Banking 101

Banks are in the business of selling a most valued and sought-after commodity called ‘money’. No matter what economic circumstances prevail, there will always be a demand for paper currency. Money has no seasonal highs or lows and there is a consumer market in every country around the globe.

The banks sell money in the form of a ‘loan’ and the profit they make from this loan is the ‘interest’. After receiving the primary amount of money that was loaned to the borrower, anything above and beyond is the profit which banks made from selling those amounts of money.

There are some fundamental principles in the banking system, which are taught in schools and universities under Economics 101, without ever being questioned or put under scrutiny. They are automatically assumed to be the norm and accepted by the learner as ordinary. There is nothing outside of these fundamental principles of banking that the world is even aware about.

In fact, the only alternative to the traditional capitalist banking system of the free-market has been a socialist driven economy (or its extremity called communism). The former is recognized as a money-maker, while the latter is viewed as a controlled and deliberate attempt to regulate (almost retard) individual economic progress.

This article is not meant as a critique of either system and views both (or anything in between) as being part of the same picture. The message being presented here is meant scrutinize a deeper undercurrent of the financial system, which is the heart of any economy.

Whatever your ism might be, some very fundamental banking principles are always at play and they need to be questioned.

When someone is born in a particular state and eventually grow up surrounded by the same set of rules and circumstances, they will generally tend to accept them as normal and never think to question them.

A man, who is born a slave and spends his life in servitude, does not know what freedom is until he sees a free man. Similarly, we cannot find an economic solution until we realize where the problem lies.

We have clearly understood the cause and effect scenario, the real-estate binge and the message of the sub-prime mortgage crises, which triggered an economic tsunami. In the end, banks no longer had any money to lend. Hence, the economic engine cannot run smoothly without the essential fuel of money.

Let’s reiterate what we mentioned earlier in the article, ‘There are some fundamental principles in the banking system, which are taught in schools and universities under Economics 101, without ever being questioned or put under scrutiny. They are automatically assumed to be the norm and accepted by the learner as ordinary. There is nothing outside of these fundamental principles of banking that the world is even aware about’.


Why Banks Lend Our Money

We were taught that if you deposit 1 dollar in a bank, the bank is able to lend out 9-10 times the same amount of money. To repeat, for every dollar we deposit in our banking account, the banks can loan 10 dollars to someone else.

The first red flag to be raised is that banks are lending our money to a third-party. The money we deposit in our accounts is loaned to a borrower, who will return the money plus the interest. In this manner, the bank has reclaimed our primary balance and additionally, made a profit by charging interest. The interest portion they will keep and the initial principle belongs to you again.

All of this is done under the assumption (nay, under the gamble) that you will not withdraw your deposited money, before the third-party borrower is able to pay it back to the bank.

In fact, if everyone tried to withdraw their savings and money from the bank, the bank would not have it. This ludicrous notion is not a charge or accusation, it is actually taught as an acceptable condition of the economic system!

To grasp and put things into perspective, imagine trusting a car to your friend for one week. You return to discover your friend rented your car for the entire week to another party and made a princely sum. If you had returned a few days earlier to collect your car, your friend would not have had the car. So someone else made a profit from your car deposit and gambled with your property at the same time, knowing the third party could have wrecked it, or not even returned it at all!

You’re unwittingly taking the risk for someone who is making money from your money. It is in fact, the banks who are indebted to us and not the other way round. Banks cannot work and function without large deposits of money; your money.

Where does the 10 come from?

For every 1 dollar we deposit with a bank, the bank can lend 10 times that amount.

Why?

Where do the extra 9 dollars come from if all we have deposited is 1 dollar? The bank has in fact, awarded itself a virtual line of credit. Not only is the bank loaning money that does not belong to them, they are seemingly able to create virtual money on top of the real money.

Not only is the depositor being used, but so is the borrower. The borrower has signed for 10 dollars, out of which 9 do not actually exist in the bank’s vault. In the end, when the borrower has returned all 10 dollars in the form of real money, the bank would have received from the borrower, the initial depositor’s money (1 dollar) + an extra 9 dollars + interest charged to the borrower.

All of this from 1 dollar! The bank has invested 0 dollars and taken no risk.

This creates an inflationary effect, because 90% of the money being ‘loaned’ by the bank, does not physically exist (9 dollars lent for every 1 dollar deposited).Thus, if everyone walked to the bank and demanded their money back, the bank would only have 10% of their money available.

If everyone tried to spend their money all at the same time, there would be an imbalance of the ratio of commodities versus the goods available at current market prices. The result would be hyper-inflation and the cost of goods would increase so much that you can only afford 10% of the goods you could have bought before the inflationary cycle.

90% of the money out there does not actually exist except on paper. When times are good and money is loaned out in plenty, we are conditioned to accept this as the economic ‘bubble’ effect, which seemingly pops every now and then, leaving the depositors and masses destitute and the banks rolling out another forecast of a ‘recession’.

We need a real economy that is built on real money; not virtual monopoly currencies that eventually fail under the guise of recessions and depressions.

The main culprit here is interest on borrowed money. The fundamental principles of the capitalist bank should be eradicated, without any compromise to the free market. This will create real money and real opportunity.

Banks dealing with interest create an economic system where 80% of people suffer the consequences of money flowing back to only 20%. Without interest, there will be no market correcting mechanisms like inflation or recessionary cycles and economic depressions.

Up until yesterday, the system bothered nobody because the international flow of money was mainly centered and received by the West. We in the West were the 20% who lived off the misery of the 80% a.k.a. rest of the world.

Today, the unchecked hedonism of interest-charging banks has created an inflationary tide that has affected Western shores.

Continue to – A Brief History of Money

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