FOR BANKS, MONEY DOES GROW ON TREES

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            Another way banks ‘make’ money is through the fractional reserve. This is a percentage set by the Fed which determines how much of a deposit banks must hold in ‘reserve.’ Right now the reserve is 10 %. This means that if you deposit $100 in your account, the bank must hold on to $10. It can do what it wants with the remaining $90, like bet it on the stock market, or lend it to someone else at interest.

             Through the factional reserve, money is multiplied. It works like this. Say you deposit $100 in your account and your bank decides to lend $90 to Ann. When she deposits the $90 in her bank, that bank must keep $9, and can lend $81 to Mary.  Now, Mary has $81, Ann has $90, and you have $100. In this manner, your initial deposit can be multiplied ten-fold ($100+$91+72.90 … = $1000).  This is how money is created out of thin air and how banks have become so profitable. 

HOW BANKS MAKE MONEY

 The Fed is in the business of making money. It issues loans in returns for IOUs and expects to be repaid with interest. Banks work the same way. Take for instance, a mortgage on a house. You’ve found a house you love with an asking price of $150,000. You’re lucky and have a good job and the bank is happy to loan you the money over a thirty-year period at 5% interest. You sign the papers and take the keys to the house the bank now owns. The bank would like you to think that it has shifted money away from other sources to give to you, but this is not the case. As soon as your loan is approved, the bank prints the money. This is done with the push of a button; a ledger entry. You now have a debt of $150,000 and your debt is the bank’s asset. It has made +$150,000. Over 30 years, you will repay a total of $285,696 (the initial loan plus $135,696 if the interest rate is 5%) -- almost double what the house was originally worth. This money is profit for the bank, made on a house it never owned and on money it never had. The Fed works the same way. It prints money to give to the government, which taxpayers repay with interest.

WHAT WENT WRONG

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In 1910, a handful of bankers, a U.S. Senator, and the Treasury Secretary devised a plan to wrest control of the money supply from Congress and give it to the banks. Three years later, on December 23, 1913, with many elected officials home for the Christmas holidays, the Federal Reserve Board (Fed) was created. The legislation took from Congress and gave to the new central bank the power to print money. Hailed as a means to take politics out of financial policy and stabilize the economy, in reality, the aim of the central bank was to make a profit. It was no coincidence that the same year the Federal Reserve was created, Federal Income Tax was imposed. The tax was needed to pay interest on the money that the government could no longer mint itself, but now had to borrow from the Fed. We pay tax, in part, to pay interest on free money the Fed creates out of thin air. (For an excellent history of the Fed see: The Creature from Jekyll Island, by G. Edward Griffin.)

WELCOME

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Welcome to Gold Street News, my personal blog about the less-known machinations of money. I’m not an economist, so this isn't going to be too technical or advanced. I started studying our banking policy after the 2008 meltdown. I was so disturbed by what I learned, I had to do something. I wrote a novel, Gold Street, detailing how our monetary system works. This isn't taught in Economics 101 at university. When monetary theory is mentioned at all, it is so dry, so long-winded, and made so complicated, it’s nearly undecipherable. But it’s not that difficult to understand. I thought if I sprinkled economics into a fast-moving thriller, I could engage readers with a story that would culminate not only with a climax, but also an understanding of the U.S. economy. (Gold Street is available on Amazon and currently has a five-star rating.) I am writing this blog to raise awareness on how our economy works. To this end, I’m going to examine current and past events that are directly or indirectly related to the use, production, and control of money in this country. I invite you to join me and discover how our economy really works.