Bill Totten's Weblog

Saturday, December 27, 2008

A Privatised Money Supply

Modern Banking and the Fractional Reserve System

Do you know where the bank gets the $160,000 for your mortgage? It's very simple. Someone walks over to a computer and types 160,000 beside your name. With only $27.93 of cash reserves for every $10,000 of assets (as of June 1999) the bank has just created the remaining $159,553 of that interest-earning money out of thin air. When, after 25 years of hard work, you pay off your mortgage, the $159,553 vanishes back into thin air. Not so the interest however. It vanishes into the banker's pocket. Chartered (that is, privately owned) banks, such as The Bank of Montreal, The Royal Bank, The CIBC, et al have created about 95 percent of our total money supply ($589.1 billion as of September 1999) in exactly this way. But the cash reserves in their vaults amount to only a paltry $3.893 billion. (About $32 billion of cash circulates in public hands.)

This is called fractional reserve banking, and it's the greatest scam of all time because it creates debt for no reason other than to enrich the banking class. Its long term effect - as becomes clearer every day - is to steadily suck wealth out of the community and into the hands of a few people, a fact that bankers and most politicians stubbornly refuse to admit. Charging interest on money created out of nothing is, in the main, unjust and immoral, and Plato, Aristotle, Cicero, the Bible (Deuteronomy 23:19), the Koran (2:275-278), the Catholic Church, many codes of law and most writers on morals have condemned it for more than two thousand years. The historical name for this evil is usury. Nevertheless bankers enjoy peace of mind because they know that the public thinks they merely lend out the savings of their depositors. In fact, banks create more than 95 percent of all deposits, for when a bank creates a loan it simultaneously creates a deposit. What banks do to justify the accusation of being economic parasites is to lend out interest-bearing money of their own creation using a very thin sliver of legal tender (cash) to back it up.

How did the banks gain this oppressive power of charging interest on mere computer entries? Very simply they lobbied and hoodwinked our politicians into giving it to them. Before World War II cash reserves of 1:10 had been the norm in practice. This meant that if you deposited $100 of cash in a bank, the banking system (though not that one bank) would eventually use that $100 to create up to $900 of credit. That credit shows up in their books as $900 of interest-bearing loans (assets), and $900 of deposits (liabilities). Note that credit is not cash - only the Bank of Canada (BoC) can print and coin money - but it's money nonetheless because you can buy things with it as long as the bank honours your cheques.

In 1991 legislation was quietly passed that eliminated required cash reserves by mid 1994. The result? Figures from the Bank of Canada Review show that by September 1998 the ratio of the banks' cash reserves ($3.893 billion) to their total assets ($1393 billion) had soared to 1:358, a ratio that was never more than 1:15 in the first half of this century. That means for every dollar of cash in their vaults or deposited with the central bank (that is, the BoC) the banks have conjured up $357 from the void which they've invested or lent out with interest. Hence the record profits. Meanwhile not one person in a hundred grasps the fact that our government permits private banks to create about 95 percent of our money supply bringing huge profits to them and endless debt to us.

Nowadays the big profits lie in government bonds, currency speculation, the stock market, and derivatives; and banks, with their power of money creation, are up to their eyeballs in all four.

But there's always a day of reckoning. History teaches us that banks are forever finding new ways to commit financial suicide, and when they do they bring the public down with them. (With the collapse of their debt-pyramids the once mighty Japanese banks have been living off the public purse for years.) But what we witnessed in 1998 was unprecedented in human history. In South East Asia, Russia and Latin America, national economies were plundered and millions impoverished, almost overnight, through the deliberate manipulation of "free" market forces.

Now that our money supply has been essentially privatized, how can we free ourselves from this sly form of economic tyranny? In the three quotes below a famous American president, a famous Canadian prime minister, and a governor of the Bank of England in the 1920s tell us exactly what needs to be done. Unfortunately, there's never been a reform of the banking system while the banks were in the driver's seat. They must first be rendered helpless by an economic collapse. When that blow comes two facts should be etched in our minds:

(1) A government can lend interest-free money into existence by borrowing from its own bank, The Bank of Canada, or, it can borrow interest-bearing money into existence by borrowing from privately owned banks.

Unfortunately The BoC has become a puppet of the financial elite, despite its mandate to serve the interests of all Canadians.

(2) A government that borrows with interest from private banks, when it can create its own interest-free money, is a government of idiots or thieves.

Unfortunately, the human mind finds it easier to believe a lie it's heard a hundred times before than to believe a truth it's hearing for the first time. We hope that the words of Jefferson, MacKenzie King and Stamp will help break down any natural scepticism you may feel when we claim that the chartered banks, in collusion with The Bank of Canada and with the complicity of our government, are riding on the backs of the citizens of this country. The right to create money belongs to the people (see notes on "It's Your Money" {1} by William Hixson), and it is the sacred duty of the state to exercise this right for their benefit. Instead, the bonanza of money creation has been handed over to private bankers by ignorant, irresponsible politicians.

I believe that banking institutions are more dangerous to our liberties than standing armies. Already they have raised up a monied aristocracy that has set the Government at defiance. The issuing power should be taken from the banks and restored to the people to whom it properly belongs. -- Thomas Jefferson {2}

Until the control of the issue of currency and credit is restored to government and recognized as its most conspicuous and sacred responsibility, all talk of sovereignty of Parliament and of democracy is idle and futile ... Once a nation parts with control of its credit, it matters not who makes the nation's laws ... Usury once in control will wreck any nation. -- William Lyon Mackenzie King {3}

Banking was conceived in iniquity and born in sin ... Bankers own the earth. Take it away from them but leave them the power to create money, and, with a flick of the pen, they will create enough money to buy it back again ... Take this great power away from them and all the great fortunes like mine will disappear and they ought to disappear, for then this would be a better and happier world to live in ... But, if you want to be the slaves of the bankers and pay the cost of your own slavery, then let bankers continue to create money and control credit. -- Sir Josiah Stamp {4}

How Banks Create Interest-Bearing Money Out of Thin Air

(and cost the average taxpayer, home owner & small business-person thousands of dollars annually)

Assuming a reserve ratio of 1:10 the table below shows how $100 of interest-free government created money (GCM), that is, cash, is used by the banking system to create $900 of interest-bearing bank-created money (BCM) in the form of loans. The reserve ratio is the ratio of cash reserves (GCM) to deposits (mostly BCM). In our example the banking system consists of fifty banks, but the money creation process would be essentially the same for any number of banks from one to infinity. (Note that if the system contained only one bank that bank could create $900 in loans immediately.)

See table at

Modern accounting uses double entry book keeping where liabilities and assets are kept exactly equal. A bank's liabilities are its deposits. Its assets are its loans (including bonds which are loans to government) and its cash reserves. Here is how the banking system creates money. In column 1 $100 of cash is deposited in Bank 1. Bank 1 creates a $90 loan in the form of a deposit as shown in column 2. This deposit is pure BCM and, because it must be paid back with interest, is an asset. With a reserve ratio of 1:10 the bank puts aside $10 in cash (column 3) to meet cash demands from the person who deposited the $100. The remaining $90 in cash covers the $90 loan. The borrower proceeds to write cheques on his $90 deposit and these cheques get deposited in Bank 2. For these cheques Bank 2 demands and gets cash from Bank 1 until eventually all $90 ends up in Bank 2. (Naturally in real life more than two banks are involved. Thus the transactions are not so simple and orderly as they must be here for explanatory purposes, but everything comes out in the wash to give exactly the same result.) However the original $100 deposit still stands to the credit of the depositor (a liability for Bank 1) even though $90 of it has moved on to Bank 2. And the $90 loan Bank 1 created when it first received the original $100 deposit also stands (an asset for Bank 1). Banks 2, 3, 4, etc. then repeat this process eventually creating $900 of BCM in the form of loans (as shown in column 2) and dispersing the original $100 as cash reserves throughout the banking system (as shown in column 3).

Note that $900 of the $1000 of deposits in column 1 is BCM, that is credit created by the banks in the form of loans. (Banks make loans by "depositing money" in your account which you must pay back with interest. Thus they are loan/deposits.) Only the original $100 cash deposit is GCM. One other point. As a loan/deposit gets spent, a deposit in some other bank grows in inverse proportion. Thus the banks have increased the money supply by $900 and not by $1800. That would be double counting. The important points, however, are as follows: this ingenious system is called fractional reserve banking; it creates debt for the sole purpose of enriching the banking class; it is a subtle form of theft; historically it was condemned as a form of usury.

How Much Does Bank Created Money (BCM) Cost the Average Taxpayer, Home Owner, Small Businessman?

The following figures for 1996 are from the Bank of Canada Review, Spring 1997, and Statistics Canada. In 1996 the GDP (gross domestic product) was $797.8 billion. The federal debt was $469.4 billion or 58.1 percent of the GDP. Interest payments on the federal debt - mostly financed with interest-bearing bank created money (BCM) rather than interest-free government created money (GCM) - amounted to $45.3 billion. The interest on the 6.7 percent of the federal debt held by The Bank of Canada and other government agencies flows back to government on our behalf. The approximately $42.2 billion in interest on the remaining 93.2 percent of the federal debt held by private banks and other members of the financial elite, domestic and foreign, is basically a subsidy to the wealthy. For reasons that have nothing to do with economic sense and everything to do with the fact that money buys political influence our government taxes ordinary citizens to pay for that subsidy. Assuming fifteen million taxpayers (children and poor people don't pay taxes) we divide $42.2 billion of interest by fifteen million and get an average of $2813 per taxpayer. But when you add provincial and other public debt to the federal debt you get a total of approximately $650 billion. So let's say about $3500 per taxpayer.

Now what about private debt? If you have a $160,000 mortgage or small business loan at seven percent, and it is amortized over 25 years, then your average annual interest will be $7242. (Over the 25 year period you'll pay $181,050 in interest, which is more than the principal.) Yet there's no economic reason why a government agency couldn't create and lend you that $160,000 at just enough to cover the cost of administering the loan, say 0.25 percent. Now your annual interest would be $206.

Here's another way of looking at the folly of BCM. In 1999 bank credit amounted to $557 billion, almost 95 percent of our money supply. Real interest (that is, nominal interest minus inflation) on this bank credit was at least five percent, or $28 billion. But where is this interest to come from since banks create credit, but not the interest they charge on that credit? It can't come from the approximately $32 billion in cash (GCM) that circulates in public hands. It can only come from more bank credit with more interest attached. But for all existing bank credit to be paid without anyone defaulting on their loans, the economy must expand by 2.9 percent ($28 billion of interest divided by the GDP, $953 billion). Since the average annual real GDP growth from 1960 to 1995 was only 2.3 percent, the economy is going to repeatedly stumble in its effort to keep up with the interest payments on all that bank credit. This is the root cause of what is known as the business cycle, and there's nothing inevitable about it. A lot of economic weather is man made. It is tolerated because it is the consequence of a system designed to provide investment income to those with financial assets. The cost to the community is increasing public and private debt with all the economic failure and misery that goes with it when the economy slows. What we have in a debt money system is cruelty motivated by self-interest and rationalized under the guise of economic law.

BCM should be abolished just as slavery was abolished. But it won't happen until the public understands the magnitude of this hidden injustice and screams blue murder. But better scream soon. With weapons like NAFTA and the MAI international banking fraternities, such as the International Monetary Fund (IMF) and the Bank for International Settlements (BIS), will soon have the middle class in their gun sights. They may use a crashing stock market as a smoke screen to contract the money supply as did the Fed in 1929. (In a radio interview in 1996 free-market champion and economic advisor to Nixon and Reagan, Milton Friedman said, "The Federal Reserve [the privately owned US central bank] definitely caused The Great Depression by contracting the amount of currency in circulation by one third from 1929 to 1933".) Then the screams will be deafening. But it's better to cry out before you are hurt than after you are hurt, especially after you are critically hurt.

Do you want to take some action? First discuss this with others. Then send a few faxes and make a few photocopies. Tape one up in your back seat car window. Leave another in the nearest bank to show them that people are beginning to understand how they siphon off wealth from the community through their outrageous privilege of creating interest-bearing money. (Government created money is interest-free.) Finally - for the really committed - ask your local bank manager just how much truth there is in all of this. You can be fairly sure he or she will resort to their much feared weapon - impenetrable economic jargon. Some bankers will actually deny that banks create any money! This is an example of what Marshall McLuhan called motivated ignorance.






For more info visit these websites:

Bill Totten


  • I have two questions for you Bill:

    1) What is the difference between "private debt" and "public debt". Aren't both debts?

    2) How does the BOC pay for the cost to administer the loans if it does not charge interest on the loans? Are you suggesting that banking is costless?

    By Blogger Socred, at 12:13 AM, December 28, 2008  

  • Well done, Bill to have put your blog together!

    And Socred, the difference between private, corporate and national debt is "responsiblity"! National debts will never be paid off. Meanwhile, banks create more damage than they serve. Wouldn't it be a good idea if money was a medium of exchange that served to facilitate trade and employment???

    Well, it takes a lot of reading, waking up and disillusionment before we become so passionate that we spread the word...

    I'm doing from a UK perspective on

    With 'globally warm' regards,

    By Blogger Unknown, at 2:14 AM, January 05, 2009  

  • "Meanwhile, banks create more damage than they serve. Wouldn't it be a good idea if money was a medium of exchange that served to facilitate trade and employment???"

    I'm not sure if banks create more damage than they serve. They do provide a very valueable service in that they are the world's bookeepers. The problem is that they are a form of government that has been centralizing its power for centuries, and that they claim to own the money they create.

    Bill's suggestions are communist (i.e. the nationalization of all debt). One of the first things the communists nationalized was the banking system.

    Money is merely a distribution system, and facilitates the distribution of goods and services. Money is financial credit, and an abstract representation of the real credit of the community, which the ability of the community to deliver goods and services when, and where, they are required.

    Bill's comments seem to be based on COMER, or the Canadian Action Party.

    By Blogger Socred, at 11:38 PM, January 10, 2009  

  • Nice take on things

    By Anonymous QUALITY STOCKS UNDER 4 DOLLARS, at 6:33 AM, January 14, 2013  

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