The Fraud Known as Banking

I compare people’s understanding of the money & banking system to computer manuals. The rate of change for computer programs has gotten so rapid that the manuals (even the digital manuals) cannot keep up.

People’s mental models of the banking system also have not kept up. Part of what they believe harkens back to when people went to a bank to deposit, for safekeeping, a commodity used as money. Customers could transfer ownership of that commodity to other people using a check. Those days are long gone. It’s a fraud in practice, if not in law.

100% Reserves

The commodity held by a bank was supposed to equal the amounts recorded in the depositors’ accounts. The commodity held for depositors was called reserves. Depositors should at any time be able to write checks drawn on their accounts with complete confidence that the bank would transfer to the payee the total amount written on the check. Confidence that banks would honor claims should have been true for all depositors at all times.

The system in which banks hold the money commodity in a quantity (at least) equal to the amount of deposit liabilities people refer to as 100% reserve banking.

But then began the fraud.

Fractional Reserves – The Fraud

Somewhere along the line, bankers figured that people didn’t use all of their money all the time. They started making loans with some of the commodities they held for their depositors’ accounts.

Banks agreed with each account holder to honor their claim for their commodity money at any time. If all depositors showed up at the bank at the same time demanding their money, the bank should have been able to honor all individual claims. Thus, for banks to hold in reserve any amount less than 100% of the amount deposited violated their agreement with their depositors. In other words, it amounted to fraud.

We call the process of holding less than 100% reserves fractional reserve banking.

Institutionalized Fraud

In 1913 Congress passed the Federal Reserve Act of 1913, which created The Federal Reserve System. The act did many things, but one of the more important and seldom acknowledged results was institutionalizing and legalizing the fraud known as fractional reserves.

At the time of this writing, I cannot find my reference giving the reserve requirement at the formation of The Federal Reserve System, but it may have been 25% or more. At the present time, the reserve requirement is 0% (No reserves.).

In layman’s terms, nothing “backs” your money.


The “failure” of Silicon Valley Bank has exposed the fraudulent nature of banking, yet no one seems to have the courage to acknowledge it. Since the advent of The Federal Reserve System, and maybe before, nothing has existed to “back” the dollars that make up our monetary system.

For a long time, we have accepted the subterfuge that the Federal Reserve System held “reserves” that “backed” our money dollars. Recently that reserve requirement dropped to zero. The depositors, who did not willingly accept the risks the bank took, did not have to experience either the inconvenience or the potential losses they now face.

In a later post, I will argue that in this fraudulent system it would cost taxpayers nothing to have the government guarantee all deposits.

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