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The Federal Reserve: Banking on the Loan

Updated on May 27, 2012

Is that loan real?

A large east coast based bank ran some advertisements on TV. These commercials depict actors as the Founding Fathers in modern times extolling the virtues of banking as good citizenship. As the advertisements starts, text appears at the bottom of the screen declaring Alexander Hamilton as the father of modern banking.

The advertisements project a warm and patriotic feeling of this bank's stature. It would seem that the Founding Fathers are in full endorsement of banking as an honorable deed. The Founding Fathers no doubt represent honesty and integrity.

Historically, Alexander Hamilton was a supporter of centralized banking and instrumental in creating the First Bank of the United States. But history has never positioned Mr. Hamilton as the father of modern banking. While that title remains aloof historians have cited several possible figures. Alexander Hamilton is not one of them.

One now has to wonder about how many have seen this commercial and thought “Interesting, I never knew that”. How many out there now believe that Alexander Hamilton was solely responsible for banking as we know it today.

If a bank is willing to distort history and fact to portray honesty and integrity, could their business practices be suspect as well?

The banking industry in this country and around the world has existed for several hundred years. In medieval times when people used gold there were repositories where they kept their gold. The upside to gold is that it has real value, the downside is that it is a heavy metal. Much too heavy to carry around especially for larger transactions. In this regard the repositories were useful.

Now these gold repositories collected a lot of gold that was just sitting around that belonged to their customers. People depended on these repositories to keep their money safe.

Somewhere along the line a clever idea was born. It was new and it was history making. The concept was as brilliant as the Debt Derivatives that brought the banking industry to its knees in 2008. But unlike the Debt Derivative, it would take centuries for this scheme to fail.

So what was this ground breaking concept? Well, instead of letting their customer’s gold sit around and collect dust, they began to lend it out. Now they had a double dipped income. They collected storage fees and interest payments all from the same gold. Masterful!

How could they do this and get away with it? It was easy! Over time they noticed that once a customer made a deposit, it was a rare that a customer would withdraw all their gold. Of course they never told their depositors they were lending out their gold and collected interest on it to boot.

This is how the modern day loan came to be. There were probably loans transacted before this but the difference was that the lenders used their own money. The new generation of lenders used other peoples money.

Before loans, loans weren’t loans. Business was pre-financed by investors. For instance, an investor would finance a ship, its crew, and materials. Months later when the ship returned with its imports, the investor would be paid back through the sale of the products. All transaction were based on the Promissory Note or IOU. If the ship sank, the investor lost out.

As a footnote, this type of financing evolved into modern day Factoring which is far less risky. In Factoring, an investor will purchase the invoices for products or services sold by that business to advance funds for a nominal fee. The business does not have to wait for payment to start its next production run. The production run is pre-funded.

For decades banks have done all they could to prevent Factoring but it has been an impossible task. In recent times banks have jumped into the fray but use it as a last resort because more money can be made from loans. Loans can be tied to other bank services and unlike Factoring, the bank can get a foothold on collateral which has real value. Just about every large bank now offers Factoring services even though they don’t advertise or advise it.

Today banks are far from independent. All banks are part of the Federal Reserve System. Membership in Federal Reserve isn’t voluntary. The Federal Reserve is the central bank for the United States and oversees all banks.

This system using a central bank is world wide. The Federal Reserve falls under not the United States Government, but is an independent corporation aligned with the IMF and World Banks. The (IMF) International monetary Fund and World Bank fall under the (BIS) Bank for International Settlements. Every transaction that has an international flavor to it passes through the BIS. While there are no laws in play, there are rules. Their business relationships and hierarchy are very close.

At some point you may need more money than you have at hand. Whether it be for property, a car, or even home improvements. So what do you do if you need or want money now. You go to the bank and secure a loan. But when you acquire a loan are you getting what you think? Are you getting real money and value? Or are you being used to generate short term wealth in a legalized Ponzi Scheme?

Let’s follow the money trail and see what happens. While we'll keep it simple to clearly track the money, keep in mind that there are millions of banking transaction everyday.

Let’s say you have $40,000 and you deposit it in one of the larger banks. By regulation dictated by the Federal Reserve, the bank is required to put 10% of your money in reserve. This is done through the Federal Reserve Bank. This 10% is the cash on hand and is suppose to be enough to handle withdraws when needed.

The Federal Reserve Bank now has $4,000 and your bank has $36,000. But sice all transactions pass through the Federal Reserve, the bank also deposited the $36,000 in the Federal Reserve. With the centralized banking model, that $36,000 is now availble to all banks in the system.

Your neighbor down the street walks into your bank and acquires a loan for $36,000 for a new car. The bank gives your neighbor a check for the full amount. Your neighbor buys the car and the dealer deposits the $36,000 check in their bank.

The teller updates the bank's computer with a credit and in turn the central computer database is also updated. After setting aside 10%, or $3,600 for reserve, the balance sheet now declares a $32,400 credit available to all banks.

Moving on, Jack needs a new roof and some other home improvements. So Jack goes to the bank and secures a loan for $32,400. The loan manager punches the amount into the computer and it spits out a check.

Jack hands the check over to his contractor and the contractor deposits it in his bank. The contractor's bank credits the computer with $32,400 setting aside $3,240 for reserves leaving a credit balance of $29,160.

Are you getting the picture? While your neighbor is repaying their loan, the banking system doubled its income on your original $40,000 deposit by giving Jack a loan based on your neighbor’s loan money deposited by their car dealer. The Federal Reserve created money out of thin air by using your money over and over.

Your money is working hard. You helped your neighbor buy a brand new car and and you are collecting about 0.91% interest on your money. So far it looks pretty good for you.

But your bank has turned around and charged your neighbor about 2.5% interest for borrowing your money. That may be well and good because the bank needs to make money to stay in business.

On the other side of the coin the bank isn’t risking any money of its own and is charging your neighbor about 2.5% interest for borrowing your money. Your money is making more for the bank than for you. You can be the judge of whether this is fair and just - it’s your money.

How is this possible? How can they do that? Simple, buy your way into government then control the cash flow.

There are no laws governing the Federal Reserve. The Federal reserve is not a government entity. It is a private corporation and monopoly. Even when the chairman of the Federal Reserve appears before congress it is a show and sham because the Federal Reserve creates its own rules with other central banks around the world.

The Federal Reserve creates money electronically or by printing then then dumps it into its own system to make it available to the banks. The banking system never runs out of money. Bank Deposits are circulated back to the Federal Reserve Bank and in turn forwarded to the banks. The use of checks, credit cards, and direct deposit prevents cash from leaving the Federal Reserve System by transferring funds from one account to another. Every bank transaction goes through the Federal Reserve. This is why there are so many branches around the country.

Cash is used only for smaller purchases. Once you purchase anything the retailer puts it right back in the bank. Cash doesn't stay out of the system very long.

Smaller banks who have very little clout and generate little profit for the system are allowed to fail. The largest banks are bailed out.

The US Mint no longer prints paper money, It has been relegated to manufacturing and distributing coin, collectibles, precious metals, and national metals.

Massive withdraws by depositors are impossible. The banks will call for a “Bank Holiday” and simply close.

The Federal Reserve is constantly redefining the value of the dollar. It does this by setting interest rates on borrowed money.

When the FED increases interest rates it has the effect of increasing the value of the dollar. When the dollar is valued higher it decreases money circulation because it costs more to borrow. As a result the private sector borrows less money and to make up for the difference it raises prices. This action causes inflation.

When the FED decreases interest rates money becomes readily available. The private sector can afford to borrow money and increase its production of products and services. In theory, this should increase the value of the dollar allowing more goods and services to be purchased thus reducing inflation. But this rarely happens because while prices may fluctuate, prices never drop below the initial price increases.

Historically, the value of the dollar has been inflated to over 96% of its worth since the Federal Reserve has controlled it. But what is really interesting is that the devaluation of currency has not affected the Federal Reserve or the big banks. Yet it has a direct effect on the economy.

Perhaps it doesn't affect those who control and have all the money. Mayer Amschel Rothschild once said “Permit me to issue and control the money of a nation, and I care not who makes its laws.”

Could it be banking is not so patriotic after all?


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    • Michele Travis profile image

      Michele Travis 

      6 years ago from U.S.A. Ohio

      Rothschilds own the part of the Federal Reserve and control the US government through the economy.

      Here is an article and it shows how everything is linked together in terms of control of the Federal Reserve and Banking in Europe.

      Kind of makes me wish I were Amish.

    • profile image


      6 years ago

      Excellent summary of the formation of banking and some of the functioning of the FED. Also, the intriguing Rothschild quote at the end that I rarely see anyone use. I enjoyed this post

    • Civil War Bob profile image

      Civil War Bob 

      6 years ago from Glenside, Pennsylvania

      Good hub, Joe...voted up, useful, interesting. From your hub, I'm thinking Judas Iscariot could be the patron saint of bankers, given he held the purse for the apostles, but, hey, that's just the way I think! Enjoy the day.

    • purnimamoh1982 profile image


      6 years ago

      very educating hub. Economics is an interesting subject although it seems a bit technical. Economics has never been written in common man's language. Hubs like yours help substantially to the understanding of the commons. Really interesting hub. Voted up and followed.


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