What is fractional reserve banking?
Fractional reserve banking is the practice that allows all banks under the Federal Reserve system to operate on a fraction of the depositors’ assets. This is usually five to 10 percent but lately is closer to zero. In other words, banks create money (credit) from thin air, by making an electronic entry into an accounting database, and lending it out at interest. This is how the vast majority of the $60 billion that commercial banks made in profit, is made. Here is a simple analogy. Say you have a classic Ford Mustang you wish to sell, and you list it in the newspaper classifieds. Say I come by and purchase it from you for $5,000. I explain to you that I don’t really have a place to keep the car, and so I’d like to keep it in your garage until I can build one of my own sometime later on. You agree, and we part company. I now own the car, but it’s still in your garage. I come by about one weekend a month to take the car out for a spin, and everything is fine. Now you get an idea. Since I
A. Fractional reserve banking is a term used to describe a system whereby an amount of money or securities called “reserves” is used as the basis to lend money. In practice, up to ten times the amount of actual held reserves may be lent. Money comes into existence as a loan. • Q. What are reserves? A. Today, reserves are mostly made up of U.S. Treasury bonds and notes. They may also be made up from common stock, or corporate bonds. Formerly, reserves also consisted of gold. • Q. How does the Fed get these reserves? A. The Fed writes a check on itself to purchase the reserves. The difference between an individual writing a check, and the Fed writing a check is this: The Fed has no money in the account when it writes the check. The check is deposited by the seller into an account. The account is credited with the amount which may then be drawn upon by the seller of the security. The Fed now owns the securities. • Q. Is this a check written on no funds? Is this not illegal? A. Not when th
