Economic Crisis

In a previous post entitled “Banking 101" (link below) I explained that the U.S. banking industry engages in fractional banking. This means that only a small amount of the money “deposited” in a bank is required to be kept in the bank’s vault. Most of the money is loaned to other customers.

When a customer obtains a loan - let’s say for $1,000 - the bank records the amount of that loan as an asset because the bank will collect interest on the loan. The amount of the loan - $1,000 -is also recorded as a liability by the bank because the money is now in “circulation.” The banks “books” are in “balance” (pay-out of $1,000 equals the loan asset of $1,000).

In a previous post entitled “Banking 101" (link below) I explained that the U.S. banking industry engages in fractional banking. This means that only a small amount of the money “deposited” in a bank is required to be kept in the bank’s vault. Most of the money is loaned to other customers.

When a customer obtains a loan - let’s say for $1,000 - the bank records the amount of that loan as an asset because the bank will collect interest on the loan. The amount of the loan - $1,000 -is also recorded as a liability by the bank because the money is now in “circulation.” The banks “books” are in “balance” (pay-out of $1,000 equals the loan asset of $1,000).

If the borrower is unable to make payments on the loan it ceases to be a bank “asset” and the $1,000 loan asset disappears from the bank’s books. The $1,000 liability remains, however, because the money is circulating through the economy.

Eventually someone will demand payment of that $1,000 from the bank. The bank can use $1,000 from the profits made with other loans to pay that liability. If that is not possible the $1,000 must then be paid by the banks owners - the shareholders.

The federal reserve is a bank for bankers. It is a central bank just as The Bank of England is a central bank for the United Kingdom. The federal reserve is, in fact, the third central bank which has plagued the citizens of the United States. Both of the others were dismantled because they destroyed the nation’s money through inflation.

The primary function of the federal reserve is to create money. If a U.S. government security for $1,000 is held by the federal reserve it can then have the Treasury Department to print $1,000 worth of federal reserve notes which Treasury then gives to the federal reserve.

The federal reserve is a bank for bankers. It is a central bank just as The Bank of England is a central bank for the United Kingdom. The federal reserve is, in fact, the third central bank which has plagued the citizens of the United States. Both of the others were dismantled because they destroyed the nation’s money through inflation.

The primary function of the federal reserve is to create money. If a U.S. government security for $1,000 is held by the federal reserve it can then have the Treasury Department to print $1,000 worth of federal reserve notes which Treasury then gives to the federal reserve.

The federal reserve now has $1,000 in cash, or more properly "fiat" money. The federal reserve retains a percentage of this cash, say 10%, and loans the remainder to a second bank. This is known as "fractional banking" because only a fraction of the money is actually on-hand at the bank.

The second bank also retains a percentage of the $900 - say $100 - and let’s say two of the bank’s customers obtain loans for $400 each and this money is deposited to the customer’s bank accounts. The bank deducts a percentage, say $100 and this bank now has an additional $700 which it then loans to a consumer.

The original $900 which was loaned to the bank by the federal reserve has been transformed into $1,700. How? Fractional cash reserves at bank total $200. Loans to customers one and two total $800. The loan to customer three is $700. Loans of $1,500 plus cash in bank of $200 equals $1,700.