of a Picasso painting to an art lover, does indeed exist but it is different in kind compared to value linked to biological survival (literally, life and death). The former refers to subjective mental states, while the latter refers to an objective biological reality that exists independent of human consciousness. Residents of the Warsaw Ghetto in 1943, for example, didn’t value guns in the same way they valued Picasso paintings. Generally, a product of human labor that has real-world utility, such as a physical tool, will be recognized by human beings as having value relative to the material needs and survival requirements of human life. This “survival value” is absolutely pragmatic and is rooted in the natural understanding that human beings have about their biological needs and their physical relationship to the objective world.

Commodity money comes about in a natural and voluntary way and does not depend on governments or banks. Natural money develops wherever and whenever human beings obtain things that they do not strictly need purely for the purpose of exchanging them for something else. The good most commonly used as a tool of exchange is de facto money. The Greek philosopher Aristotle first defined the characteristics of a commodity that can be used as money as (1) divisibility, (2) durability, (3) portability and (4) scarcity, i.e., rare and valuable. More recently, money has been described as a medium of exchange, a unit of account, e.g., a standard weight of gold or silver, and a store of value. Of course, money must also be widely accepted, which can be accomplished either through natural forces or through coercion.

The supply of commodity money naturally remains constrained in proportion to the production of other goods. The resources and labor required to produce natural commodity money exist in relation to other economic resources needed for the survival requirements of human life. Production of commodity money subtracts resources that have direct survival value from other economic activities. Therefore, the law that regulates the production of commodity money is the law of survival. The law of survival is not a proscriptive law (declared by a human authority) but a descriptive law based on observation. The production of commodity money is regulated automatically according to the biological needs of human beings. Thus, commodity money is tightly coupled or “tethered” to physical economic activity in the objective world in the same way as building shelter. Human beings very rarely build more shelter than they need because the economic inputs required to do so are better spent elsewhere once sufficient shelter exists. The price mechanism in modern economics is a reflection of this underlying reality.

While it is commonly believed that any token can be used as money, this refers only to the medium of exchange, i.e., currency. Currency is precisely a “money substitute”, which is a convenience, but is not, strictly speaking, money. Land deeds, for example, can circulate as a currency but they are not the land itself. Creating more currency units in a vacuum, in this case un-backed “land deeds” with no land attached, does not create more land or any other form of wealth in the objective world even if it increases the number of transactions and the size of the economy measured in “land deeds”.

Throughout history, schemes have been attempted whereby currencies that cost virtually nothing to produce, and that have no survival value, have been substituted for commodity money. Artificial money, known as ‘fiat currency’ has putative “value” simply because it is declared to have a value by a government or central bank. Fiat currency schemes replace the survival value of commodity money with subjective value and substitute a mere medium of exchange for natural commodity money. Modern currencies, including the U.S. dollar, the British pound, the euro and the Japanese yen, are all fiat currency schemes. As a practical matter, a fiat currency unit is worth whatever it can purchase but it is not a standard by which value can be measured because its purchasing power is unstable. In fact, there are several fundamental problems with fiat currencies.

1. There Is No Spoon – In the popular 1999 film The Matrix, written by Lana and Andy Wachowski (“The Wachowski Brothers”), the protagonist, Neo, has the following conversation with a gifted child who can bend spoons with his mind:

Child: Do not try and bend the spoon. That’s impossible. Instead… only try to realize the truth.

Neo: What truth?

Child: There is no spoon.

Neo: There is no spoon?

Child: Then you’ll see, that it is not the spoon that bends, it is only yourself.

There is a difference between an abstraction and an abstract concept. “Money” is an abstraction in the same way that “container” encompasses both a bottle and a jar. Abstractions are artifacts of language that generally describe the world. In contrast, an abstract concept is the mental representation of an idea, such as liberty. Abstract concepts are literally ideas that exist in the human mind. Law, for example, expresses the concept of justice but an arbitrary law is not just merely because it is law. Unjust laws certainly exist. Declaring that a stone is a seafaring vessel does not imbue it with the ability to float on water, even if it can skip on the surface if it has enough spin. Such a declaration would be an illogical misuse of language masking an obvious absurdity. Nonetheless, the same obvious absurdity underlies fiat currencies. The erroneous conflation of “money”, which is an abstraction, and “value”, which is an abstract concept, is an example of sophistry; a trick of words played on unsophisticated minds. In fact, fiat currencies which exist today, not principally as notes or coins, but as electronic digits in computers, have no value.

2. Coercion – Coercion characterizes fiat currencies because most people would not accept them unless forced to do so against their will. In the United States, for example, the replacement of gold-backed money in 1933 required the use of legal force (criminal penalties of $10,000, ten years in prison, or both) to compel U.S. citizens to accept irredeemable Federal Reserve Notes in place of gold certificates.

3. Rent Seeking – Fiat currency schemes extract economic rents by forcing commerce to take place in the fiat currency system. Since human beings trade with one another to survive, the ability to freely exchange value for value is a natural right having the same moral foundation as the right to life, liberty and the pursuit of happiness. In a marketplace based on voluntary arrangements, there is no middleman extracting an economic rent in exchange for permission to participate in commerce.

4. Immorality – Fiat currency schemes are immoral because the primary thing that makes them acceptable is coercion. Forcing people to accept artificial money that has no objective value against their will and self interest is an immoral act. Additionally, fiat currency schemes allow those who control the currency to redistribute wealth by altering the availability, quantity and distribution of the currency, which is little more than legalized theft.

5. Central Planning – Since fiat currencies are based on coercive, rather than voluntary market relationships, a central authority is required that has the power to eliminate competing currencies, i.e., to establish a monopoly. Central economic planning is not only anti-democratic and the antithesis of a free market, but also inevitably fails. Human society is not blessed with the omniscient and infallible individuals required to make financial and economic decisions in place of the decisions of millions of individuals, households, entrepreneurs and businesses. The record of history, e.g., the USSR, is absolutely clear. Central planning of an economy produces a never ending stream of unintended consequences that lead to never ending interventions and that ultimately destroy economic activity.

6. Price Instability – Fiat currencies, because they require relatively insignificant physical economic inputs, have no direct relationship to the survival requirements of human life. Since it is decided by central planners, the quantity of currency in a fiat currency scheme is always and inevitably incorrect. This causes price instability and artificially stimulates or depresses economic activity as a function of how much currency is produced and of how it is distributed. As a practical matter, price stability can never be achieved in a fiat currency scheme.

7. Economic Volatility – Since fiat currencies are loosely coupled to physical economic activity in the objective world, they tend to become increasingly de-coupled and eventually “un-tethered” over time. An economy is the aggregate of millions of independent, individual human actors and there is no way that those responsible for a fiat currency can guess the correct quantity, although they can recognize incorrect quantities after the fact by their consequences, e.g., credit booms, recessions, large-scale price bubbles and economic collapses, such as the Great Depression, which began only sixteen years after the U.S. Federal Reserve was established. Of course, economies can be volatile for many reasons. The effect of fiat currencies, however, is to greatly magnify economic volatility.

8. Currency Debasement – Voltaire famously wrote that “Paper money eventually returns to its intrinsic value—zero.” Fiat currencies issued by governments or central banks represent intangible, subjective concepts of value like “full faith and credit” but the currency itself has no lasting value. Specifically, fiat currencies have a built-in tendency to decline in purchasing power over time as more currency is produced, particularly in fractional reserve and debt-based fiat currency schemes. In debt-based fiat currency schemes, the currency must be constantly inflated or a deflationary vicious circle (a collapse of debt) will set in. Those responsible for the currency predictably produce more than is necessary to maintain stable prices or to sustain stable economic activity, e.g., to diminish the risk of deflation, for political promises and favors, to wage war, etc. Price instability and economic volatility are the result. Currency debasement eventually undermines the basic economic structure of society. In The Economic Consequences of the Peace (1919), John Maynard Keynes wrote:

“Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.”

9. Wealth Redistribution – Arbitrarily increasing the quantity of currency in an economy distorts the distribution of money and, therefore, redistributes purchasing power, effectively stealing wealth from the majority, e.g., savers and wage workers, to serve the interests of a privileged minority. Redistribution of wealth, as opposed to production of wealth, causes a net loss of wealth to society. Government deficit spending, although it may be motivated by good intentions, changes the quantity of currency and results in currency debasement. Thus, government deficit spending operates as a dishonest, hidden tax on savers and wage workers. In his well known 1966 essay, Gold and Economic Freedom, former Federal Reserve Chairman Alan Greenspan, wrote:

“Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists’ antagonism toward the gold standard.”

10. Concentration of Wealth – Over time, fiat currency schemes cause wealth and property to accrue to those who enjoy the extraordinary privilege of creating the currency, thus increasing the concentration of wealth in society. Extreme concentration of wealth is economically and ultimately politically destabilizing. An individual with a one million dollar income, for example, will not buy as many consumer products, cars or appliances as ten households with incomes of one hundred thousand dollars. In his remarks at a symposium sponsored by the Federal Reserve Bank of Kansas City in Jackson Hole, Wyoming (August 28, 1998), then Federal Reserve Chairman Alan Greenspan pointed out that:

“Ultimately, we are interested in the question of relative standards of living and economic well-being. Thus, we need also to examine trends in the distribution of wealth, which, more fundamentally than earnings or income, represents a measure of the ability of households to consume…”

11. Moral Hazard – Baron Acton observed in 1887 that “Power tends to corrupt, and absolute power corrupts absolutely.” Since fiat currencies are created by monetary monopolies ex nihilo, e.g., through loan contracts, they provide a legal means of obtaining something for virtually nothing. As a result, those responsible for fiat currencies enjoy almost unlimited influence over economic and, therefore, political life. Sadly, human beings can never be good stewards of a currency system that provides one group in society with the means to obtain something for nothing. In fact, societies dominated by immoral fiat currency schemes eventually develop a something-for-nothing culture; a culture of entitlement in which, rather than producing wealth, everyone endeavors to live at the expense of everyone else.

12. Corruption and Cronyism – As a consequence of moral hazard, fiat currencies tend to encourage cronyism and corruption and ultimately produce a culture of corruption. The Roman poet Juvenal wrote “Quis custodiet ipsos custodes?” (“Who will guard the guards themselves?”). History is replete with the horrors of absolute power and with monetary abuses resulting in economic collapse. Just as democide has been a leading cause of death in the last one hundred years, fiat currencies have been a leading cause of poverty. Fiat currency schemes redistribute and concentrate wealth, resulting in a tiny and exceedingly wealthy minority, but they do not produce wealth. Francisco d’Anconia, one of the central characters in the novel Atlas Shrugged by Ayn Rand, explains the following in his famous “money speech”:

“…Money is a tool of exchange, which can’t exist unless there are goods produced and men able to produce them. Money is the material shape of the principle that men who wish to deal with one another must deal by trade and give value for value. Money is not the tool of the moochers, who claim your product by tears, or the looters who take it from you by force. Money is made possible only by the men who produce… Not an ocean of tears nor all the guns in the world can transform those pieces of paper in your wallet into bread you need to survive tomorrow… Whenever destroyers appear among men, they start by destroying money, for money is men’s protection and the base of a moral existence. Destroyers seize gold and leave its owners a counterfeit pile of paper. This kills all objective standards and delivers men into the arbitrary power of an arbitrary setter of values… Paper is a mortgage on wealth that does not exist, backed by a gun aimed at those who are expected to produce it. Paper is a check drawn by legal looters upon an account which is not theirs: upon the virtue of the victims…”

13. Confidence Failure – Since the value of fiat currencies is essentially subjective, maintaining the perception of “value” in the face of economic decline and despite rising prices can be challenging. Fiat currencies are ultimately dependent on confidence and trust in those responsible for the currency. When fiat currencies are abused, confidence fails and they revert to their intrinsic value (zero). Thus, monetary policy in a fiat currency scheme focuses directly on maintaining confidence. Behavioral economics, for example, has become a primary tool of monetary and economic policy implementation. As a consequence, economic reporting by governments and central banks, and by the news media, does not reflect an objective viewpoint. Management of perception has the effect of influencing the subjective mental states of those who use a particular fiat currency so as to maintain the perception of “value”. However, in the best case, perception management is one-sided “spin”, and, in the worst case, it is propaganda that is contrary to fact and that simply prevents ordinary people from recognizing the steps they need to take in order to protect their financial interests against currency debasement and other risks associated with fiat currencies. Nonetheless, cognitive dissonance (a psychological tension between conflicting cognitions) can result in the sudden collapse of fiat currencies when economic conditions deteriorate sufficiently or when prices rise too quickly, i.e., the spell of value subjectivism is broken.

14. Counterparty Risk – The “value” of fiat currencies requires trust in counterparties, but trust, like confidence, is an ephemeral, subjective mental state. In the objective world, agreements between governments and central banks and those who rely on their fiat currency schemes can be arbitrarily modified or broken. In fact, they are implicitly broken whenever a currency is debased. The promises of deposed governments and failed banks become instantly worthless.

15. Transaction Settlement – A transaction in commodity money is a direct exchange of value for value. When a fiat currency transaction is performed, one party holds fiat currency and the other is the recipient of goods or services, but, like a retroactive breach of contract, the value of the fiat currency can be changed and may even become zero. Since there is always a residual third party to the transaction, i.e., a government or central bank, transactions remain unsettled.

Fiat currency schemes are philosophically misguided, fundamentally immoral and ultimately unstable. Fiat currencies are premised on value subjectivism and erroneously conflate money and value. They represent a mere medium of exchange and rely on unstable subjective mental states such as confidence and trust. As a result, they are ultimately fragile and prone to fail suddenly when those using them wake from the dream of value subjectivism.

Fiat currencies are immoral because they are forced on people against their will and contrary to their self interest and because they are a mechanism for legalized theft through currency debasement. Monetary monopolies extract economic rents by holding hostage the rights of individuals to freely exchange value for value. Central economic planning, redistribution of wealth and concentration of wealth undermine economic activity and encourage a culture of entitlement. Since fiat currency schemes are the source of exorbitant power, they engender extreme moral hazard, produce cronyism and corruption and foster a culture of corruption.

Fiat currencies are subject to the decisions of central planners and are invariably debased producing price instability and increasing economic volatility. Governments and central banks that promulgate fiat currency schemes remain as perpetual counterparties to transactions posing a constant and unlimited risk. Resulting transactions are not fully settled because the value of the currency can be arbitrarily altered after the fact.

History has shown that fiat currencies are always debased and that confidence in them eventually fails causing vast economic disruptions, losses of wealth, social and political chaos and even loss of life. The inevitable disasters caused by fiat currency schemes are usually followed by a return to commodity money but, once stability is achieved, a new fiat currency scheme is put in place repeating an unnecessary and destructive cycle that benefits few and harms many. Ironically, while commodity money is denigrated by those who benefit from fiat currency schemes, former Federal Reserve Chairman Alan Greenspan noted as recently as 1999 that “Gold still represents the ultimate form of payment in the world. Fiat money in extremis is accepted by nobody. Gold is always accepted.”

Defenders of fiat currency schemes claim that they promote stable prices and moderate economic volatility. In fact, the opposite is true. Fiat currencies not only destabilize economies but undermine the moral basis of society. Without exception, in every historical case when a currency has been de-coupled from the objective world, i.e., from commodity money, the result has been disaster. Fiat currency schemes guarantee unending monetary and resulting economic, social and political chaos marked by brief periods of calm between inevitable abuses, bubbles and collapses.

About Ron Hera

Ron Hera

Founder at Hera Research, LLC
Primary Tel: 360.339.8541
Other Tel: 206.905.8680
7205 Martin Way East Suite 72 Olympia WA 98516
ron @

Two great Movie – documentaries on the Criminal Banker Issue and our stolen money


Oh Canada presents how nations allow private banks to create their money and put the public in debt to these banks instead of creating their money themselves without any debt. Although it’s main focus is Canada, nations around the world use the same system.


Please support the video creators by buying the high quality video from their website or by making a donation Greek subtitles now available. The AMERICAN DREAM is a 30 minute animated film that shows you how you’ve been scammed by the most basic elements of our government system. All of us Americans strive for the American Dream, and this film shows you why your dream is getting farther and farther away. Do you know how your money is created? Or how banking works? Why did housing prices skyrocket and then plunge? Do you really know what the Federal Reserve System is and how it affects you every single day? THE AMERICAN DREAM takes an entertaining but hard hitting look at how the problems we have today are nothing new, and why leaders throughout our history have warned us and fought against the current type of financial system we have in America today. You will be challenged to investigate some very entrenched and powerful institutions in this nation, and hopefully encouraged to help get our nation back on track. Buy the high quality video from the website, The video creators understand that how the monetary system works can be very confusing to some and have done a brilliant job in explaining how the whole system is set up to keep you forever in debt. This is not what the original founding fathers of America had in mind. Also, this is not just an American problem. It’s the same scam in nearly all countries around the world


Fractional-Reserve Banking

Fractional-Reserve Banking is a financial system in which deposit-taking financial institutions likebanks, are required to keep as a reserve only a small fraction of all the money deposited with them. When an individual or business deposits their money with a commercial bank, they lend the bank their money and the bank pays them interest on the loan. The money that has been deposited with the bank is used by the bank to originate loans for its customers who need financing. The deposit account owners who have lent their money to the bank, can withdraw their money at any time, but in reality at any given time only a small fraction of the money are being withdrawn simultaneously. The fact that not all depositors will demand their money at once has great implications, and is the main reason fractional-reserve banking is possible.
Most people have no idea how fractional-reserve banking works, but if the they understood its nature the fractional reserve banking will be exposed for what it is – a grand money-robbing scam imposed on the unsuspecting society. Lets see how fractional-reserve banking works.

How does Fractional-Reserve Banking Work?

Let’s see how fractional-reserve banking works. A customer of Bank #1 deposits $100 in his chequing account. The bank keeps the required reserve of 10% ($10) and lends the rest $90 to another bank customer. The second customer spends the $90 and this money ultimately ends in another chequing account at Bank #2. The Bank #2 keeps 10% ($9) of the deposit as a reserve and lends $81 to one of its customers. If this process continues 5 times in total we’ll have the following result.


The initial deposit of $100 magically ballooned to $468.5, creating $368.5 out of thin air through loans. Sounds like a Ponzi scheme? I’ll leave it to you to decide. As you can see your money is not actually in the bank, after you deposit it there. The $368.5 is money created by commercial banks, and they enter the economy and expand the money supply.

Why is Fractional-Reserve Banking Possible?

The fractional reserve banking is possible, because at any given time just a very small percentage of all deposited money is withdrawn. Furthermore the withdrawals are offset by new deposits. Most people keep their money in the bank most of the time (thinking that their money is secure there), which makes it easier for the banks to repay back money deposited with it on demand.

Bank Runs

What happens if the depositors of a particular bank lose faith in the ability of the bank to repay their deposits? If this happens the depositors will try to withdraw their money from the bank at the same time, but of course the bank will not able to repay them, because it actually keeps only fraction of the deposited money as reserves. Welcome to the wonderful world of fractional-reserve banking! This unpleasant situation is referred to as a bank run, and may cause the bank to fail unless the central bank act as a lender of last resort and bail out the bank.


The Wall Street Ponzi Scheme called Fractional Reserve Banking

Borrowing from Peter to Pay Paul

by Ellen Brown

Global Research, January 3, 2009

Cartoon in the New Yorker: A gun-toting man with large dark glasses, large hat pulled down, stands in front of a bank teller, who is reading a demand note. It says, “Give me all the money in my account.”

Bernie Madoff showed us how it was done: you induce many investors to invest their money, promising steady above-market returns; and you deliver – at least on paper. When your clients check their accounts, they see that their investments have indeed increased by the promised amount. Anyone who opts to pull out of the game is paid promptly and in full. You can afford to pay because most players stay in, and new players are constantly coming in to replace those who drop out. The players who drop out are simply paid with the money coming in from new recruits. The scheme works until the market turns and many players want their money back at once. Then it’s game over: you have to admit that you don’t have the funds, and you are probably looking at jail time.

A Ponzi scheme is a form of pyramid scheme in which earlier investors are paid with the money of later investors rather than from real profits. The perpetuation of the scheme requires an ever-increasing flow of money from investors in order to keep it going. Charles Ponzi was an engaging Boston ex-convict who defrauded investors out of $6 million in the 1920s by promising them a 400 percent return on redeemed postal reply coupons. When he finally could not pay, the scam earned him ten years in jail; and Bernie Madoff is likely to wind up there as well.

Most people are not involved in illegal Ponzi schemes, but we do keep our money in accounts that are tallied on computer screens rather than in stacks of coins or paper bills. How do we know that when we demand our money from our bank or broker that the funds will be there? The fact that banks are subject to “runs” (recall Northern Rock, Indymac and Washington Mutual) suggests that all may not be as it seems on our online screens. Banks themselves are involved in a sort of Ponzi scheme, one that has been perpetuated for hundreds of years. What distinguishes the legal scheme known as “fractional reserve” lending from the illegal schemes of Bernie Madoff and his ilk is that the bankers’ scheme is protected by government charter and backstopped with government funds. At last count, the Federal Reserve and the U.S. Treasury had committed $8.5 trillion to bailing out the banks from their follies.1 By comparison, M2, the largest measure of the money supply now reported by the Federal Reserve, was just under $8 trillion in December 2008.2 The sheer size of the bailout efforts indicates that the banking scheme has reached its mathematical limits and needs to be superseded by something more sustainable.
Penetrating the Bankers’ Ponzi Scheme

What fractional reserve lending is and how it works is summed up in Wikipedia as follows:

“Fractional-reserve banking is the banking practice in which banks keep only a fraction of their deposits in reserve (as cash and other liquid assets) with the choice of lending out the remainder, while maintaining the simultaneous obligation to redeem all deposits immediately upon demand. This practice is universal in modern banking. . . .The nature of fractional-reserve banking is that there is only a fraction of cash reserves available at the bank needed to repay all of the demand deposits and banknotes issued. . . . When Fractional-reserve banking works, it works because:

“1. Over any typical period of time, redemption demands are largely or wholly offset by new deposits or issues of notes. The bank thus needs only to satisfy the excess amount of redemptions.
“2. Only a minority of people will actually choose to withdraw their demand deposits or present their notes for payment at any given time.
“3. People usually keep their funds in the bank for a prolonged period of time.
“4. There are usually enough cash reserves in the bank to handle net redemptions.

“If the net redemption demands are unusually large, the bank will run low on reserves and will be forced to raise new funds from additional borrowings (e.g. by borrowing from the money market or using lines of credit held with other banks), and/or sell assets, to avoid running out of reserves and defaulting on its obligations. If creditors are afraid that the bank is running out of cash, they have an incentive to redeem their deposits as soon as possible, triggering a bank run.”

Like in other Ponzi schemes, bank runs result because the bank does not actually have the funds necessary to meet all its obligations. Peter’s money has been lent to Paul, with the interest income going to the bank.

As Elgin Groseclose, Director of the Institute for International Monetary Research, wryly observed in 1934:

“A warehouseman, taking goods deposited with him and devoting them to his own profit, either by use or by loan to another, is guilty of a tort, a conversion of goods for which he is liable in civil, if not in criminal, law. By a casuistry which is now elevated into an economic principle, but which has no defenders outside the realm of banking, a warehouseman who deals in money is subject to a diviner law: the banker is free to use for his private interest and profit the money left in trust. . . . He may even go further. He may create fictitious deposits on his books, which shall rank equally and ratably with actual deposits in any division of assets in case of liquidation.”3

How did the perpetrators of this scheme come to acquire government protection for what might otherwise have landed them in jail? A short history of the evolution of modern-day banking may be instructive.

The Evolution of a Government-Sanctioned Ponzi Scheme

What came to be known as fractional reserve lending dates back to the seventeenth century, when trade was conducted primarily in gold and silver coins. How it evolved was described by the Chicago Federal Reserve in a revealing booklet called “Modern Money Mechanics” like this:

“It started with goldsmiths. As early bankers, they initially provided safekeeping services, making a profit from vault storage fees for gold and coins deposited with them. People would redeem their “deposit receipts” whenever they needed gold or coins to purchase something, and physically take the gold or coins to the seller who, in turn, would deposit them for safekeeping, often with the same banker. Everyone soon found that it was a lot easier simply to use the deposit receipts directly as a means of payment. These receipts, which became known as notes, were acceptable as money since whoever held them could go to the banker and exchange them for metallic money.

“Then, bankers discovered that they could make loans merely by giving their promises to pay, or bank notes, to borrowers. In this way, banks began to create money. More notes could be issued than the gold and coin on hand because only a portion of the notes outstanding would be presented for payment at any one time. Enough metallic money had to be kept on hand, of course, to redeem whatever volume of notes was presented for payment.

“Transaction deposits are the modern counterpart of bank notes. It was a small step from printing notes to making book entries crediting deposits of borrowers, which the borrowers in turn could ‘spend’ by writing checks, thereby ‘printing’ their own money.”

If a landlord had rented the same house to five people at one time and pocketed the money, he would quickly have been jailed for fraud. But the bankers had devised a system in which they traded, not things of value, but paper receipts for them. It was called “fractional reserve” lending because the gold held in reserve was a mere fraction of the banknotes it supported. The scheme worked as long as only a few people came for their gold at one time; but investors would periodically get suspicious and all demand their gold back at once. There would then be a run on the bank and it would have to close its doors. This cycle of booms and busts went on throughout the nineteenth century, culminating in a particularly bad bank panic in 1907. The public became convinced that the country needed a central banking system to stop future panics, overcoming strong congressional opposition to any bill allowing the nation’s money to be issued by a private central bank controlled by Wall Street. The Federal Reserve Act creating such a “bankers’ bank” was passed in 1913. Robert Owens, a co-author of the Act, later testified before Congress that the banking industry had conspired to create a series of financial panics in order to rouse the people to demand “reforms” that served the interests of the financiers.4

Despite this powerful official backstop, however, the greatest bank run in history occurred only twenty years later, in 1933. President Roosevelt then took the dollar off the gold standard domestically, and Federal Reserve officials resolved to prevent further bank runs after that by flooding the banking system with “liquidity” (money created as debt to banks) whenever the banking Ponzi scheme came up short.

“Too Big to Fail”: The Government Provides the Ultimate Backstop

When these steps too proved insufficient to keep the banking scheme going, the government itself stepped up to the plate, providing bailout money directly from the taxpayers. The concept that some banks were “too big to fail” came in at the end of the 1980s, when the Savings and Loans collapsed and Citibank lost 50 percent of its share price. Negotiations were conducted behind closed doors, and “too big to fail” became standard policy. Bank risk was effectively nationalized: banks were now protected by the government from loss regardless of risk-taking or bad management.

There are limits, however, to the amount of support even the government’s deep pocket can provide. In the past two decades, the bankers’ lending scheme has been kept going by an even more speculative scheme known as “derivatives.” This is a complex subject that has been explored in other articles, but the bottom line is that more dollars are now owed in the derivatives casino than exist on the planet. (See Ellen Brown, “It’s the Derivatives, Stupid!” and “Credit Default Swaps: Derivative Disaster Du Jour,”

Attempting to fill the derivatives black hole with taxpayer money must inevitably be at the expense of other essential programs, such as Social Security and Medicare. Interestingly, Social Security and Medicare themselves are in some sense Ponzi schemes, since earlier retirees collect their benefits from the contributions of later workers. These programs, too, may soon be facing bankruptcy, in this case because their mathematical models failed to account for a huge wave of Baby Boomers who would linger longer than previous generations and demand expensive drugs and care through their senior years, and because the fund money has have been drawn on by the government for other purposes. The question here is, should the government be backstopping private banks that have mismanaged their investment portfolios at the expense of workers contractually entitled to a decent retirement from a fund they have paid into all their working lives? The answer, of course, is no; but there may be a way that the government could do both. If it were to nationalize the banking system completely – if the government were to assume not just the banks’ losses but their profits, oversight and control – it might have the funds both to maintain Social Security and Medicare and to provide a sustainable credit mechanism for the whole economy.

Replacing Private with Public Credit

Readily available credit has made America “the land of opportunity” ever since the days of the American colonists. What has transformed this credit system into a Ponzi scheme that must continually be propped up with bailout money is that the credit power has been turned over to private parties who always require more money back than they create in the first place. Benjamin Franklin reportedly explained this defect in the eighteenth century. When the directors of the Bank of England asked what was responsible for the booming economy of the young colonies, Franklin explained that the colonial governments issued their own money, which they both lent and spent into the economy:

“In the Colonies, we issue our own paper money. It is called ‘Colonial Scrip.’ We issue it in proper proportion to make the goods pass easily from the producers to the consumers. In this manner, creating ourselves our own paper money, we control its purchasing power and we have no interest to pay to no one. You see, a legitimate government can both spend and lend money into circulation, while banks can only lend significant amounts of their promissory bank notes, for they can neither give away nor spend but a tiny fraction of the money the people need. Thus, when your bankers here in England place money in circulation, there is always a debt principal to be returned and usury to be paid. The result is that you have always too little credit in circulation to give the workers full employment. You do not have too many workers, you have too little money in circulation, and that which circulates, all bears the endless burden of unpayable debt and usury.”

In an article titled “A Monetary System for the New Millennium,” Canadian money reform advocate Roger Langrick explains his concept in contemporary terms. He begins by illustrating the mathematical impossibility inherent in a system of bank-created money lent at interest:

“[I]magine the first bank which prints and lends out $100. For its efforts it asks for the borrower to return $110 in one year; that is it asks for 10% interest. Unwittingly, or maybe wittingly, the bank has created a mathematically impossible situation. The only way in which the borrower can return 110 of the bank’s notes is if the bank prints, and lends, $10 more at 10% interest . . . . The result of creating 100 and demanding 110 in return, is that the collective borrowers of a nation are forever chasing a phantom which can never be caught; the mythical $10 that were never created. The debt in fact is unrepayable. Each time $100 is created for the nation, the nation’s overall indebtedness to the system is increased by $110. The only solution at present is increased borrowing to cover the principal plus the interest of what has been borrowed.”

The better solution, says Langrick, is to allow the government to issue enough new debt-free dollars to cover the interest charges not created by the banks as loans:
“Instead of taxes, government would be empowered to create money for its own expenses up to the balance of the debt shortfall. Thus, if the banking industry created $100 in a year, the government would create $10 which it would use for its own expenses. Abraham Lincoln used this successfully when he created $500 million of ‘greenbacks’ to fight the Civil War.”

National Credit from a Truly National Banking System

In Langrick’s example, a private banking industry pockets the interest, which must be replaced every year by a 10 percent issue of new Greenbacks; but there is another possibility. The loans could be advanced by the government itself. The interest would then return to the government and could be spent back into the economy in a circular flow, without the need to continually issue more money to cover the interest shortfall.

The fractional reserve Ponzi scheme is bankrupt, and the banks engaged in it, rather than being bailed out by its victims, need to be put into a bankruptcy reorganization under the FDIC. The FDIC then has the recognized option of wiping their books clean and taking the banks’ stock in return for getting them up and running again. This would make them truly “national” banks, which could dispense “the full faith and credit of the United States” as a public utility. A truly national banking system could revive the economy with the sort of money only governments can issue – debt-free legal tender. The money would be debt-free to the government, while for the private sector, it would be freely available for borrowing at a modest interest by qualified applicants. A government-owned bank would not need to rob from Peter to advance credit to Paul. “Credit” is just an accounting tool – an advance against future profits, or the “monetization” (turning into cash) of the borrower’s promise to repay. As British commentator Ron Morrison observed in a provocative 2004 article titled “Keynes Without Debt”:

“[Today] bank credit supplies virtually all our everyday means of exchange, and this brings into sharp focus the simple fact that modern money is no longer constrained by outmoded intrinsic values. It is pure fiat [enforced by law] and simply a glorified accounting system. . . . Modern monetary reform is about displacing the current economic paradigm of ‘what can be afforded’ with ‘what we have the capacity to undertake.’”5

The objection to government-issued money has always been that it would be inflationary, but today some “reflating” of the economy could be a good thing. Just in the last year, more than $7 trillion in purchasing power has disappeared from the money supply, including wealth destruction in real estate, stocks, mutual fund shares, life insurance and pension fund reserves.6 Money is evaporating because old loans are defaulting and new loans are not being made to replace them.
Fortunately, as Martin Wolf noted in the December 16 Financial Times, “Curing deflation is child’s play in a ‘fiat money’ – a man-made money – system.” The central banks just need to get money flowing into the economy again. Among other ways they could do this, says Wolf, is that “they might finance the government on any scale they think necessary.”7

Rather than throwing money at a failed private banking system, public credit could be redirected into infrastructure and other projects that would get the wheels of production turning again. The Ponzi scheme in which debt is just shuffled around, borrowing from one player to pay another without actually producing anything of real value, could be replaced by a system in which the national credit card became an engine for true productivity and growth. Increased “demand” (money) would come from earned wages and salaries that would increase “supply” (goods and services) rather than merely servicing a perpetually increasing debt. When supply keeps up with demand, the money supply can be increased without inflating prices. In this way the paradigm of “what we can afford” could indeed be superseded by “what we have the capacity to undertake.”

Ellen Brown developed her research skills as an attorney practicing civil litigation in Los Angeles. In Web of Debt, her latest book, she turns those skills to an analysis of the Federal Reserve and “the money trust.” She shows how this private cartel has usurped the power to create money from the people themselves, and how we the people can get it back. Her earlier books focused on the pharmaceutical cartel that gets its power from “the money trust.” Her eleven books include Forbidden Medicine, Nature’s Pharmacy (co-authored with Dr. Lynne Walker), and The Key to Ultimate Health (co-authored with Dr. Richard Hansen). Her websites are


1. Kathleen Pender, “Government Bailout Hits $8.5 Trillion,” San Francisco Chronicle (November 26, 2008).
2. “Federal Reserve Statistical Release H.6, Money Stock Measures,” (December 18, 2008).
3. Robert de Fremery, “Arguments Are Fallacious for World Central Bank,” The Commercial and Financial Chronicle (September 26, 1963), citing E. Groseclose, Money: The Human Conflict, pages 178-79.4. Robert Owen, The Federal Reserve Act (1919); “Who Was Philander Knox?”, (1999).
5. Ron Morrison, “Keynes Without Debt,” (April 2004).
6. Martin Weiss, “Biggest Sea Change of Our Lifetime,” Money and Markets (December 22, 2008).
7. Martin Wolf, “‘Helicopter Ben’ Confronts the Challenge of a Lifetime,” Financial Times (December 16, 2008).

Ellen Brown is a frequent contributor to Global Research. Global Research Articles by Ellen Brown

Fractional Reserve Banking

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Fractional-reserve banking is a form of banking where banks maintain reserves (of cash and coin or deposits at the central bank) that are only a fraction of the customer’sdeposits. Funds deposited into a bank are mostly lent out, and a bank keeps only a fraction (called the reserve ratio) of the quantity of deposits as reserves. Some of the funds lent out are subsequently deposited with another bank, increasing deposits at that second bank and allowing further lending. As most bank deposits are treated as money in their own right, fractional reserve banking increases the money supply, and banks are said to create money. Due to the prevalence of fractional reserve banking, the broad money supply of most countries is a multiple larger than the amount of base money created by the country’s central bank. That multiple (called the money multiplier) is determined by the reserve requirement or other financial ratio requirements imposed by financial regulators, and by the excess reserves kept by commercial banks.[1][2]

Central banks generally mandate reserve requirements that require banks to keep a minimum fraction of their demand deposits as cash reserves. This both limits the amount ofmoney creation that occurs in the commercial banking system,[2] and ensures that banks have enough ready cash to meet normal demand for withdrawals. Problems can arise, however, when depositors seek withdrawal of a large proportion of deposits at the same time; this can cause a bank run or, when problems are extreme and widespread, asystemic crisis. To mitigate this risk, the governments of most countries (usually acting through the central bank) regulate and oversee commercial banks, provide deposit insurance and act as lender of last resort to commercial banks.

Fractional-reserve banking is the most common form of banking and is practiced in almost all countries. Although Islamic banking prohibits the making of profit from interest on debt, a form of fractional-reserve banking is still evident in most Islamic countries.


Savers looking to keep their valuables in safekeeping depositories deposited gold coins and silver coins at goldsmiths, receiving in turn a note for their deposit (see Bank of Amsterdam). Once these notes became a trusted medium of exchange an early form of paper money was born, in the form of the goldsmiths’ notes.[3]

As the notes were used directly in trade, the goldsmiths observed that people would not usually redeem all their notes at the same time, and they saw the opportunity to invest their coin reserves in interest-bearing loans and bills. This generated income for the goldsmiths but left them with more notes on issue than reserves with which to pay them. A process was started that altered the role of the goldsmiths from passive guardians of bullion, charging fees for safe storage, to interest-paying and interest-earning banks. Thus fractional-reserve banking was born.

However, if creditors (note holders of gold originally deposited) lost faith in the ability of a bank to redeem (pay) their notes, many would try to redeem their notes at the same time. If in response a bank could not raise enough funds by calling in loans or selling bills, it either went into insolvency or defaulted on its notes. Such a situation is called a bank run and caused the demise of many early banks.[3]

Repeated bank failures and financial crises led to the creation of central banks – public institutions that have the authority to regulate commercial banks, impose reserve requirements, and act as lender-of-last-resort if a bank runs low on liquidity. The emergence of central banks mitigated the dangers associated with fractional reserve banking.[2][4]

From about 1991 a consensus had emerged within developed economies about the optimum design of monetary policy. In essence central bankers gave up attempts to directly control the amount of money in the economy and instead moved to indirect means by targeting interest rates. This consensus is criticized by some economists.[5]

Reason for existence

Fractional reserve banking allows people to invest their money, without losing the ability to use it on demand. Since most people do not need to use all their money all the time, banks lend out that money, to generate profit for themselves. Thus, banks can act as financial intermediaries — facilitating the investment of savers’ funds.[2][6] Full reserve banking, on the other hand, does not allow any money in such demand deposits to be invested (since all of the money would be locked up in reserves) and less liquid investments (such as stocks, bonds and time deposits) lock up a lender’s money for a time, making it unavailable for the lender to use.

According to mainstream economic theory, regulated fractional-reserve banking also benefits the economy by providing regulators with powerful tools for manipulating the money supply and interest rates, which many see as essential to a healthy economy.[7]

How it works

The nature of modern banking is such that the cash reserves at the bank available to repay demand deposits need only be a fraction of the demand deposits owed to depositors. In most legal systems, a demand deposit at a bank (e.g., a checking or savings account) is considered a loan to the bank (instead of a bailment) repayable on demand, that the bank can use to finance its investments in loans and interest bearing securities. Banks make a profit based on the difference between the interest they charge on the loans they make, and the interest they pay to their depositors (aggregately called the net interest margin (NIM)). Since a bank lends out most of the money deposited, keeping only a fraction of the total as reserves, it necessarily has less money than the account balances of its depositors.

The main reason customers deposit funds at a bank is to store savings in the form of a demand claim on the bank. Depositors still have a claim to full repayment of their funds on demand even though most of the funds have already been invested by the bank in interest bearing loans and securities.[8] Holders of demand deposits can withdraw all of their deposits at any time. If all the depositors of a bank did so at the same time a bank run would occur, and the bank would likely collapse. Due to the practice of central banking, this is a rare event today, as central banks usually guarantee the deposits at commercial banks, and act as lender of last resort when there is a run on a bank. However, there have been some recent bank runs: the Northern Rock crisis of 2007 in the United Kingdom is an example. The collapse of Washington Mutual bank in September 2008, the largest bank failure in history, was preceded by a “silent run” on the bank, where depositors removed vast sums of money from the bank through electronic transfer.[citation needed] However, in these cases, the banks proved to have been insolvent at the time of the run.[citation needed] Thus, these bank runs merely precipitated failures that were inevitable in any case.

In the absence of crises that trigger bank runs, fractional-reserve banking usually functions smoothly because at any one time relatively few depositors will make cash withdrawals simultaneously compared to the total amount on deposit, and a cash reserve can be maintained as a buffer to deal with the normal cash demands from depositors seeking withdrawals. In addition, in a normal economic environment, cash is steadily being introduced into the economy by the central bank, and new funds are steadily being deposited into the commercial banks.

However, if a bank is experiencing a financial crisis, and net redemption demands are unusually large over a period of time, the bank will run low on cash reserves and will be forced to raise additional funds to avoid running out of reserves and defaulting on its obligations. A bank can raise funds from additional borrowings (e.g., by borrowing from the money market or using lines of credit held with other banks), or by selling assets, or by calling in short-term loans. If creditors are afraid that the bank is running out of cash or is insolvent, they have an incentive to redeem their deposits as soon as possible before other depositors access the remaining cash reserves before they do, triggering a cascading crisis that can result in a full-scale bank run.

As an example for a very simple idea of how the fractional reserve system can work if there is only one bank, for a Reserve Fraction of 10%, a bank can turn a $1000 deposit of “M0” money, into $18,997 of “M1” money. Ignoring interest & fees, which makes banks even more profitable, this is how a bank can copy 90% of “M0” money to make “M1” money, where in this example the money loaned out is simply re-deposited in the bank and loaned out again, and so on, that is how the $18,997 “M1” money comes from the $1000 of “M0” money. Banks do this by accumulating loans and deposits (effectively multiplying) the “M0” supply to make a larger “M1” supply. Banks can collect interest on the spread of the higher loan interest from the lower deposit interests. Return On Investment (ROI) for a bank is theoretically infinite considering the bank is using none of its own money, if one excludes the cost of setting up and maintaining the accounting system.

Money creation

Main article: Money creation

Modern central banking allows banks to practice fractional reserve banking with inter-bank business transactions with a reduced risk of bankruptcy. The process of fractional-reserve banking expands the money supply of the economy but also increases the risk that a bank cannot meet its depositor withdrawals.[9][10] Though not a mainstream economic belief, a number of central bankers, monetary economists, and text books, have said that banks create money by ‘extending credit’, where banks obligate themselves to borrowers, and then later manage whatever liabilities this creates for them, where if the central bank targets interest rates, it must supply base money on demand to meet the banks reserve requirements, after the banks have begun the lending process[11][12][13][14][15][16][17][18] and that rather than deposits leading to loans, causality is reversed, and loans lead to deposits.[19][20][21][22]

There are two types of money in a fractional-reserve banking system operating with a central bank:[23][24][25]

  1. Central bank money: money created or adopted by the central bank regardless of its form –- precious metals, commodity certificates, banknotes, coins, electronic money loaned to commercial banks, or anything else the central bank chooses as its form of money
  2. Commercial bank money: demand deposits in the commercial banking system; sometimes referred to as chequebook money

When a deposit of central bank money is made at a commercial bank, the central bank money is removed from circulation and added to the commercial banks’ reserves (it is no longer counted as part of M1 money supply). Simultaneously, an equal amount of new commercial bank money is created in the form of bank deposits. When a loan is made by the commercial bank (which keeps only a fraction of the central bank money as reserves), using the central bank money from the commercial bank’s reserves, the m1 money supply expands by the size of the loan.[2] This process is called deposit multiplication.

Example of deposit multiplication

The table below displays the mainstream economics relending model of how loans are funded and how the money supply is affected. It also shows how central bank money is used to create commercial bank money from an initial deposit of $100 of central bank money. In the example, the initial deposit is lent out 10 times with a fractional-reserve rate of 20% to ultimately create $500 of commercial bank money. Each successive bank involved in this process creates new commercial bank money on a diminishing portion of the original deposit of central bank money. This is because banks only lend out a portion of the central bank money deposited, in order to fulfill reserve requirements and to ensure that they always have enough reserves on hand to meet normal transaction demands.

The relending model begins when an initial $100 deposit of central bank money is made into Bank A. Bank A takes 20 percent of it, or $20, and sets it aside as reserves, and then loans out the remaining 80 percent, or $80. At this point, the money supply actually totals $180, not $100, because the bank has loaned out $80 of the central bank money, kept $20 of central bank money in reserve (not part of the money supply), and substituted a newly created $100 IOU claim for the depositor that acts equivalently to and can be implicitly redeemed for central bank money (the depositor can transfer it to another account, write a check on it, demand his cash back, etc.). These claims by depositors on banks are termed demand deposits or commercial bank money and are simply recorded in a bank’s accounts as a liability (specifically, an IOU to the depositor). From a depositor’s perspective, commercial bank money is equivalent to central bank money – it is impossible to tell the two forms of money apart unless a bank run occurs (at which time everyone wants central bank money).[2]

At this point in the relending model, Bank A now only has $20 of central bank money on its books. The loan recipient is holding $80 in central bank money, but he soon spends the $80. The receiver of that $80 then deposits it into Bank B. Bank B is now in the same situation as Bank A started with, except it has a deposit of $80 of central bank money instead of $100. Similar to Bank A, Bank B sets aside 20 percent of that $80, or $16, as reserves and lends out the remaining $64, increasing money supply by $64. As the process continues, more commercial bank money is created. To simplify the table, a different bank is used for each deposit. In the real world, the money a bank lends may end up in the same bank so that it then has more money to lend out.


The expansion of $100 of central bank money through fractional-reserve lending with a 20% reserve rate. $400 of commercial bank money is created virtually through loans.

Although no new money was physically created in addition to the initial $100 deposit, new commercial bank money is created through loans. The 2 boxes marked in red show the location of the original $100 deposit throughout the entire process. The total reserves plus the last deposit (or last loan, whichever is last) will always equal the original amount, which in this case is $100. As this process continues, more commercial bank money is created. The amounts in each step decrease towards a limit. If a graph is made showing the accumulation of deposits, one can see that the graph is curved and approaches a limit. This limit is the maximum amount of money that can be created with a given reserve rate. When the reserve rate is 20%, as in the example above, the maximum amount of total deposits that can be created is $500 and the maximum increase in the money supply is $400.

For an individual bank, the deposit is considered a liability whereas the loan it gives out and the reserves are considered assets. Deposits will always be equal to loans plus a bank’s reserves, since loans and reserves are created from deposits. This is the basis for a bank’s balance sheet.

Fractional reserve banking allows the money supply to expand or contract. Generally the expansion or contraction of the money supply is dictated by the balance between the rate of new loans being created and the rate of existing loans being repaid or defaulted on. The balance between these two rates can be influenced to some degree by actions of the central bank.

This table gives an outline of the makeup of money supplies worldwide. Most of the money in any given money supply consists of commercial bank money.[23] The value of commercial bank money is based on the fact that it can be exchanged freely at a bank for central bank money.[23][24]

The actual increase in the money supply through this process may be lower, as (at each step) banks may choose to hold reserves in excess of the statutory minimum, borrowers may let some funds sit idle, and some members of the public may choose to hold cash, and there also may be delays or frictions in the lending process.[26] Government regulations may also be used to limit the money creation process by preventing banks from giving out loans even though the reserve requirements have been fulfilled.[27]

Money multiplier

Main article: Money multiplier

The expansion of $100 through fractional-reserve banking with varying reserve requirements. Each curve approaches a limit. This limit is the value that the money multiplier calculates.

The most common mechanism used to measure this increase in the money supply is typically called the money multiplier. It calculates the maximum amount of money that an initial deposit can be expanded to with a given reserve ratio.


The money multiplier, m, is the inverse of the reserve requirement, R:[28]



For example, with the reserve ratio of 20 percent, this reserve ratio, R, can also be expressed as a fraction:


So then the money multiplier, m, will be calculated as:


This number is multiplied by the initial deposit to show the maximum amount of money it can be expanded to.

The money creation process is also affected by the currency drain ratio (the propensity of the public to hold banknotes rather than deposit them with a commercial bank), and the safety reserve ratio (excess reserves beyond the legal requirement that commercial banks voluntarily hold—usually a small amount). Data for “excess” reserves and vault cash are published regularly by the Federal Reserve in the United States.[29] In practice, the actual money multiplier varies over time, and may be substantially lower than the theoretical maximum.[30]

Confusingly there are many different “money multipliers”, some referring to ratios of rates of change of different money measures and others referring to ratios of absolute values of money measures.

Reserve requirements

The modern mainstream view of reserve requirements is that they are intended to prevent banks from:

  1. generating too much money by making too many loans against the narrow money deposit base;
  2. having a shortage of cash when large deposits are withdrawn (although the reserve is thought to be a legal minimum, it is understood that in a crisis or bank run, reserves may be made available on a temporary basis).

In practice, some central banks do not require reserves to be held, and in some countries that do, such as the USA and the EU they are not required to be held during the day when the banks are lending, and banks can borrow from other banks at near the central bank policy rate to ensure they have the necessary amount of required reserves by the close of business. Required reserves are therefore considered by some central bankers, monetary economists and textbooks to only play a very small role in limiting money creation in these countries. Most commentators agree however, that they help the banks have sufficient supplies of highly liquid assets, so that the system operates in an orderly fashion and maintains public confidence. The UK for example, which does not have required reserves, does have requirements that the banks keep a certain amount of cash, and in Australia while there are no reserve requirements, there are a variety of requirements to ensure the banks have a stabilising ratio of liquid assets, such as deposits held with local banks. Individual countries adhere to varying required reserve ratios which have changed over time.

In addition to reserve requirements, there are other required financial ratios that affect the amount of loans that a bank can fund. The capital requirement ratio is perhaps the most important of these other required ratios. When there are no mandatory reserve requirements, which are considered by some mainstream economists to restrict lending, the capital requirement ratio acts to prevent an infinite amount of bank lending.

Alternative views

See also: Endogenous money

Theories of endogenous money date to the 19th century, and were described by Joseph Schumpeter, and later the post-Keynesians.[31] Endogenous money theory states that the supply of money is credit-driven and determined endogenously by the demand for bank loans, rather than exogenously by monetary authorities.

Charles Goodhart worked for many years to encourage a different approach to money supply analysis and said the base money multiplier model was “such an incomplete way of describing the process of the determination of the stock of money that it amounts to misinstruction”[32] Ten years later he said: “Almost all those who have worked in a [central bank] believe that this view is totally mistaken; in particular, it ignores the implications of several of the crucial institutional features of a modern commercial banking system…”.[33] Goodhart has characterized the money stock as a dependent endogenous variable.[34] In 1994,Mervyn King said that the causation between money and demand is a contentious issue, because although textbooks assume that money is exogenous, in the United Kingdom money is endogenous, as the Bank of England provides base money on demand and broad money is created by the banking system.[35][36][37]

Seth B. Carpenter and Selva Demiralp concluded the simple textbook base money multiplier is implausible in the United States.[38]

Money supplies around the world

Components of US money supply (currency, M1, M2, and M3) since 1959. In January 2007, the amount of central bank money was $750.5 billion while the amount of commercial bank money (in the M2 supply) was $6.33 trillion. M1 is currency plus demand deposits; M2 is M1 plus time deposits, savings deposits, and some money-market funds; and M3 is M2 plus large time deposits and other forms of money. The M3 data ends in 2006 because the federal reserve ceased reporting it.

Components of the euro money supply 1998-2007

Main articles: Money supply and Inflation

Fractional-reserve banking determines the relationship between the amount of central bank money (currency) in the official money supply statistics and the total money supply. Most of the money in these systems is commercial bank money. Fractional reserve banking involves the issuance and creation of commercial bank money, which increases the money supply through the deposit creation multiplier. The issue of money through the banking system is a mechanism of monetary transmission, which a central bank can influence indirectly by raising or lowering interest rates (although banking regulations may also be adjusted to influence the money supply, depending on the circumstances).


Because the nature of fractional-reserve banking involves the possibility of bank runs, central banks have been created throughout the world to address these problems.[4][39]

Central banks

Main article: Central bank

Government controls and bank regulations related to fractional-reserve banking have generally been used to impose restrictive requirements on note issue and deposit taking on the one hand, and to provide relief from bankruptcy and creditor claims, and/or protect creditors with government funds, when banks defaulted on the other hand. Such measures have included:

  1. Government bond deposit requirements for note issue
  2. 100% Marginal Reserve requirements for note issue, such as the Bank Charter Act 1844 (UK)
  3. Sanction on bank defaults and protection from creditors for many months or even years, and
  4. Central bank support for distressed banks, and government guarantee funds for notes and deposits, both to counteract bank runs and to protect bank creditors.
Liquidity and capital management for a bank

Main articles: Capital requirement and Market liquidity

To avoid defaulting on its obligations, the bank must maintain a minimal reserve ratio that it fixes in accordance with, notably, regulations and its liabilities. In practice this means that the bank sets a reserve ratio target and responds when the actual ratio falls below the target. Such response can be, for instance:

  1. Selling or redeeming other assets, or securitization of illiquid assets,
  2. Restricting investment in new loans,
  3. Borrowing funds (whether repayable on demand or at a fixed maturity),
  4. Issuing additional capital instruments, or

Because different funding options have different costs, and differ in reliability, banks maintain a stock of low cost and reliable sources of liquidity such as:

  1. Demand deposits with other banks
  2. High quality marketable debt securities
  3. Committed lines of credit with other banks[citation needed]

As with reserves, other sources of liquidity are managed with targets.

The ability of the bank to borrow money reliably and economically is crucial, which is why confidence in the bank’s creditworthiness is important to its liquidity. This means that the bank needs to maintain adequate capitalisation and to effectively control its exposures to risk in order to continue its operations. If creditors doubt the bank’s assets are worth more than its liabilities, all demand creditors have an incentive to demand payment immediately, a situation known as a run on the bank.[citation needed]

Contemporary bank management methods for liquidity are based on maturity analysis of all the bank’s assets and liabilities (off balance sheet exposures may also be included). Assets and liabilities are put into residual contractual maturity buckets such as ‘on demand’, ‘less than 1 month’, ‘2–3 months’ etc. These residual contractual maturities may be adjusted to account for expected counter party behaviour such as early loan repayments due to borrowers refinancing and expected renewals of term deposits to give forecast cash flows. This analysis highlights any large future net outflows of cash and enables the bank to respond before they occur. Scenario analysis may also be conducted, depicting scenarios including stress scenarios such as a bank-specific crisis.[citation needed]

Risk and prudential regulation

In a fractional-reserve banking system, in the event of a bank run, the demand depositors and note holders would attempt to withdraw more money than the bank has in reserves, causing the bank to suffer a liquidity crisis and, ultimately, to perhaps default. In the event of a default, the bank would need to liquidate assets and the creditors of the bank would suffer a loss if the proceeds were insufficient to pay its liabilities. Since public deposits are payable on demand, liquidation may require selling assets quickly and potentially in large enough quantities to affect the price of those assets. An otherwise solvent bank (whose assets are worth more than its liabilities) may be made insolvent by a bank run. This problem potentially exists for any corporation with debt or liabilities, but is more critical for banks as they rely upon public deposits (which may be redeemable upon demand).

Although an initial analysis of a bank run and default points to the bank’s inability to liquidate or sell assets (i.e. because the fraction of assets not held in the form of liquid reserves are held in less liquid investments such as loans), a more full analysis indicates that depositors will cause a bank run only when they have a genuine fear of loss of capital, and that banks with a strong risk adjusted capital ratio should be able to liquidate assets and obtain other sources of finance to avoid default[citation needed]. For this reason, fractional-reserve banks have every reason to maintain their liquidity, even at the cost of selling assets at heavy discounts and obtaining finance at high cost, during a bank run (to avoid a total loss for the contributors of the bank’s capital, the shareholders)[citation needed].

Many governments have enforced or established deposit insurance systems in order to protect depositors from the event of bank defaults and to help maintain public confidence in the fractional-reserve system.

Responses to the problem of financial risk described above include:

  1. Proponents of prudential regulation, such as minimum capital ratios, minimum reserve ratios, central bank or other regulatory supervision, and compulsory note and deposit insurance, (see Controls on Fractional-Reserve Banking below);
  2. Proponents of free banking, who believe that banking should be open to free entry and competition, and that the self-interest of debtors, creditors and shareholders should result in effective risk management; and,
  3. Withdrawal restrictions: some bank accounts may place a limit on daily cash withdrawals and may require a notice period for very large withdrawals. Banking laws in some countries may allow restrictions to be placed on withdrawals under certain circumstances, although these restrictions may rarely, if ever, be used;
  4. Opponents of fractional reserve banking who insist that notes and demand deposits be 100% reserved.
Example of a bank balance sheet and financial ratios

An example of fractional reserve banking, and the calculation of the reserve ratio is shown in the balance sheet below:


In this example the cash reserves held by the bank is $3010m ($201m currency + $2809m held at central bank) and the demand liabilities of the bank are $25482m, for a cash reserve ratio of 11.81%.

Other financial ratios

The key financial ratio used to analyze fractional-reserve banks is the cash reserve ratio, which is the ratio of cash reserves to demand deposits. However, other important financial ratios are also used to analyze the bank’s liquidity, financial strength, profitability etc.

For example the ANZ National Bank Limited balance sheet above gives the following financial ratios:

  1. The cash reserve ratio is $3010m/$25482m, i.e. 11.81%.
  2. The liquid assets reserve ratio is ($201m+$2809m+$1797m)/$25482m, i.e. 18.86%.
  3. The equity capital ratio is $8703m/107787m, i.e. 8.07%.
  4. The tangible equity ratio is ($8703m-$3297m)/107787m, i.e. 5.02%
  5. The total capital ratio is ($8703m+$2062m)/$107787m, i.e. 9.99%.

It is very important how the term ‘reserves’ is defined for calculating the reserve ratio, as different definitions give different results. Other important financial ratios may require analysis of disclosures in other parts of the bank’s financial statements. In particular, for liquidity risk, disclosures are incorporated into a note to the financial statements that provides maturity analysis of the bank’s assets and liabilities and an explanation of how the bank manages its liquidity.

How the example bank manages its liquidity

See also: Duration gap

The ANZ National Bank Limited explains its methods as:[citation needed]

Liquidity risk is the risk that the Banking Group will encounter difficulties in meeting commitments associated with its financial liabilities, e.g. overnight deposits, current accounts, and maturing deposits; and future commitments e.g. loan draw-downs and guarantees. The Banking Group manages its exposure to liquidity risk by maintaining sufficient liquid funds to meet its commitments based on historical and forecast cash flow requirements.

The following maturity analysis of assets and liabilities has been prepared on the basis of the remaining period to contractual maturity as at the balance date. The majority of longer term loans and advances are housing loans, which are likely to be repaid earlier than their contractual terms. Deposits include substantial customer deposits that are repayable on demand. However, historical experience has shown such balances provide a stable source of long term funding for the Banking Group. When managing liquidity risks, the Banking Group adjusts this contractual profile for expected customer behaviour.



Main article: Criticism of fractional-reserve banking

Critics of fractional reserve banking have argued one or more of the following: that it is unstable, that it exacerbates business cycles, that it causes inflation, or that it leads to environmental degradation.

“The Federal Reserve Idea was doubtless right; if it had not been, it could not have been established. But it has been manipulated. It has not been a ‘federal’ reserve; it has been a private reserve. It has been operated in the interest of bankers and not of everyone in general. Capable of being used to carry the country gradually back to a natural flow of business and to a natural level of prices, it was used to bludgeon business at a critical time and to bludgeon it in such a way that money-lenders profited when producers suffered.

If that is the fact, there is no American banker but will say that the method was wrong; economically wrong, logically wrong, commercially wrong, if not criminally wrong.

Today the Federal Reserve boasts of its own reserve as if that were a sign of national economic health. With the country struggling to live, the Federal Reserve ought to be low, not high. The height which the reserve has reached is a measure of the depth of the country’s depression.

If the Federal Reserve would let out a part of that flood of money — a high financial authority suggests that less than 10 percent would do it — it would be like an infusion of blood into the nation’s veins.”
-Henry Ford
(Chapter 61, Volume 3, THE DEARBORN INDEPENDENT, issue of 16 July 1921, “The International Jew”)

See also


  1. ^ Abel, Andrew; Bernanke, Ben (2005), “14.1”, Macroeconomics (5th ed.), Pearson, pp. 522–532
  2. ^ a b c d e f Mankiw, N. Gregory (2002), “Chapter 18: Money Supply and Money Demand”, Macroeconomics(5th ed.), Worth, pp. 482–489
  3. ^ a b United States. Congress. House. Banking and Currency Committee. (1964). Money facts; 169 questions and answers on money- a supplement to A Primer on Money, with index, Subcommittee on Domestic Finance … 1964.. Washington D.C..
  4. ^ a b The Federal Reserve in Plain English – An easy-to-read guide to the structure and functions of the Federal Reserve System. See page 5 of the document for the purposes and functions:
  5. ^ Abel, Andrew; Bernanke, Ben (2005). “7”. Macroeconomics (5th ed.). Pearson. pp. 266–269.
  6. ^ Mankiw, N. Gregory (2002). “9”. Macroeconomics (5th ed.). Worth. pp. 238–255.
  7. ^ Committee on Finance and Industry 1931 (Macmillan Report) on bankers desire to complicate banking issues.”The economic experts have evolved a highly technical vocabulary of their own and in their zeal for precision are distrustful, if not derisive of any attempts to popularize their science.”
  8. ^ Page 57 of ‘The FED today’, a publication on an educational site affiliated with the Federal Reserve Bank of Kansas City, designed to educate people on the history and purpose of the United States Federal Reserve system. The FED today Lesson 6
  9. ^ “Mervyn King, Finance: A Return from Risk”. Bank of England. ” Banks are dangerous institutions. They borrow short and lend long. They create liabilities which promise to be liquid and hold few liquid assets themselves. That though is hugely valuable for the rest of the economy. Household savings can be channelled to finance illiquid investment projects while providing access to liquidity for those savers who may need it…. If a large number of depositors want liquidity at the same time, banks are forced into early liquidation of assets – lowering their value …'”
  10. ^ “Disyatat, P. 2010 The bank lending channel revisited.”. Bank for International Settlements. “Page 2. the concept of the [mainstream economics] money multiplier is flawed and uninformative in terms of analyzing the dynamics of bank lending. Page 7 When a loan is granted, banks in the first instance create a new liability that is issued to the borrower. This can be in the form of deposits or a cheque drawn on the bank, which when redeemed, becomes deposits at another bank. A well functioning interbank market overcomes the asynchronous nature of loan and deposit creation across banks. Thus loans drive deposits rather than the other way around.”
  11. ^ “Paul Tucker, Money and credit: Banking and the Macroeconomy”. Bank of England. ” banks….in the short run…..lever up their balance sheets and expand credit at will….Subject only but crucially to confidence in their soundness, banks extend credit by simply increasing the borrowing customer’s current account…..This ‘money creation’ process is constrained by their need to manage the liquidity risk from the withdrawal of deposits and the drawdown of backup lines to which it exposes them.”
  12. ^ “Glen Stevens, the Australian Economy: Then and now”. Reserve Bank of Australia. ” money multiplier, as an introduction to the theory of fractional reserve banking. I suppose students have to learn that, and it is easy to teach, but most practitioners find it to be a pretty unsatisfactory description of how the monetary and credit system actually works. In large part, this is because it ignores the role of financial prices in the process.”
  13. ^ “White, W. Changing views on how best to conduct monetary policy: the last fifty years”. Bank for International Settlements. “Some decades ago, the academic literature….emphasised the importance of the reserves supplied by the central bank….., and the implications (via the money multiplier) for the growth of money and credit. Today, it is more broadly understood that no industrial country conducts policy in this way under normal circumstances….there has been a decisive shift towards the use of short-term interest rates as the policy instrument [in industrialised countries]. In this framework, cash reserves supplied to the banking system are whatever they have to be to ensure that the desired policy rate is in fact achieved.”
  14. ^ “Freedman, C. Reflections on Three Decades at the Bank of Canada”. Bank of Canada. “It used to be that most academic research treated money (or sometimes base) as the exogenous policy instrument under the control of the central bank. This was an irritant to those of us working in central banks, because the instrument of policy had always been the short-term interest rate, and because all monetary aggregates (beyond base) have always been and remain endogenous. In recent years, more and more academics, in specifying their models, have treated the short-term interest rate as the policy instrument, thereby increasing the usefulness of their analyses…”
  15. ^ Understanding the Remarkable Survival of Multiplier Models of Money Stock Determination. Eastern Economic Journal, 1992, vol. 18, issue 3, pages 305-314
  16. ^ “(Holmes, 1969 page 73 at the time Senior Vice President of the Federal Reserve Bank of New York responsible for open market operations) I have not seen, cited in Bank and Credit the Scientific Journal of the National Bank of Poland”. ” In the real world, banks extend credit, creating deposits in the process, and look for reserves later. The question then becomes one of whether and how the Federal Reserve will accommodate the demand for reserves. In the very short run, the Federal Reserve has little or no choice about accommodating that demand… …'”
  17. ^ “Modern Money Mechanics. Page 37. Money Creation and Reserve Management” (PDF). Federal Reserve Bank of Chicago. ” Page 7. Of course, they do not really pay out loans from 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 in exchange for credits to the borrowers’ transaction accounts. Loans (assets) and deposits (liabilities) both rise by $9,000. Reserves are unchanged by the loan transactions. But the deposit credits constitute new additions to the total deposits of the banking system. Page 37. In the real world, a bank’s lending is not normally constrained by the amount of excess reserves it has at any given moment. Rather, loans are made, or not made, depending on the bank’s credit policies and its expectations about its ability to obtain the funds necessary to pay its customers’ checks and maintain required reserves in a timely fashion …'”
  18. ^ “The Transmission of Monetary Policy in Canada”. Bank of Canada. “Required reserves have traditionally been justified by a desire to influence the size of the money multiplier and by prudential concerns. However, central banks’ views about money supply determination have for a long time been that the money stock is demand determined”
  19. ^ Elements of Banking Made Simple, Hoyle and Whitehead (Oxford: Heinemann, 1989 edition). From preface “specifically designed to meet the requirements of the Institute of Bankers’ Banking Certificate and Foundation Course”. Page 22 “Consider a deposit….£1000 in banknotes….(a) We can lend out £700…. This is the simple view of bank lending. (b) It is….possible for us to have deposits of £3333.33. As we only have deposits….of £1000 we can lend out £2333.33, provided we can find borrowers. This is the more sophisticated view of bank lending.
  20. ^ a b c Bank for International Settlements – The Role of Central Bank Money in Payment Systems. See page 9, titled, “The coexistence of central and commercial bank monies: multiple issuers, one currency”: A quick quotation in reference to the 2 different types of money is listed on page 3. It is the first sentence of the document:
    “Contemporary monetary systems are based on the mutually reinforcing roles of central bank money and commercial bank monies.”
  21. ^ a b European Central Bank – Domestic payments in Euroland: commercial and central bank money: One quotation from the article referencing the two types of money:
    “At the beginning of the 20th almost the totality of retail payments were made in central bank money. Over time, this monopoly came to be shared with commercial banks, when deposits and their transfer via cheques and giros became widely accepted. Banknotes and commercial bank money became fully interchangeable payment media that customers could use according to their needs. While transaction costs in commercial bank money were shrinking, cashless payment instruments became increasingly used, at the expense of banknotes”
  22. ^ ebook: The Federal Reserve – Purposes and Functions:
    see pages 13 and 14 of the pdf version for information on government regulations and supervision over banks
  24. ^ A handbook of alternative monetary economics, by Philip Arestis, Malcolm C. Sawyer, p. 53
  25. ^ “Goodhart C A E (1984( Monetary Policy in Theory and Practice p.188. I have not seen, cited in Monetary Policy Regimes: a fragile consensus. Peter Howells and Iris Biefang-Frisancho Mariscal” (PDF). University of the West of England, Bristol. ” The base-multiplier model of money supply determination (which lies behind the exogenously determined money stock of the LM curve) was condemned years ago as ‘such an incomplete way of describing the process of the determination of the stock of money that it amounts to misinstruction …'(Goodhart 1984. Page 188)”
  26. ^ “Paul Tucker, Managing the central bank’s balance sheet: Where monetary policy meets financial stability”. Bank of England. ” given this way of implementing monetary policy, money – both narrow and broad – is largely endogenous. The central bank simply supplies whatever amount of base money is demanded by the economy at the prevailing level of interest rates.”
  27. ^ “Razzak, W. Money in the Era of Inflation Targeting”. Reserve Bank of New Zealand. “In New Zealand….money supply is endogenous”
  28. ^ Money, Reserves, and the Transmission of Monetary Policy: Does the Money Multiplier Exist? Conclusions
  29. ^ Reserve Bank of India – Report on Currency and Finance 2004-05 (See page 71 of the full report or just download the section Functional Evolution of Central Banking):
    The monopoly power to issue currency is delegated to a central bank in full or sometimes in part. The practice regarding the currency issue is governed more by convention than by any particular theory. It is well known that the basic concept of currency evolved in order to facilitate exchange. The primitive currency note was in reality a promissory note to pay back to its bearer the original precious metals. With greater acceptability of these promissory notes, these began to move across the country and the banks that issued the promissory notes soon learnt that they could issue more receipts than the gold reserves held by them. This led to the evolution of the fractional reserve system. It also led to repeated bank failures and brought forth the need to have an independent authority to act as lender-of-the-last-resort. Even after the emergence of central banks, the concerned governments continued to decide asset backing for issue of coins and notes. The asset backing took various forms including gold coins, bullion, foreign exchange reserves and foreign securities. With the emergence of a fractional reserve system, this reserve backing (gold, currency assets, etc.) came down to a fraction of total currency put in circulation.

Further reading

External links

The Bankers Who call the TRUTH Criticism

Criticism of Fractional Reserve Banking

From Wikipedia, the free encyclopedia

Fractional-reserve banking

Criticisms of fractional-reserve banking have been put forward from a variety of perspectives. Critics have included economists such as Irving Fisher,[1] Frank Knight[2], and Milton Friedman.[3] Within the economics profession today, most criticisms are from non-mainstream economic theories such as those of the Austrian School.[4] There are also critics from outside the economics profession.


Critics of fractional reserve banking and the related fiat paper monetary system may use the term debt-based monetary system[5] or credit-based monetary system to emphasize the role that credit plays in the current monetary system.[6] These terms are not in general use, and economists generally refer instead to the money supply, broad money and the money multiplier when discussing the mechanism by which the commercial banking system expands the quantity of money in an economy. The study of monetary theory in the economics profession is referred to as monetary economics.

General criticisms

Critics of fractional reserve banking claim that since money creation requires loans from the banking system, people are required to go into debt in order for any new money to be created. They assert that this can debase the means of exchange. Critics find it problematic that banks “create money out of nothing.”[7]

One criticism posits that since debt and the interest on the debt can only be paid in the same form of money, the total debt (principal plus interest) can never be paid in a debt-based monetary system unless more money is created through the same process. For example: if 100 credits are created and loaned into the economy at 10% per year, at the end of the year 110 credits will be needed to pay the loan and extinguish the debt. However, since the additional 10 credits does not yet exist, it too must be borrowed. This implies that debt must grow exponentially in order for the monetary system to remain solvent.[8][page needed] This was the argument of the Social Credit movement of the 1930s, who proposed to remove the job of money creation from banks and give it to governments.

Other criticisms relate to the potential fragility of bank liquidity in a fractional reserve banking environment, the financial risk of bank runs that depositors bear when depositing money with banks, and the impact that demand deposits have on the stock of money, and on inflation (that is, the implicit expansion of the money supply and its associated impact on prices and the exchange rate). An alternative to fractional reserve banking is full-reserve banking.[9] With full-reserve banking, some monetary reformers, such as Stephen Zarlenga of the American Monetary Institute, support the concurrent issuance of debt-free fiat currency from the Treasury, while others such as Congressman Ron Paul and some economists from the Austrian school, call for a commodity currency as existed under the gold standard.[10][11][12]

Some commentators, like debt-focused critics including Stephen Zarlenga, Lew Rockwell and Murray Rothbard, link together fractional-reserve banking, central banking, and government-enforced “paper” or fiat currency as negative features of modern monetary systems. They argue that fiat money and the practice of fractional reserve banking does not impose a natural limit on the growth of the money supply, and that this causes inherently unsustainable bubbles in asset and capital markets, which are vulnerable to speculation.[8][13][14][15][16][17] These commentators often use the term “debt-based monetary system” to refer to an economic system where money is created primarily through fractional-reserve banking techniques, using the banking system.[5]

Mark Anielski, and other political thinkers such as Michael Rowbotham, argue that this system of money supply has characteristics similar to a pyramid scheme, where the newly indebted are compelled to induce others into debt to pay off their own debts.[18]

Exacerbation of the business cycle

 Austrian Business Cycle Theory

Adherents of the Austrian School claim that fractional-reserve banking, by expanding the money supply, will lower the interest rates compared to a hypothetical full-reserve banking system, although this idea has been criticized within mainstream economics.[19][20][21] Austrian economists argue that the presumed discrepancy will affect the role of the interest rate as the price of investment capital, guiding investment decisions.


Fractional reserve banking involves the creation of money by the commercial bank system, increasing the money supply. According to the quantity theory of money, this larger money supply leads to more money ‘chasing’ the same amount of goods, which leads to a higher price level.[22] Austrian economists state that this expansion of the broad money supply (demand deposits and notes) caused by fractional reserve banking is a cause of price inflation.[23]

Environmental degradation

Some conservationists and environmentalists believe that fractional reserve banking creates the necessity for indefinite economic growth which leads to environmental destruction and depletion of natural resources especially when coupled with population growth.[24][25]

See also


  1. ^ Fisher, Irving (1997), 100% Money, Pickering & Chatto Ltd;, ISBN 978-1851962365
  2. ^ Daly, Herman E; Farley, Joshua (2004), Ecological Economics: Principles and Applications, Island Press, p. 250, ISBN 1-55963-312-3
  3. ^ Friedman, M., A Program for Monetary Stability, New York, Fordham University Press, 1960, pp. 65
  4. ^ a b For an example of the public use of the term, see the speech of the Earl of Caithness in the House of Lords on 5 March 1997
  5. ^ For example of the public use of the term, see this speech given by Zhou Xiaochuan, Reform the monetary system, 23 March 2009 (BIS), and this article, Roving Cavaliers of Credit by Steve Keen (with commentary by Yves Smith)
  6. ^ See the Memorandum (page 5 of PDF) from Judge Martin Mahoney in 1968 on his Judgement and Decree in the Credit River Case [1]
  7. ^ a b Rowbotham, Michael (1998), The Grip of Death: A Study of Modern Money, Debt Slavery and Destructive Economics, Jon Carpenter Publishing, ISBN 9781897766408
  8. ^ Stephen A. Zarlenga, The Lost Science of Money AMI (2002)
  9. ^ Sound Money, Lew Rockwell
  10. ^ Our Money Madness, Lew Rockwell
  11. ^ The Case for a Gold Dollar, Murray Rothbard
  12. ^ Anielski, Mark (2000), “Fertile Obfuscation: Making Money Whilst Eroding Living Capital” (PDF), 34th Annual Conference of the Canadian Economics Association, San Francisco, CA: Redefining Progress, pp. 41–2
  13. ^ Sraffa P. (1932a), Dr. Hayek on Money and Capital, in “Economic Journal”, n. 42, pp. 42-53
  14. ^ Nicholas Kaldor (1939). “Capital Intensity and the Trade Cycle”. Economica 6 (21): 40–66.doi:10.2307/2549077.
  15. ^ Friedman, Milton. “The ‘Plucking Model’ of Business Fluctuations Revisited”. Economic Inquiry: 171–177.
  16. ^ Ludwig von Mises, The Theory of Money and Credit, ISBN 0-913966-70-3 [2] See also: Jesus Huerta de Soto, Money, Bank Credit, and Economic Cycles, ISBN 0-945466-39-4 [3]
  17. ^ Agenda for a New Economy: From Phantom Wealth to Real Wealth by David Korten 2009 ISBN 1605092894
  18. ^ The Long Emergency: Surviving the End of Oil, Climate Change, and Other Converging Catastrophes of the Twenty-First Century by James Howard Kunstler 2006 ISBN 0802142494