Monday, 25 May 2009

Fractional reserve banking - at last some support!


On the 28th of March 2009 I wrote a blog entry called The most important thing to understand about banks. It was the result of my research in to fractional reserve banking. The key thing that I had worked out was that it was just too easy for bankers to earn money. Or more specifically, if the "money multiplier" was M and the banks could lend money to borrowers with the borrowers paying interest at rate I, then the amount of interest that banks could earn on their starting reserves was effectively (M x I). At the time I felt like I was the only person on the planet to have worked this out because I had never seen anyone else say it. I thought that perhaps I had made some mistake. But then I came across the following, rather long (3.5 hours!), but very good, documentary called The Money Masters - How International Bankers Gained Control of America, and at 19 mins 25 seconds in to the movie they say
"every bank in the U.S. is allowed to loan out at least ten times more money than they actually have, thats why they get rich on charging lets say 8% interest -its not really 8% per year which is their income, its 80%, thats why bank buildings are always the largest in town".
I was right!

So while I am happy to find some support for my conclusions, I am not at all happy with the way the banks are screwing the rest of the economy.


  1. Ah, sorry about this. That's actually a complete misconception, which seems to be propagated by a paper from Murray Rothbard, although it may predate him. It does get quite complex, especially with changes over the last decade, but in principle/theory, a bank can only lend a fraction of its deposits, typically 9/10. Which also explains why it is called fractionalreserve banking.

    I'm slowly trying to reverse engineer this system, so you can find some more information over at my blog,, including a disproof of the 10x claim, if you're interested.

  2. I think there is a lot of criticism aimed at the fractional reserve system, but if you are interested there is an excellent paper by the Chicago Fed called MODERN MONEY MECHANICS, it explains in detail how the entire system works with all its nuances. In fact, what you have said is correct when speaking of the banking system as a whole, but for each individual bank its only 90% of its deposits that it can lend out.

    check out my blog if you want more intel on it