Frackin Reserve How Fractional Reserve Banking Creates Money and Why it is Fraudulent (3/6)When plunder becomes a way of life for a group of men living together in society, they create for themselves in the course of time a legal system that authorizes it and a moral code that glorifies it. Frederic Bastiat In Part 1 we looked at the mechanics of fractional reserve banking and the mathematics behind it. We also saw how absurd it could be when trying to divide by zero. Then in Part 2 we looked at one perspective of what is money? and defined it in terms of its relationship to wealth. It is now time to turn our attention to discovering how fractional reserve banking creates money. Once we understand the how, we can answer the question, Why is fractional reserve banking fraudulent? If you recall the basic fractional reserve banking cycle, it went like this: Putting that in a table, we can see that the total amount of money that people have very quickly grows from an initial deposit of $1,000 to much, much more. To understand where the money appears, we need to walk through the cycle again. The most important thing to be aware of is the timeline of events. Adam deposits $1,000. Now, the bank owes Adam $1,000. And the bank, by law, can give out $900 of Adams money to Anne. And that is it right there. That is how fractional reserve banking manufactures money in the form of debt. That is, it creates money as debt. Fraudulent Abuse of Money Looking at this from a slightly different angle, Adam gave the bank his money for safe keeping. But, instead of keeping Adams money safe, the bank used it. Where the bank was entrusted to protect the money, they abused it. When you give your children to the babysitter to watch over and protect them while you go out for a quiet dinner, you dont expect the babysitter to rape and abuse your children. This is what banksters do. They rape your money. This is the first way in which fractional reserve banking is a crime. It is a fraudulent abuse. So weve seen how as iterations are added into the fractional reserve cycle, the money supply expands as debt. The behaviour here is very much like a mainspring, that with each twist becomes tighter and tighter, gaining energy. Hold the spring in your hand and release it, and youll likely hurt yourself as it very quickly expends its stored energy. In fractional reserve banking, the cycle of a deposit and loan adds to the energy in the system. The key concepts to understand here are the energy, and most importantly, the time involved. A slowly unwinding spring wont rip open your hand. The spring needs to whip open, lightning fast to make you scream in pain as you run for a bandage and drip blood all over the floor. Similarly, when the fractional reserve process quickly unwinds, pain follows. Without understanding how time affects fractional reserve banking is to miss a great deal of what it is and what it implies. When the bank loans that $900 to Anne, that money has never, does not, and will never exist. It is a fiction. Complete fantasy. Imaginary. Heres how that works. There is a time gap between when Adam deposits his money, and the time Adam withdraws his money. This is called the float time. Heres what it looks like on a timeline: Notice how the float time keeps getting smaller. If we represent the float times from many iterations, those float times would look like this: Yes. Fractional reserve banking is a temporal pyramid scheme. (The same basic structure as a Ponzi scheme.) Temporally, it is fraud. It is fraudulent because the banks are lending out money that does not belong to them. When you deposit your money in a bank, you fully expect to be able to withdraw the full amount at any time. You do not expect to wait. However, this is exactly what happens when there is a run on the banks. En masse, people withdraw their money, but the bank doesnt have it because they have given that money away to someone else in the form of a loan. Banks then shut their doors and refuse to return peoples money to them. A run on the bank is exactly the same thing that happens in a pyramid scheme when the bottom falls out. The entire system collapses. They are not different in any significant way. Pyramid schemes collapse because there arent enough people left to buy into the con; and fractional reserve banking collapses through a run on the banks because there isnt enough time to manage the con. This is the second way in which fractional reserve banking is criminal fraud. When money is created as debt, the process of fractional reserve banking very closely resembles check kiting, where the float time in check kiting is analogous to the time between a customer depositing and withdrawing money. Indeed, all fractionally reserve created debt money can be viewed as float money. Floated money is simply money that is duplicated in the system between the time it takes for it to be deducted from one account and deposited in another account. In both situations, the bank and kiter are taking advantage of the float time in order to create money. This is how fractional reserve banking fraudulently counterfeits money. Ryan Smyth is a Canadian expat currently living in Australia. He works in software, but is passionate about many current issues and the impending demise of freedom and privacy. He can be found blathering on (and sometimes ranting) at his blog, Cynic.me. 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