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Banking and the 1%

USA CONGRESS ECONOMYThe 99% and the 1%. We see it all over the news. There are protest movements in almost every major city focused on it. We all know that something is wrong, but almost no one can put their finger on the root cause. The reason is that the vast majority of people have no idea how banking works or where money comes from.

Did you know that only about 3% of money exists in physical form as coins or bills? The remaining 97% of money exists as numbers in bank computers representing various account balances.

Most people believe that the balance on their bank statement is just a symbol representing how many physical dollars, contained in the bank’s vault, that belong to them. It isn’t. The fact is, the number on the statement is the money. Think about it – there is more than 30 times as much money on bank account statements as there exists physical currency. The number on your statement is the money.

Most people have a quaint notion that banking works something like this: Joe Customer goes down to the bank to deposit his hard earned money into a savings account, which pays him a return based on an interest rate. The bank then loans that money out at a higher interest rate and profits from the difference.

If that were the case, then how can the money be both loaned out by the bank and available for use by the customer at the same time?

The answer is it can’t. Somewhere along the line, the bank obtained more money than was originally deposited.

So, where did the extra money come from? Well, remember that the number on the account statement is the money. So if you’re a bank, it’s pretty simple: Create an account and key in a number. Done. Instant new money.

Of course, they can’t do this completely willy nilly. There are certain rules and procedures that must be followed. Namely that the new money in accounts must be loaned out and that there are limits as to how much money can be created versus how much was actually deposited.

But at the end of the day, for every new dollar deposited into a bank, almost 99 new dollars can be created out of thin air by the banking system. But here’s the best part: The bank earns interest on all of those dollars it just created! You and I must work for our dollars before they can earn us interest. No such requirement for a bank.

And, it gets better. Let’s say there was some sort of collateral promised against a loan and the loan goes bad. The bank then gets ownership of real stuff (a house, a car, a boat, etc.) even though the money it “loaned” was nothing more than a number keyed into an account.

That’s quite the business model. No need to actually produce anything when the government grants you the legal right to create new money. Bankers figured out long ago that working for a living was for the middle class.

And speaking of the middle class – and the rest of the 99% – I’m afraid the bad news doesn’t end there.

There’s a larger price to pay for all of this banker privilege beyond just having to work for a living. You’ve heard the expression “There is no free lunch.”  Well, it’s true. When a bank creates new money, it reduces the purchasing power of all other money, including the money in your savings account and your paycheck.

The average person – who doesn’t know how banking works – observes this as the price of things going up. “Gee honey, the price of milk just went up again. It must be getting more expensive to produce milk.” Wrong. It’s actually getting cheaper to produce most things due to increases in productivity. It’s just that your money and your savings and your income are losing their value faster.

Computers and electronics are an interesting case. They get cheaper every year because the gains in manufacturing productivity are so great, that even bankers can’t devalue the money that fast. But this is the normal action of prices in a sound money system. Sound money retains its purchasing power, and almost all manufactured goods cost less to produce every year. If our monetary and banking systems weren’t based on fraud, a person would never need to get a single raise or increase in pay to see their standard of living rise every single year. Please take a minute and contrast that with your experience in our current system.

That 3-10% price inflation we see is how much purchasing power our incomes lose every year. To say it another way, our standard of living falls 3-10% every year after year after year. It wasn’t that long ago that a middle class family in America could comfortably get by on a single income. It is now often necessary for a household to have two full time incomes just so it can struggle by..

So how did the 99% become the 99%? It’s because that is exactly what our monetary and banking systems are designed to do. It is an institutionalized system of wealth transfer that acts slowly over time. Like the boiling frog, most don’t realize what has happened until they’ve been cooked.

Perhaps at some point you’ve stumbled across the famous quote by Henry Ford:

“It is well enough that the people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.”

Now you know what he was referring to.

3 Responses to “Banking and the 1%”

  1. Bill Haynes

    Fractional reserve banking is probably the least understood aspect of money and banking. As Carter says, at banks money comes into existence by the stroke of a pen. Murray Rothbard’s “The Mystery of Banking” explains how it works and details the immorality of fractional reserve banking. See our review under Essential Reading on this blog.

    Rothbard’s “What Has Government Done to Our Money?” is another excellent book on money, and a review can be found on this blog’s Book Reviews. Additionally, offers a free pdf. download of “What Has Government Done to Our Money?” Download here:

  2. How to Own Gold

    Hi Bill, great article.

    I have likened fiat money to alchemy. For ages kings tried to turn metals into gold, or in any other case crate money from nothing. With the Fed the State has their alchemist, much to our peril.

  3. Brian Jowaisas

    I’m afraid the severe financial illiteracy that pervades the US is working against us in the battle to stabilize the economy. Nobody realizes how crazy this system is. If you sketched out this system on paper, from the start, nobody would believe it. Everyone would say “That won’t work, nobody will buy in…” But because it’s happened incrementally, it’s gone unnoticed. Slowly, but surely, they’ve taken physical currency out of the system: through the over emphasis of credit, then digital banking and through quantitative easing…there’s no real money. Except gold and silver.


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