Fractional Reserve Banking Made Easy
September 30, 2009 by goldguru · Leave a Comment
By Terence Gillespie, GoldSeek
The paper bills in our wallet are not money. And they are not Notes as in “Federal Reserve Note” written on the top of the bill. They are actually just Tokens. Federal Reserve Tokens, if you like, is what should be written on top of the bills. They are not redeemable for anything other than themselves. And they represent only one thing: Your belief in their value. Hopefully, your belief extends to the next person you try to give them to.
The only real use for them is paying your taxes to either the state or federal government. You can be sure, however, that both will stop accepting them as payment even for taxes if you and I stop believing in the paper bills.
Paper money, or fiat, was originally accepted because you could redeem the paper for gold upon request. When people got used to the paper they felt more and more comfortable and were less likely to redeem it for their gold. They knew that they could redeem it at any time and the paper is lighter, more convenient and can be denominated in much smaller increments so that everyday transactions are made more practical.
By the time the gold imparts this trust to the paper the people storing the gold start using it for other purposes. The primary other purpose is to start using the gold as someone else’s money in addition to yours. When that happens the banker has now, in effect, doubled the amount of gold in his vault and is only in trouble if you decide to reclaim your gold. By that time many more people are storing their gold with the banker and he found that only a small percentage of people ever reclaimed their gold.
Now, at this point in the story nothing wrong has happened as long as:
- You are told that your gold deposit is being lent out.
- You are paid for storing your gold.
- Your are not charged under the guise of a storage fee because the gold is no longer being stored by the banker.
- There is a 1-to-1 relationship between the gold you lent the banker and the gold the banker has lent out.
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