by Anthony Migchels
September 6, 2012

from RealCurrencies Website






Recently the International Monetary Fund (IMF) published a report called ‘The Chicago Plan Revisited’.


The report claims that Fractional Reserve Banking is problematic and discusses the perceived benefits of Full Reserve Banking.

However: the problem is not money creation and not even Fractional Reserve Banking. The problem is interest. It matters not whether we pay interest for fully or partly backed loans.


The report did make the rounds in the Alternative Media. Several people sent it to me and a number of sites commented on it.

Most people of course understand that when the IMF moves its lips it is probably in the process of committing genocide, but since full reserve banking has been almost universally promoted by monetary reformers in the US (but not Europe), it has raised many eyebrows. People feel vindicated.


But unfortunately the Money Power is again ahead of the field and has slyly sold this ‘reform’ to both the libertarians and the populists.





Fractional Reserve Banking

First, let’s recap. Under a fractional reserve banking system, banks do not lend out deposits, but create new credit, new dollars based on the deposit.


Classically a bank can create 90 cents for every dollar that is deposited. This is not a constant. The last 20 years the banks were allowed to create up to 98 cents on every dollar deposited.


It is not true that the bank can lend out ten times the deposit as is often claimed. In the old days the goldsmiths did lend out ten times the deposit, but in the modern age the banks have managed to obscure the process.


The banking system as a whole does create 10 times as much  and up to 50 times as much when they are allowed to lend out 98 cents on the dollar.


Here’s how it works:

when a dollar is deposited, the bank creates 90 cents and lends it out. Now there is $1,90 (the deposit, plus the new 90 cents). The new 90 cents are then deposited in another account, perhaps at another bank. This 90 cent deposit is used to create 81 cents. Now there is $2,71 in circulation.


Next the 81 new cents are deposited at the next bank, who the proceeds to lend out 72 new cents, after which there is $3,43 in total. Etcetera...


After the whole process is done there are 10 new dollars in circulation.

So this is the sleight of hand of fractional reserve banking: the bank requires a deposit to lend, but it does not lend the deposit.


It creates the credit the minute it is lent out. Individual banks almost double the deposit, but the banking system as whole in this way ultimately creates 10 new dollars on every dollar that is deposited.


To fully appreciate the extent of this fraud, it is crucial to understand that the banking system is one, as we previously discussed.


All the banks own each other so basically there is one banker at the top that does indeed create all the money out there.





Full Reserve Banking

Full reserve banking pretends to solve the problem because it would require the banks not to create new money based on the deposit, but to actually lend out the deposit itself.


Full reserve banking is propagated by many monetary reformers, both proven frauds like Murray Rothbard and his Austrian Economics and classical populists.


The Kucinich HR2990 N.E.E.D act, which was penned by the American Monetary Institute’s Zarlenga and which calls for a debt free government unit, also wants to provide credit via full reserve banking.


However, the problem is not debt, it’s interest.


This is just one of the reasons why it is so essential to have a clear grasp of the issue, to understand that debt does not automatically mean interest.


The point is:

we are made to believe that we would feel better if we would pay interest over fully backed loans than over freshly printed cash.

For instance, Gary North made a career of denouncing ‘Greenbackers' (an antiquated term in this day and age of Social and Mutual Credit) by writing:

“Counterfeiting (he is calling fractional reserve banking counterfeiting, AM) is theft for one reason, and only one reason. Paper bills are issued that look exactly like bills that are backed by 100% of their face value in money metals, but these bills do not have such a backing. In other words, if all the individuals went to claim their money metals at the same time, some people could not collect.

Pay attention here, because these are the ‘little details’ that make or break real reform. It is somewhat subtle lies like this that allow the Money Power to maintain its domination.


In a full reserve gold based banking system there would be no theft, according to Gary North. However: we would still pay $300k interest over a $200k mortgage. We would be paying them in gold coins or in paper fully backed by gold, but we would be paying.


We all know that gold is completely controlled by the Rothschilds and their ilk. Gold based loans is what brought them to power.

Are we really going to believe they care whether they get paid for a gold or paper based, full or fractional reserve banking based monopoly? I don’t think so.


The truth is, that Fractional Reserve Banking actually proves for all with eyes to see that we can create all the money we will ever need at basically zero cost.

And if credit can be so cheaply created, it is insane that society should pay such incredible sums for it.


Let’s recall that interest is always a wealth transfer from poor to rich. The rich have money, the poor need to borrow. All in all the poorest 80% pay anywhere between 5 to 10 trillion dollars per year in interest to the richest 10% worldwide.


And yes, fractional reserve banking is unstable: banks go bust all the time.


But really, even that would not happen if the system was not controlled by total maniacs who create the boom/bust cycle by letting their own banks go bust after each credit induced boom. In this way they create depressions, because their banks cannot lend when busted, meaning a deflation with associated economic collapse.


Normal people managing the system would allow a stable situation, even with fractional reserve banking.


It also is a convoluted and expensive way of creating credit. Mutual Credit is completely simple and requires zero reserves or savings and the credit facility cannot go bust because of bank runs.


But antiquated as it may be, fractional reserve banking is not the heart of the matter.





Compound Interest

The Chicago Plan encompasses more than full reserve banking.


It is based on debt free Government money. This is obviously much better than a usurious monopoly in private hands. This matter is also (favorably) discussed in the IMF report.


However, debt free money combined with full reserve banking allows the Money Power to regain full control of all the money in circulation in a relatively short period of time through compound interest.


Here’s some relevant text from the linked article on compound interest with debt free units:

“Let’s say, for argument’s sake, they obtain 10% of it’s supply.

They start lending at say 5%. Of this 5% they use 2% for cost. The remaining 3% is profit, new capital, new deposits for their banks.
After 1 year of lending they control 13% of the money supply. After two years 16.09%. After three years 19.28.
After 10 years of lending they would control 34% and after 20 years 81% of the money supply.

Compound interest in operation.

Of course, the exact numbers are not important here, it’s the process that matters.”





Full Reserve Banking is still... well, banking.


The wise know that banking is one and banking is the problem. Don’t try to control the banks, because they will always control you. They control the money supply and rape us with interest on a money supply they completely own, be it through paper or through gold, through fractional or full reserve banking.


To the Money Power it’s all the same. The System was built to enslave, it cannot be really reformed. Banks should be closed and replaced with Mutual (interest free) Credit facilities.


But why would the IMF promote a debt free Government unit? That indeed is a good question.


It’s not the first time that a blatant Money Power outfit like the IMF does so. Some time back the Financial Times’s Lex suggested the Government might consider printing some debt free cash. (Unfortunately I read about it in their paper edition and their Internet content is behind a pay per view wall.)




It seems the System is so insolvent the Money Power is actually fearing losing control over the bond market, which is the basis of its supremacy. The level of indebtedness is such that its banks and the taxpayer underwriting their operations might get overwhelmed.


Printing some debt free cash to plug a few gaping holes might actually just be what the doctor ordered at this stage.