Oct 10, 2009 - 02:52 PM
The heart of the modern monetary system is fractional reserve banking. This system is based on fraud. At the very heart of the modern economy is fraud – fraud on a gigantic scale.
What is the nature of this fraud? Counterfeiting. Banks are government-licensed institutions that issue bogus IOUs. Because these IOUs function as money, they are counterfeit money. This is the heart, mind, and soul of all modern banking.
There is only one textbook in money and banking that states explicitly that all fractional reserve banking rests on fraud: Murray Rothbard's The Mystery of Banking. It is not used in any university. It never has been. It was published in 1983. It went out of print almost immediately. It is on-line here.
Rothbard takes the reader through the traditional T-account exercise that is common to all upper-division textbooks in money and banking. Unlike all the others, his book shows how the process of making deposits and lending the money involves counterfeiting whenever the depositor has the legal right to withdraw his money on demand.
This is not the same as a life insurance contract in which you can borrow against your built-up reserves. The company treats the policy-holder as it would treat another borrower. It raises money to make the loan.
The withdraw-on-demand banking process has the same effect as counterfeiting gold and silver coins by adding base metals (pp. 48–51). It has the same effect as issuing paper money that has no backing in gold or silver (pp. 51–55). It has the same effect as issuing warehouse receipts for goods stored for which there are no goods stored (pp. 88–90).
The banking system issues multiple IOUs to depositors and borrowers, yet these IOUs are based on the same initial deposits. Traditional textbooks describe this process, but they refuse to identify the process as counterfeiting. They also refuse to mention that this process of monetary inflation is the sole basis of all booms and busts: the business cycle. This was Ludwig von Mises' insight as far back as 1912 in his book, The Theory of Money and Credit.
Rothbard makes it clear why fractional reserve banking is fraudulent. This is why no professor assigns his book to his classes.
The irresistible temptation now emerges for the goldsmith or other deposit banker to commit fraud and inflation: to engage, in short, in fractional reserve banking, where total cash reserves are lower, by some fraction, than the warehouse receipts outstanding. It is unlikely that the banker will simply abstract the gold and use it for his own consumption; there is then no likelihood of ever getting the money should depositors ask to redeem it, and this act would run the risk of being considered embezzlement. Instead, the banker will either lend out the gold, or far more likely, will issue fake warehouse receipts for gold and lend them out, eventually getting repaid the principal plus interest.
In short, the deposit banker has suddenly become a loan banker; the difference is that he is not taking his own savings or borrowing in order to lend to consumers or investors. Instead he is taking someone else's money and lending it out at the same time that the depositor thinks his money is still available for him to redeem. Or rather, and even worse, the banker issues fake warehouse receipts and lends them out as if they were real warehouse receipts represented by cash. At the same time, the original depositor thinks that his warehouse receipts are represented by money available at any time he wishes to cash them in. Here we have the system of fractional reserve banking, in which more than one warehouse receipt is backed by the same amount of gold or other cash in the bank's vaults.
It should be clear that modern fractional reserve banking is a shell game, a Ponzi scheme, a fraud in which fake warehouse receipts are issued and circulate as equivalent to the cash supposedly represented by the receipts (pp. 96–97).
Modern economists do not acknowledge that fractional reserve banking is a gigantic system of counterfeiting. They do not apply the same analysis to fractional reserve banking that they would apply to counterfeiting if they discussed counterfeiting. They rarely discuss counterfeiting. This is because they know that bright students can make the analytical connection. The students will be tempted to conclude what is in fact the case, namely, that fractional reserve banking is a form of counterfeiting.
BORROWED SHORT AND LENT LONG
The banker offers a deal to holders of currency. (Prior to 1914 in Europe and prior to 1933 in the United States, the public held gold coins.) Here is the offer.
FULL STORY
The heart of the modern monetary system is fractional reserve banking. This system is based on fraud. At the very heart of the modern economy is fraud – fraud on a gigantic scale.
What is the nature of this fraud? Counterfeiting. Banks are government-licensed institutions that issue bogus IOUs. Because these IOUs function as money, they are counterfeit money. This is the heart, mind, and soul of all modern banking.
There is only one textbook in money and banking that states explicitly that all fractional reserve banking rests on fraud: Murray Rothbard's The Mystery of Banking. It is not used in any university. It never has been. It was published in 1983. It went out of print almost immediately. It is on-line here.
Rothbard takes the reader through the traditional T-account exercise that is common to all upper-division textbooks in money and banking. Unlike all the others, his book shows how the process of making deposits and lending the money involves counterfeiting whenever the depositor has the legal right to withdraw his money on demand.
This is not the same as a life insurance contract in which you can borrow against your built-up reserves. The company treats the policy-holder as it would treat another borrower. It raises money to make the loan.
The withdraw-on-demand banking process has the same effect as counterfeiting gold and silver coins by adding base metals (pp. 48–51). It has the same effect as issuing paper money that has no backing in gold or silver (pp. 51–55). It has the same effect as issuing warehouse receipts for goods stored for which there are no goods stored (pp. 88–90).
The banking system issues multiple IOUs to depositors and borrowers, yet these IOUs are based on the same initial deposits. Traditional textbooks describe this process, but they refuse to identify the process as counterfeiting. They also refuse to mention that this process of monetary inflation is the sole basis of all booms and busts: the business cycle. This was Ludwig von Mises' insight as far back as 1912 in his book, The Theory of Money and Credit.
Rothbard makes it clear why fractional reserve banking is fraudulent. This is why no professor assigns his book to his classes.
The irresistible temptation now emerges for the goldsmith or other deposit banker to commit fraud and inflation: to engage, in short, in fractional reserve banking, where total cash reserves are lower, by some fraction, than the warehouse receipts outstanding. It is unlikely that the banker will simply abstract the gold and use it for his own consumption; there is then no likelihood of ever getting the money should depositors ask to redeem it, and this act would run the risk of being considered embezzlement. Instead, the banker will either lend out the gold, or far more likely, will issue fake warehouse receipts for gold and lend them out, eventually getting repaid the principal plus interest.
In short, the deposit banker has suddenly become a loan banker; the difference is that he is not taking his own savings or borrowing in order to lend to consumers or investors. Instead he is taking someone else's money and lending it out at the same time that the depositor thinks his money is still available for him to redeem. Or rather, and even worse, the banker issues fake warehouse receipts and lends them out as if they were real warehouse receipts represented by cash. At the same time, the original depositor thinks that his warehouse receipts are represented by money available at any time he wishes to cash them in. Here we have the system of fractional reserve banking, in which more than one warehouse receipt is backed by the same amount of gold or other cash in the bank's vaults.
It should be clear that modern fractional reserve banking is a shell game, a Ponzi scheme, a fraud in which fake warehouse receipts are issued and circulate as equivalent to the cash supposedly represented by the receipts (pp. 96–97).
Modern economists do not acknowledge that fractional reserve banking is a gigantic system of counterfeiting. They do not apply the same analysis to fractional reserve banking that they would apply to counterfeiting if they discussed counterfeiting. They rarely discuss counterfeiting. This is because they know that bright students can make the analytical connection. The students will be tempted to conclude what is in fact the case, namely, that fractional reserve banking is a form of counterfeiting.
BORROWED SHORT AND LENT LONG
The banker offers a deal to holders of currency. (Prior to 1914 in Europe and prior to 1933 in the United States, the public held gold coins.) Here is the offer.
FULL STORY
