Banking 101 - How to Make Money Out of Nothing

The federal reserve is a bank for bankers. It is a central bank just as The Bank of England is a central bank for the United Kingdom. The federal reserve is, in fact, the third central bank which has plagued the citizens of the United States. Both of the others were dismantled because they destroyed the nation’s money through inflation.

The primary function of the federal reserve is to create money. If a U.S. government security for $1,000 is held by the federal reserve it can then have the Treasury Department to print $1,000 worth of federal reserve notes which Treasury then gives to the federal reserve.The federal reserve now has $1,000 in cash, or more properly “fiat” money. The federal reserve retains a percentage of this cash, say 10%, and loans the remainder to a second bank. This is known as “fractional banking” because only a fraction of the money is actually on-hand at the bank.

The second bank also retains a percentage of the $900 – say $100 – and let’s say two of the bank’s customers obtain loans for $400 each and this money is deposited to the customer’s bank accounts. The bank deducts a percentage, say $100 and this bank now has an additional $700 which it then loans to a consumer.

The original $900 which was loaned to the bank by the federal reserve has been transformed into $1,700. How? Fractional cash reserves at bank total $200. Loans to customers one and two total $800. The loan to customer three is $700. Loans of $1,500 plus cash in bank of $200 equals $1,700.

Let’s say that customer one writes a check to a merchant against his loan account for $400. The merchant brings the check to the bank. How much cash is actually at the bank? That’s right, $200. Can the merchant get $400? Not no – but heck no.

The real tragedy is, this can go on almost endlessly – or at least until people demand more cash than there is actual cash to be given to them. That is what is now happening all over the banking industry. People are demanding that they be given their money. Those who do get their money will only get it because the federal reserve has treasury print more.

Does this sound like a mess? Consider this, we haven’t even talked about inflation yet. It all gets more unsavory – a great deal more unsavory. That, in a nut shell, is the world banking system.

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