Fractional Reserve Lending

By law, banks are allowed to loan out a variable 7 to 9 times that which they have cash reserves on hand to cover. This means that if a bank holds a depositor’s money in the amount of $100, then they are legally allowed to lend out $700 to $900, depending on the rules regarding lending, which are instituted by privately held institutions called Central Banks.

Examples of Central Banks include World Bank, the International Monetary Fund, The US Federal Reserve, and the newly coalesced BRICs bank. The history of central banking is a long one, its origins stemming from the necessity for a standardized form of exchange currency, eliminating the necessity of keeping barter items on hand.

The practice of using paper currency, backed by some form of tangible asset, is a relatively new one, in its current form. At some point in history, an astute predecessor to the modern banking industry noticed that when people deposited their gold, in exchange for a more lightweight and manageable paper representation of gold, they tended to hoard it like gold. Generally a good thing. Some people, however, spent their paper currency frivolously, and soon required what would become know as a ‘loan.’ The banker knew that even though the amount of paper currency given out was equal to the amount of gold taken in, not everyone spent their paper that quickly, and some people were able to turn their paper into more paper, eliminating the need for them to ever withdraw their gold at all. So the banker, in order to mitigate the risk of future loss, decides to charge an individual a premium, or ‘interest,’ on the loan in addition to the original amount of the loan. Of course, the consequences of abandoning or being delinquent on the loan had to be determined prior to the contracting, and probably involved some type of bodily harm, asset forfeiture, or incarceration.

Over time, it was mathematically deduced that this practice was a feasible one going forward, so long as a certain ratio of lent money to actual reserves was observed. What was not then observed, but which is being observed now, is the effects of the exponential function, which shows how lending at a rate in great excess of deposit will cause a rate of debt in exponential relation to the rate of deposit. In other words, as deposits increase, the allowed lendable amount increases in an exponential fashion, until the amount of debt owed is ridiculously large in comparison to the reserves on hand.

But this only becomes a problem when everyone wants to withdraw their gold at the same time. Consequently, laws had to be enacted to prevent people from withdrawing their gold, should emergency conditions exist. This is the price we must all pay for the security of the economic system upon which we depend in our day to day lives.

Today, the central banking system is so important to us, that even when they make grave mistakes with risky and contrived investments, and devalue a great portion of assets owned by the people, we must prop them up with more deposits – deposits we do not make willingly.

Currency is no longer backed by tangible assets like gold and other precious metals, in fact, precious metals now only have value in relation to the currency, which is only backed by the world’s collective faith in the economic system. This is a highly untenable situation. The debt ratios of developed countries are increasing rapidly compared to their ability to produce, and the world’s ability to consume. At some point, if not this one, the debts will become so large that repayment will become impossible in our current paradigm, which only vastly increased, unsustainable consumption could correct.

Fractional reserve lending is based on usury – the imposing of interest on monies lent – forbidden by God, and proven in this realm to result only in misery for the many, great excess of increase for the few who exploit it.

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