Friday, 20 March 2009

Fractional Reserve Banking Caused The Economic Crisis


The fractional-reserve scam is the key to how the banking elite control nations, because it allows them to manipulate the money supply. This crisis, like all others since central banking was conceived, is due to manipulation of the money supply.

The particular details about this one should be analyzed in this context.

The two distinct functions of a bank are 1) deposit banking, and 2) savings-and-loan banking. Deposit banking is money warehousing, the depositor retains property rights, and the warehouser cannot do anything with the deposited money. For the service of storing money, the depositor should pay the bank a small fee.

Savings-and-loan banking is where money is lent out at a rate high rate to borrowers and a lower rate is paid to savers. Crucially, while the saver’s money is lent out, the saver cannot use it. Unlike with a deposit, savings are not available on demand.

It is this more fundamental division that needs to be restored in the banking industry. The only reason this distinction is blurred by banks is because it allows them to get away with fractional reserve banking. They lend out deposited money, which is supposed to always be available on demand. This way, they are literally creating money. This increases the money supply, causes malinvestments and an artificial boom, until the market forces becoming overwhelming and the banks are forced to contract.

Banks can only do this because of the institution of central banking, which is a government-granted monopoly. Legal tenders laws, “lender of last resort” guarantees, deposit “insurance” are all designed to support the fractional reserve banking scam. As long as people don’t catch on that the banks don’t have enough money to redeem all deposits, it can continue.

For more information, see CHAPTER V: BANKING.

From 1913-1920, the Fed massively increased the money supply and market forces caused a recession in 1920-21. It did the same thing from 1921-1929, creating a bigger boom, which caused a bigger bust. This time the government intervened, preventing the market from adjusting. This caused the Great Depression, which was lengthened further by FDR’s disastrous policies.

Gold served as a check on the amount of dollars that could be issued, but this was overcome with the 1933 gold seizure and the abolishing of the gold standard domestically. In 1945, the dollar became the reserve currency of the world, and the Fed was now able to hugely increase the money supply by ‘exporting the inflation’. In the late 60’s confidence in the dollar declined and demands for redemption in gold by foreigners caused a drain on gold reserves until Nixon declared national bankruptcy in 1971 and closed the ‘gold window’.

The dollar was now completely free of any restrictions. Massive inflation and huge artificial booms and busts were now possible. With carefully chosen government regulations, the industries suffering the biggest bubble can be virtually chosen at will.

The repeal of the Glass-Steagall Act meant that mortgage-backed securities and other complex financial instruments could be created. But debt that is so complex that even investors cannot understand it would not come about on the free market. These instruments are backed by the government, through institutions like Fannie and Freddie.

Deregulation enabled the dollar inflation to reach new levels. This is the biggest artificial boom ever; the economy needs massive readjustment, and market forces are becoming overwhelming.

The Fed has only two choices: inflate further, risking hyperinflation and a dollar collapse, or stop inflating, and allow the recession to take place. If it inflates further, the recession when it comes will be more severe. It is likely going to be more severe than the 1930’s, due not only to the size of the boom, but because of low savings, low manufacturing and huge debts, public and private.

The situation will be made worse by any government intervention to stop the market process from working, such as bank and industry bailouts and stimulus packages. High taxes, and even higher spending, causing deficits and mounting national debt, will make the recession worse than it would otherwise be. Regulations, price controls and government jobs (green brigades) will also make things worse.

For more information, see: CHAPTER VI: CENTRAL BANKING.

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