|“Whoever controls the volume of money in any country is absolute master of all industry and commerce. And when you realize that the entire system is very easily controlled, one way or another by a few powerful men at the top, you will not have to be told how periods of inflation and depression originate.”|
|President James Garfield, 1881.|
The Logic Behind Fractional Reserve Banking
The fractional moneyconcept started centuries ago.
Let’s look back to Europe and the practice of the early goldsmiths who stored the precious metal coins of their other customers for a fee.
In addition to the goldsmiths who storedcoins, there was another class of my merchants, calls “scriveners,” who lentcoins. The goldsmiths reasoned that they, too, could act as scriveners, but do so with other people’s money. They said it was a pity for all that coin to just sit idle in their vaults. Why not lend it out and earn a profit which then could be split between themselves and their depositors? Put it to work, instead of merely gathering dust. They had learned from experience that very few of their depositors ever wanted to remove their coins at the same time. In fact, net withdrawals seldom exceeded 10 or 15% of their stockpile. It seemed perfectly safe to lend up to 80 or even 85% of their coins. And so the warehouseman began to act as loan brokers on behalf of their depositors, and the concept of banking, as we know it today, was born.
That’s the way many history books describe it, but there’s more involved here than merely putting idle money to work. First of all, sharing the interest income with the owners of the deposits was not part of the original concept. That only became general practice many years later after the depositors became outraged and needed to be re-reassured that these loans were in their interest, as well. In the beginning, they didn’t even know that their coins were being lent out. They naïvely thought that the goldsmiths were lending their own money.
The goldsmiths accepted gold deposits for which they issued receipts which were redeemable on demand. These receipts were passed from hand to hand and were known as goldsmiths’ notes, the predecessors of banknotes. The goldsmiths paid interest of 5% on their customers’ deposits and then lent the money to their more needy clients at exorbitant rates becoming, in fact, pawnbrokers who advanced money against the collateral of valuable property.
They also learned that it was possible to make loans in excess of the gold actually held in their vaults, because only a small fraction of their depositors attempted to convert their receipts into gold at any one time. Thus began the fractional reserve system, the practice of lending “money” that doesn’t really exist. It was to become the most profitable scam in the history of mankind. It was also the quicksand on which the Bank of England was subsequently founded in 1694 — more than 300 years ago.
NEW- Sept: More Detail on the International Banking Ponzi Scheme
Here’s a recent, very well written article that goes into much more detail than I provided in the video.