We trust banks to keep our money safe, to provide us with loans, and to help us invest in our future. But what if the very system that underpins modern banking is corrupt? What if banks, through their use of fractional reserve banking, are actually creating and perpetuating the very financial crises they claim to be preventing? One needs only to look into how money is created in our society to learn that our entire financial system is built on a foundation of debt, where banks create money out of nothing through the issuance of loans that ultimately impoverish citizens through the issuance of interest.
How is Money Created?
In the US, when the government requires funds, it turns to the country’s central bank, the Federal Reserve, and requests a loan. In response, the Federal Reserve generates new currency in the form of US dollars and transfers it to the government. As a result of this transaction, the government generates treasury notes, which represent a commitment to repay the borrowed amount. These notes serve as a ticket of debt and a promise from the US government to pay back the Federal Reserve.
This method of currency creation implies that all money is debt. For without the creation of debt, there would be no money. This means that every single dollar in your possession is owed to somebody else by somebody else, and if all debts both public and private were to be paid off, there would be no money in circulation. This realization that ‘Money = Debt’ is apparent when observing charts of US Money Supply alongside US Federal Debt.
“If there were no debts in our money system, there wouldn’t be any money.”Marriner Eccles, Governor of the US Federal Reserve September, 1941
Fractional Reserve Banking
First written in 1961 and revised in 1992, the book ‘Modern Money Mechanics’ published by the Federal Reserve Bank of Chicago comprehensively details the mechanisms by which reserve banks control and expand the money supply through a system called ‘Fractional Reserve Banking’.
Fractional reserve banking is defined as a system where banks only hold a fraction of customer deposits in their reserve, and lend out the rest. This definition is somewhat misleading however, as the banks do not lend out your money, instead they create new sums of money out of thin air on the basis that there is a demand for a loan contract, and the reserve deposit condition is met. In the book ‘Modern Money Mechanics’, the process when described in laymens terms works like this:
- Person (1) takes out loan with Bank (1)
- Bank (1) prints out money for loan and gives money to Person (1)
- Person (1) circulates loan money into economy (i.e purchases a home)
- Person (2), the beneficiary of the new circulated currency (i.e the builders of the home), deposits money into Bank (2)
- Bank (2) now has deposit as collateral for new loan
This process can continue indefinitely, and when the calculations of this process are extrapolated it is found that for every $10000 deposited into the bank, $90000 can be created. This means that banks can create 9 times the amount of money that they have deposited into it out of thin air. Now it is true not every bank engages in this excessive amount of Fractional Reserve Banking, but it is still harrowing to learn that this process of money creation through the issuance of debt was designed to expand the money supply at such a rate which will never be matched by the expansion in goods and services, meaning this fundamental mechanism of our monetary system is inherently inflationationary. This is because all new currency will derive its value from the existing supply of money.
Another thing to note with this type of monetary system is that if too many depositors try to withdraw their money at the same time, the bank may not have enough cash on hand to meet these demands. The situation is banks are essentially creating money out of thin air and using the deposits of their customers as collateral. This system can be incredibly profitable for banks, but it also exposes them to significant risk if everyone wished to withdraw their deposits at once.
Money Supply Imbalance
As previously explored, our financial system is built on a mountain of debt. As banks generate new money by issuing and extending loans, they simultaneously incur additional debt that must be settled, along with interest. If we accept that the entirety of our monetary supply is nothing but debt, then the logical question arises: where within the system can the funds be sourced to meet the interest payments? Sadly, the answer is that these funds do not exist. In essence, this monetary system maintains an inherent deficit which can never be paid off and will necessitate ever-increasing amounts of currency creation to service the mounting interest payments that grow progressively over time.
One needs only to look at a chart of the US debt ceiling over time to see the entire notion that debt can be limited in our current monetary system is simply not possible. As long as the US Federal Reserve continues to perpuate the fractionalised reserve banking system, debt will continue to grow, as will the need to expand the money supply further to service this debt. This is imbalance of money supply and need for continued money supply expansion means:
- Fractionalised Reserve Baking is inherently inflationary
- Our monetary system has financial crisis’s and loan defaults configured into it
The US Dollar Machine Gun
“There are two ways to conquer and enslave a nation. One is by the sword. The other is by debt.”John Adams 1826
During its time as the global reserve currency, the United States and its Federal Reserve established various monetary organizations such as the International Monetary Fund (IMF), World Bank, and World Trade Organization (WTO). These organizations, while serving specific purposes in regulating the global economy, ultimately granted the United States immense financial control over the rest of the world, using the US dollar as their weapon. Prior to their establishment, the US was simply exporting its inflation, and had very little means to financially control other countries beyond restricting trade. However, with the creation of these monetary organizations, the US government was able to impose their inherently unjust monetary system on the world, giving rise to a ‘Corpocracy’ where industrial, media, and banking giants consolidated immense power and wealth, becoming intertwined with the government. This Corpocracy funds political campaigns to incentivize government officials into policy outcomes that benefit their businesses, at the expense of the general public. This is no conspiracy theory where powerful elites gather together and plot, rather than an overarching rule to maximise profits in this monetary system which is inherently unequal.
A good example of this unfairness is how wealth is siphoned from the lower to upper class through certificate of deposits (CDs), which offer a risk-free interest rate of 4-5%, and are only accessible to those with large amounts of wealth. These CDs are funded by someone in a lower income bracket paying 4-5% interest on their loan, resulting in a transfer of wealth from the poor to the rich, widening the wealth gap over time.
There are numerous inherent inequalities programmed into this monetary system, which the US government exploits as a financial bullying tactic to acquire resources and privatize public assets belonging to foreign countries. In “Confessions of an Economic Hitman,” the author describes a consistent pattern of actions taken by the US government where they indebt nations either through their own indiscretion or through bribery, render them unable to pay off the debt and then offer to refinance the debt under new conditions which include cheaply sellling their resources and public assets to US government corporations for their profit.
More and more, leaders on a global scale have seen the weaponization of the US dollar. When the US sanctioned Russia after the invasion of Ukraine, the world got to see the playbook used by the US government to maintain its grip as the dominant power. However, Russia leveraged its high gold supply and global resource dependency for their energy, ultimately resulting in minimal impact on their currency from the US sanctions. The whole world is now seeing that the US dollar is not as powerful as it once was, and countries are banding together in the BRICS alliance in a push for a commodity-backed currency. Recent developments in Saudi Arabia, where they have reduced their oil production, signals a shift in sentiment across the world stage that the US dollar is likely on its way out, as countries are realizing the fractional reserve banking system is more trouble than it’s worth, and the way the US imposes itself over the world through its currency monopoly is unfair.
The trend now is a global shift in sentiment away from a globalized US-dominated system towards a more regionalized system that relies far less on the US dollar. This is the classic situation where all the kids in the schoolyard turn their back on the bully. In this case, the kids in the schoolyard are the countries of the world, while the bully is the United States government, the Federal Reserve, IMF, WTO, and the giant corporations which reside among them. However, it will take time for societal values to shift, and history shows that previous dominant powers rarely lay down willingly to the rise of a new power.