The Fractional Banking System — The Cause of Inflation and Most of Our Other Problems How Do Banks Create Money? Fractional banking, or fractional reserve lending, is the process where private banks create our money supply and is the cause of inflation and consequently, rising prices. To add insult to injury, that legally counterfeited money supply is then lent to the government through the purchase of bonds. The interest is then paid for with our taxes. But I digress, and the debtbased money system is best left to another article. Fractional banking is literally money creation out of thin air. If say, Bank XYZ has $1000 on deposit, they actually are allowed to loan out up to ten times that amount. A recent audit of the banks showed that some of them were leveraging their assets much higher than 10-1. Fannie Mae and Freddie Mac was doing 70-1 and Goldman Sachs, 333-1! The reserve requirement in Europe is 33-1. This is totally unstable and is what leads to inflation and its inevitable deflation and general economic stability. Boy, if you kill the Fed and don’t kill fractional reserve lending, you’ve done nothing. ~ Milton Friedman There’s also a argument that this private bank created money is unconstitutional. Article 1, Section 8, Clause 5 of the Constitution gives Congress, and only Congress, the the power to create money and regulate it’s value. In 1939, a group of highly respected economics professors, including Irving Fisher, published a Program for Monetary Reform. One of the key steps in this reform would be eliminating fractional reserve lending. In other words, a bank could only lend out what it has on hand. Independent studies have shown that implementing these reforms would
result in a 10% increase in GDP. Here are excerpts: A chief loose screw in our present American money and banking system is the requirement of only fractional reserves behind demand deposits. Fractional reserves give our thousands of commercial banks power to increase or decrease the volume of [money] by increasing or decreasing bank loans and investments. The banks thus exercise what has always, and justly, been considered a prerogative of sovereign power. As each bank exercises this power independently without any centralized control, the resulting changes in the volume of the circulating medium are largely haphazard. This situation is a most important factor in booms and depressions‌. If we do not adopt the 100% reserve system, and if the present movement for balancing the budget succeeds without providing for an adequate money supply, the resulting reduction in the volume of our circulating medium may throw us into another terrible deflation and depression, at least as severe as that through which we have just been passing. When violent booms and depressions, in which fluctuations in the supply of money play so vital a part, rob millions of their savings and prevent millions from working, Constitutions are likely to become scraps of paper. Download a copy of Program for Monetary Reform here.