How Money is Created and Who Controls Money
Read chapter 1 to understand this article better.
Paragraphs below should be eye openers. Also check out further links for more info at the end of this chapter.
In the previous chapter we explored that money is a commodity that everyone needs, and that money is whatever we agree it to be. We also learned that money can loose value and disappear completely, while assets like land, gold and natural resources carry on their value through centuries and will always have value.
Let’s see how our money is created.
Worldwide monetary system works on the basis of Fractional Reserve Banking.
Fractional Reserve Banking is 100% legal:
- Banks can lend 10 times as much money as they have on reserve.
- Banks can charge interest rate on the money they lend.
If you put $1000 into a bank, BY LAW that bank can lend out $10,000 and charge interest on top of it.
Pay attention and read above sentence 3 more times. Your mind should be shocked in disbelief.
Let it settle for a minute and continue reading. After you finish reading this article research fractional reserve banking for more proof and facts.
BY LAW banks can lend out 10 times money than they have on reserve. When you go to get a mortgage for $100,000, all bank has to have on reserve is $10,000. BY LAW it can create $100,000 from only $10,000 and:
- charge you interest on entire $100,000
- demand payout of entire $100,000 (keep in mind it only had $10,000 originally and created other $90,000 out of nothing)
In essence all the bank did was type in numbers into the system, create $90,000 profit for itself and charge you interest on top! All this made from just $10,000 of banks reserves.
This is how banks operate around the world, and this is why bank buildings are the tallest. In a sense, banks can legally counterfeit money and create money out of thin air. The return on investment from each loan is 90% + interest.
The 1/10 rule is for US and Canada. In some countries banks are permitted to lend 13 - 20 times the amount of money they have on reserve.
Fractional Reserve Banking | Money as Debt | The Money Masters
Another KEY concept to understand is how reserves work.
Banks MUST have 10% of their loans on deposit and cannot loan more. If a bank had $1000 dollars on reserve and lend out $10,000 permitted by law, it has to wait until loan is repaid, or more capital is gained with more deposits.
This is KEY to understanding how central banks control regional banks, because central banks are the ones who control reserve supply. Central banks are the entities that give other banks the RESERVES from which smaller banks can create ten times more money.
For example, when central bank like Federal Reserve gives X bank $1000 (not necessarily dollars, but special bank credits), X bank can loan out $10,000.
When Federal Reserve, retracts those $1000 from X bank, X bank has to take back $10,000 it lended (because reserves went down, and by law it cannot exceed 1/10 ratio). To get back the $10,000 X bank has to call in loans and tighten lending criteria to prevent further lending.
So to simplify:
To increase money supply all central banks have to do:
- Put “credits” on deposits to other banks, equivalent in value to a specific sum of money.
- Banks can then lend 10 times more money based on the amount of the credit, as a result increasing money supply in the economy.
To decrease money supply central bank has to:
- take away those “credits” from deposit
- as a result banks are forced to tighten lending and call in loans
And here’s the KEY - credits are based on nothing and are created out of thin air at Federal Reserve discretion. Federal reserve decides when to give “credits” and when to take them away.
To put it in plain words, Federal Reserve decides how much money there is going to be in an economy. If it wants to create a recession all it has to do is contract money supply. It it wants to create better financial conditions all it has to do is put “credits” on the account of other banks and those banks can lend more money.
Above is the oversimplified explanation of the system. You can read detailed explanation below.
First, what are bonds?
Bonds are promises to pay, bonds are not money, but papers which says “I Promise to Pay”. People buy bonds to get a secure rate of interest. At the end of the term of the bond, government repays the bond, plus interest, and the bond is destroyed.
Here’s the Fed money making process.
- The federal open market committee approves the purchase of US bonds on the open market.
- Bonds are purchased by the fed from whoever is offering them for sale in the open market
- Fed pays for the bonds with electronic credits to the sellers bank, those credits are based on nothing. The fed just creates the credits.
- The banks use these deposits as reserves. They can loan 10 times the amount of their reserves to new borrowers, all at interest.
In this way a fed purchase of 1 millions worth of bonds, gets turned into over 10 million dollars in bank accounts. The fed in effect creates 10% of this new money and the banks create the other 90%.
To contract the 90% of created money fed simply has to reverse the steps.
The fed sells bonds to the public and the money flows out of the purchasers local bank. Loans must be reduced by 10 times the amount of the sale. So a fed sale of a million dollars in bonds results in 10 million dollars less money in the economy.
This delegates to the bankers the power to create 90% of the money supply based on only fractional reserves, which are created out of thin air and loaned out at interest.
continue reading
Source: The Money Masters.
Part 1 | Part 3