A little info on money and banking.

This is just something I put together for a guy at work who wanted to understand the 2nd zeitgeist a little better. I'm posting it just in case it helps someone understand how bad our banking system is. Enjoy, and excuse any errors.


Does money actually have any value?

Money - : something generally accepted as a medium of exchange, a measure of value, or a means of payment.

Money doesn't actually hold any value. It is just a piece of paper. But, over time we have come to trust that people will want this paper in exchange for there goods and services.

Until 1971 money(paper) could be turned into the govt. in exchange for gold at a determined exchange rate. This is no longer the case

So yes, the only thing that gives money value is me, you, and the guy you pay to cut your grass.



How is money created?

Fractional-Reserve Banking - is the banking practice in which banks keep only a fraction of their deposits in reserve (as cash and other highly liquid assets) and lend out the remainder, while maintaining the simultaneous obligation to redeem all these deposits upon demand. Fractional reserve banking necessarily occurs when banks lend out any fraction of the funds received from deposit accounts. This practice is universal in modern banking.


Let's say you deposit 10k into your personal bank. At any particular time your bank is only required to hold on to 10% of your 10k deposit. So, the bank must keep 1k in a reserve at all times. The other 9k is considered an excessive credit. More simply put, they do not have to keep this money on hand. This money is now available to be loaned out.

Logically, you would think that the 9k available to be loaned is the 9k from your 10k deposit. This is not so. The bank creates 9k out of nothing to be loaned out. It does not, I repeat DOES NOT come out of the 9k you deposited. They cannot do such a thing. What if tomorrow you needed all 10k of your deposit? They wouldn't dare deny you. They can't! That would be blasphemy! No worries. They won't. They only need you to deposit the money to give them the power to create new money. This is, the number one contributing force that drives inflation. This process can go on and on. In short, for every deposit x ever made into the banking system, 9x the amount of that original deposit can be created out of thin air.

They then loan out "made up money" (money the bank itself created out of thin air) in exchange for a promissory not from the borrower, who will most likely promise to pay the money back(with interest, but we'll get to that later) or forfeit assets or equity equal to the value of the loan they received.

Quote from Modern Money Mechanics (Released by the Federal Reserve) : "Of course, they(Commercial Banks) do not pay out loans from the deposits they receive. If they did this no additional money would be created. What they do when they make loans is to accept promissory notes in exchange for credits to the borrowers' transaction accounts."


This process drives inflation by creating excessive amounts of money while productions of goods stays the same. Scarcity decides value. If money is plentiful, and gas isn't. Then it takes more meaningless pieces of paper to purchase minute amounts of fuel. The idea is mind blowing and takes a second to grasp. But essentially, it's truly screwed up. As I'm sure you, and everyone else knows, wages do not always necessarily keep up. Chew on this for a while, and you'll be in awe.

Continued from above.



What is inflation in terms of the monetary system?

Inflation - increase in the amount of money and credit in relation to the supply of goods and services.


I believe that theory is pretty straight forward. Many opinions and definitions exist in description of inflation. Most are rather technical and hard to follow. Inflation, in my own words, is excess of money, in comparison to limited goods. In the above explanation you learned how money is created. Thus, you can easily see how inflation comes into play. Banks can basically create 9 times the amount of any deposit out of thin air. It doesn't take a genius to see that the abundance of money, and the decline in it's value, is on the rise. In 2007, it would take $21.60 USD to equal $1.00 USD in 1913. Interestingly enough, the Federal Reserve was established in 1913. You do the math.

Two causes of inflation are the most generally accepted. They are Demand-Pull and Cost-Push.


Demand-Pull Inflation -this theory can be summarized as "too much money chasing too few goods". In other words, if demand is growing faster than supply, prices will increase. This usually occurs in growing economies.

Cost-Push Inflation - When companies' costs go up, they need to increase prices to maintain their profit margins. Increased costs can include things such as wages, taxes, or increased costs of imports.

In conclusion, it is important to note that inflation is extremely controversial and debated. Many theories and opinions exist. Grasping the concept is rather easy, but a true understanding will take some further reading. Google is your friend.

P.S. Seriously, google is your friend. BING, YAHOO,AOL, ASK. They all suck. Also note wikipedia for being worth it's weight.


Where does the application of interest fit into all of this?

Interest - The fee charged by a lender to a borrower for the use of borrowed money, usually expressed as an annual percentage of the principal.

Ah, and finally we reach the truly mind blowing application of interest. To explain interest, we have to back up to money creation. More importantly where money originates from, before it hits the hands of the public. The federal reserve is the birth place of all money in circulation today. The whole story goes a little something like this:

The govt. decides it needs new money to go into circulation. It calls up the fed and asks to borrow 10 billion dollars. The fed says sure. The govt. sends federal bonds over to the Federal Reserve in exchange for cold hard cash. Wah lah! 10 billion dollars is no in existence.

But, as with all loans, the fed expects to be paid back interest! Which is defined above. Let's say the fed charges a flate rate of 6%. That is 10 billion x .06 to be paid back on top of the 10 billion originally loaned. The original loan amoint is often referred to as the principal.

600 million dollars. Yes I did the math. 600 million dollars is to be paid back on top of the 10 billion originally borrowed. So, the govt. is to pay back the sum of 10 billion 600 million dollars over a specified period of time. Seems fair, right? Look closer.

I said previously that all money is created by the Federal Reserve. The fed only created 10 billion to loan to the govt , but they expect 600 million in interest to be paid. Where is that 600 million created!?

It isn't. No, I'm not joking. It is never created. The fed only creates the principal. So the interest will NEVER be there. Welcome to modern day slavery. We are all enslaved to fight for an amount of money that never existed.

At this point I'm sure you're thinking to yourself: "Well it's tough sometimes, but I've managed to pay most the bills I accrue, including interest." Well my friend, you're fortunate. Infact, most of us here in the U.S. are. Thank god were bullies

Continued again.

If you cannot pay you're mortgage, the bank will own your house. From a piece of paper the bank itself created, they will own your home. In the process, you will be on the streets, with little chance of climbing the labor ladder to a position to be proud of. Modern day slavery.

The only thing that has changed is that they've made us fight for the right to be a slave

AAARRRRGGGGHHHH...

This is exactly what peeves me off sooooo badly about the FED and banking system.

They can create money and then demand interest on money they don't technically even flippin have in the first place.

I'm not a Christian but even I can see why Jesus said:

A) Money is the root of all evil
B) Not to charge interest on money lent

thank you for laying this out so well and in layman's terms.

A question though:

What does this mean then, when a person who borrowed "fake" money goes out and spends said "fake" money on goods and then doesn't pay the money back? Conversely, what does it mean when said borrower DOES pay the "fake" money back plus interest?

If what you have already stated applies to my questions, would you be ever so kind as to point out what does apply.

Well deserved star & flag

Good question. I'll be looking into it. Thanks