Understanding Fractional Reserve Lending


     Too many people do not know what Fractional Reserve Lending is, and as fundamental as it is to our modern economic system, one would think that it would be taught in every school and be common knowledge.  The truth is that even the people who should know of Fractional Reserve Lending, such as bank employees, economics majors, etc, actually  DO NOT KNOW about Fractional Reserve Lending.  This little paper will reveal to you Fractional Reserve Lending, and when you are finished reading it, you will understand why it is such a well kept secret.

     Fractional Reserve Lending is exactly what its name implies:  To Lend Money with only a Fraction of the Face Value of that money in your vault.  For example, a bank that lends you $100, is only required to physically possess TEN dollars.  That’s right, a bank only needs 10% REAL assets to lend you money.  Some of you may be marveling that this is actually legal, wouldn’t it be nice if we all only needed 10% real assets to work with money?  Well, it is legal, but only for banks.    

     What follows is the mechanics of Fractional Reserves which deserves full your attention. It is practiced by every bank everywhere, every day, and is allowed by law, (for only banks that is):  A person deposits $1000 into his local bank account; this bank can then loan 90% of this amount ($900) to a second individual and only be obligated to maintain 10% physically in the bank.  (Thus a “fractional reserve”)  Therefore, the initial person still has $1000 in their account, but now the second individual also has $900, from thin air! And the cycle indefinitely continues.  From bank to bank the money is transferred and grows, thus from this $1000 the chain of lending would be: 1000, 900, 810, 729, 656, 590, 531, 478, 430, 387, 348, 313, 282, 254, 229, 206, 185, 166, 149, 134, 121, 109, 98, 88, 79, 71, 64, 58, 52, 47, 42, 38, 34, 31, 28, 25, 22, 20, 18, 16, 14, 13, 12, 11, 10, 9, 8, 7, 6, 5, 4, 3.5, 3, 2.7, 2.43, 2.19, 1.98, 1.78, 1.6, 1.49, 1.3, 1.17, 1.05, 0.94 etc.  Totaling $8962.08, and these figures have been rounded off for sake of simplicity, the actual value would be $9000.

     Thus is shown the bank's unwarranted license to create money, yes, private individuals creating money  and none of it is backed by anything meaningful.   Anyone else would be imprisoned for counterfeiting!  But this is not yet the extent of the crime.  Once Interest is added to this scheme the robbing of the people skyrockets!

     Okay, we have already shown that the bank who lends you $100 is actually only lending you TEN.  Well you see, even though the bank only had TEN, they want YOU to pay back ONE HUNDRED! (sounds fair right?) This is $90 dollars pure profit – that’s bad enough isn’t it – But you have forgotten INTEREST.   Say this bank was charging 30% interest, a common high credit card rate, without going into the details of compound interest, (which would make the figure much higher!) we will consider only this simple example:  30% interest on $100 is Thirty dollars.  So let’s just say that you paid the full interest and ended up paying the bank back $130 dollars for your $100 dollar loan . . . Now remember that the bank  had ONLY TEN DOLLARS!  Thus off of TEN dollars they have profited $120 dollars!  This is a 1200% profit!  Hard to believe?  Are you starting to realize why this isn’t taught in school?  This makes loan sharks look like fairy-godmothers!   You see, due to the Fractional Reserve illusion, all interest rates are actually TIMES TEN.  So the next time the housing market says it is doing you a favor by having the interest rates at 5%, REMEMBER!  That it is actually 50%!  --  Some favor huh?

      Here is one more illustration for you so that this hits home a little harder:

     A bank loans to a buyer on Fractional Reserve for a $100,000 house for 30 years at 6% interest.  Because of a 10% Fractional Reserve, the bank owns this house for ONLY $10,000 DOLLARS!  The buyer spends 10 years paying $1,000 monthly payments adding up to $120,000.  This is $20,000 MORE than the cost of the home, and TWELEVE (12) TIMES MORE than what the bank paid for it.  However on paper it will show that the buyer still owes around $52,000.  His employing corporation happens to cut jobs to utilize exploited oversea labor, unemployed, and without knowledge of self sustenance, the buyer can no longer make the payment on the house which should already be his.  The bank gleefully forecloses, taking the house and leaving the man with nothing, but a loss of ten years of his life and $120,000!  The bank has PROFITED $110,000 PLUS a $100,000 home to use again in the same SCAM.  This is the case for 1 out of every 3 mortgages and one origin of the tremendous profits written off as "loss" by the banking industry.

     It is suggested that you reread this, if you are not wholly and grossly appalled, there is still something that you do not understand.  The mind revolts when it discovers that it has been being VASTLY deceived, you are not alone.  If you wish to understand this in greater detail, watch this video which teaches fractional reserve in common terms, assuming that the viewer has never heard of it:

Fractional Reserve 101




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