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Fractional Reserve Lending

Remember those early bankers who wrote extra receipts for gold deposits and effectively printed money? Didn't that sound at least devious if not downright immoral and unlawful? If you or I were to print money we'd be locked up, guaranteed!

Not only does this practice continue today, it is the very basis of our banks' lending structures. Rather than calling it what it is—a license to print money based on using other peoples' deposits—today we call it Fractional Reserve Lending. The name may have changed, but the practice remains exactly the same.

Say you want to start a bank. Federal and state guidelines require you to have a certain amount of money in "reserves". In 2011, for Net Transaction Accounts these reserves are:

Reservable LiabilityReserve Requirement
$0 to reserve requirement exemption amount
($10.7 million)
0 percent of amount
Over reserve requirement exemption amount ($10.7 million) and up to low reserve tranche ($58.8 million)3 percent of amount
Over low reserve tranche ($58.8 million)$1,443,000 plus 10 percent of amount over $58.8 million

Source: www.federalregister.gov

Through the principle of fractional reserve lending, a bank can lend a multiple of the money it actually has in reserve. Therefore, if a bank has $58.8 million in cash reserves (the low reserve trench limit in the table above), it can actually make $1.96 billion in loans AND charge interest on that money!

As an individual you can't do that. You can't lend money you don't have and charge interest on it. And furthermore, all of this is hugely inflationary.

As of March 2009, U.S. revolving consumer debt, made up almost entirely of credit card debt, stood at about $950 billion.1 Ask any economist and they will tell you that expanding the money supply in this fashion is hugely inflationary and decreases the purchasing power of real money, yours and mine.

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