The people and governments of the US and Europe have so much debt that they probably can’t pay it off. This is likely to lead to a collapse of the entire world financial system (1, 2). The fundamental problem behind this is fractional reserve banking, which allows bankers to steal wealth from everyone at the cost of putting everyone in debt. The problem will not be fixed until a majority of people realize that fractional reserve banking is illegitimate.

Fractional reserve banks create money in the following manner. You deposit $100 in the bank. They loan out $80 of those dollars. The loanee puts the $80 back in the bank. The bank now has $100 in reserves—all your money. But if you add up the checking account balances—$100 from your account and $80 from the loanee’s account—you get a total of $180. Thus $80 in new money has been created by the bank, given to the bank, and then loaned out by the bank, which they earn interest on. Since the bank has 10/18 reserves, higher than the legal limit, they keep loaning out money until 80% or so of the money in the world is owed to them. (The 80% figure assumes 20% reserves. If the reserves are X, then the bank ends up owning and loaning out (100-X)% of the money.)

This is an illegitimate practice. Although the bank in this scenario does not start out having any of the money, through accounting fraud they end up owning 80% of the money, and loaning it out. Because they have fraudulently stolen 80% of the money, this creates an incentive for everyone to get a loan from the bank. For suppose you are a business, and your competitor gets a loan. They are able to expand their business more rapidly than you. You must get a loan to compete. In this manner, everyone is encouraged to get a loan from the bank. Everyone ends up in debt.

There is more than one bank in the world, of course, but the effect is the same. Everyone owes something to banks because banks have fraudulently stolen 80% of the money. This problem is only made worse by central banks which, by printing money and giving it to banks, ensure that banks can never lose. Any bad business decisions made by banks are fixed by stealing wealth from savers through the mechanism of inflation.

No other fraud in the world financial system could possibly be as large as fractional reserve banking in terms of the quantity of money that is stolen. Fractional reserve banking is thus the most fundamental problem with the world financial system. It must end if we are going to free ourselves from debt slavery. For this to happen, everyone is probably going to need to understand the nature of the fraud so they can opt out. Otherwise it will continue to suck people in.

Reference: “The Mystery of Banking” by Murray Rothbard. See also this discussion on Hacker News and this discussion on the Bitcoin Forum.

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