Fractional reserve banks (FRBs) are fraudulent (1,2). If they keep 10% reserves, then they counterfeit into existence 90% of the money (that’s the fraud part), which they wisely loan out rather than just buy stuff with it. By inflating the money supply, they steal purchasing power from everyone, who then have to get a loan from a bank to recover the amount of purchasing power that rightly belongs to them. The bank charges a fee (interest) for the service of stealing your purchasing power and loaning it back to you. It’s a giant scam that benefits bankers at the expense of everyone else.

With FRBs both legal and common, everyone is encouraged to go into debt. (Note that there is nothing wrong with loaning money. The problem is with counterfeiting money, and then loaning that out.) This is fundamentally why governments, organizations and people are in so much debt today. The problem is even greater than it seems, because banks counterfeit a vast majority of the money supply into existence, greatly inflating the money supply. The only way to pay off all this counterfeited money is to deflate the money supply by 90% (or so, depending on reserves). But this would be economically catastrophic, because once the deflation starts, almost no one would be able to pay off their debt, because the value of the money would rise so rapidly that that they cannot produce value fast enough to pay it back. Thus, central banks have been created that print new reserves, so fresh new money can pay off old debts. But this just increases the amount of debt, because banks pyramid new counterfeited, loaned-out money on top of the new reserves.

This debt-based system is very fragile, because if someone becomes incapable of paying off a very large loan, the effects can ripple and magnify throughout the system. If Person A cannot pay off Person B, then Person B cannot pay off Person C, and so on, until everyone cannot pay off their debts. Worse, if Person A used the loan from Person B as leverage, then the amount they lose can be vastly more than the amount they owe, making them not just incapable of paying back the loan to Person B, but making it impossible to pay off anything else they owe to anyone else, magnifying the problem. When this happened to the entire banking system in 2008, the Federal Reserve (the central bank of the United States), printed new money which it gave to banks so they could pay off their debts so the system wouldn’t collapse. This is a terrible solution, because it only ensures the worst businesses are kept alive, sucking resources out of the rest of the economy.

The solution to this giant mess is to end the fraudulent practice of fractional reserve banking so that our system does not depend so deeply on debt. If FRBs didn’t exist, then debt-money would only account for a small fraction of the money supply rather than the vast majority. Then, if someone couldn’t pay back their debts (which happens all the time), the problem wouldn’t ripple as far (because not everyone is in debt), and it would not be magnified (because there is much less leverage in the system). This can be done either by making fractional reserve banking (FRB) illegal, or by removing all regulations from the banking sector so that the bad banks simply fail, and thus only banks that keep high reserves would be able to compete. Unfortunately this cannot be done instantly, because it would cause a tremendous contraction of the money supply, which would have terrible economic effects in the short run (although in the long run it would be much better). Thus we would like to know if there is a smooth way to end FRB that does not cause catastrophic effects in the near term.

My solution is this. We need to turn all fake, counterfeited money into real money. The central bank will simply give all banks 100% reserves. (It might seem unfair to simply give, as a gift, 100% reserves to banks, but this merely reveals the fraud that is already there.) Now there is enough money in the system to pay off all the debt without contracting the money supply. On that same day, fractional reserve banking will be made illegal. The day after that, the central bank will be ended, since printing money (which is basically the only thing it does), serves no public good. And all other regulations on the banking sector will be removed, enabling true free market competition. We will also need a cultural change where we all mutually recognize that forcing people to do stuff is wrong, that way the government cannot cement the fraudulent practice of FRB into existence through the use of force again.

It is possible to end FRB in a way that does not cause an economic catastrophe by turning all counterfeited debt-money into real money by giving FRBs 100% reserves as a gift, and then making FRB illegal. Unfortunately, I do not think this is likely to happen, because the powerful banking interests in our society do not want to end the giant scam that they benefit from at everyone else’s expense. Instead, the over-indebted system, particularly in the United States and Europe, will just collapse, either through a default, or through an effective default arising by printing, and thus devaluing, the money.

See also The World Financial System May Be Collapsing

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