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Fractional Reserve Banking

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Published on Mar 25, 2012

This is the documentary Zeitgeist Addendum.

Society today, is composed of a series of institutions. From political institutions, legal institutions, religious institutions. To institutions of social class, familiar values, and occupational specialization.

It is obvious, the profound influence these traditionalized structures have in shaping our understandings and perspectives. Yet, of all the social institutions, we are born into, directed by, and conditioned upon.. There seems to be no system as taken for granted, and misunderstood, as the monetary system.

Taking on nearly religious proportions, the established monetary institution exists as one of the most unquestioned forms of faith there is. How money is created, the policies by which it is governed, and how it truly affects society, are unregistered interests of the great majority of the population.

In a world where 1% of the population owns 40% of the planets wealth. In a world where 34.000 children die every single day from poverty and preventable diseases, and, where 50% of the world's population lives on less than 2 dollars a day... One thing is clear. Something is very wrong. And, whether we are aware of it or not, the lifeblood of all of our established institutions, and thus society itself, is money.

Therefore, understanding this institution of monetary policy is critical to understanding why our lives are the way they are. Unfortunately, economics is often viewed with confusion and boredom. Endless streams of financial jargon, coupled with intimidating mathematics, quickly deters people from attempts at understanding it. However, the fact is: The complexity associated with the financial system is a mere mask. Designed to conceal one of the most socially paralyzing structures, humanity has ever endured.

[/Peter Joseph] "None are more hopelessly enslaved than those who falsely believe they are free." -Johann Wolfgang von Goethe- 1749-1832

[Peter Joseph]

A number of years ago, the central bank of the United States, the Federal Reserve, produced a document entitled "Modern Money Mechanics". This publication detailed the institutionalized practice of money creation as utilized by the federal reserve and the web of global commercial banks it supports.

On the opening page the document states its objective. The purpose of this booklet is to describe the basic process of money creation in a fractional reserve banking system. It then precedes to describe this fractional reserve process through various banking terminology.

A translation of which goes something like this: The United States government decides it needs some money. So it calls up the federal reserve and requests say 10 billion dollars. The FED replies saying: "sure, we'll buy ten billion in government bonds from you". So the government takes some pieces of paper, paints some official looking designs on them, and calls them treasury bonds. Then it puts a value on these bonds to the sum of 10 billion dollars and sends them over to the FED. In turn the people of the FED draw up a bunch of impressive pieces of paper themselves, only this time calling them federal reserve notes, also designating a value of ten billion dollars to the set. The FED than takes these notes and trades them for the bonds. Once this exchange is complete, the government than takes the ten billion in federal reserve notes, and deposits it into an bank account. And, upon this deposit the paper notes officially become legal tender money. Adding ten billion to the US money supply.

And there it is! Ten billion in new money has been created. Of course, this example is a generalization. For, in reality, this transaction would occur electronically, with no paper used at all. In fact, only three percent of US money supply exists in physical currency. The other 97 percent essentially exists in computers alone.

Now, government bonds are by design instruments of debt. And when the FED purchases these bonds with money it essentially created out of thin air, the government is actually promising to pay back that money to the FED. In other words, the money was created out of debt.

This mind numbing paradox, of how money or value can be created out of debt, or a liability, will become more clear as we further this exercise.

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