ArtsAutosBooksBusinessEducationEntertainmentFamilyFashionFoodGamesGenderHealthHolidaysHomeHubPagesPersonal FinancePetsPoliticsReligionSportsTechnologyTravel

How the Federal Reserve Creates Money out of Thin Air Explained to 12 year Olds

Updated on February 13, 2019
Sue Adams profile image

Juliette Kando is a supporter of "Research for Truth" devoted to exposing the most blatant yet best hidden scandals in the world today.

The privately owned Federal Reserve is legally allowed to print non-existent money out of thin air. Fractional Reserve Lending, the system that global banking is based on, is the root cause of the enormous inequalities in buying power of the population. According to Robert H.Hempbill, Credit Manager of the Federal Reserve Bank of Atlanta, “It is the most important subject intelligent persons can investigate and reflect upon.”

Private banking cartels drain the wealth and cause gross inequalities and poverty.
Private banking cartels drain the wealth and cause gross inequalities and poverty. | Source

The Root Cause of the Problem

When 15% of the American population lives in extreme poverty, with 23% of those being war veterans, and over 1.5 million American children are homeless (source BBC Panorama 13 February 2012), one can but wonder what went wrong and why. Thanks to information freely available, you and I, and all the homeless people in America can now begin to understand what really is going on with the economy. It is a long story that started 100 years ago with the creation of the Federal Reserve Bank.

The root cause of the problem is the Federal Reserve, a private banking cartel that has been designed to systematically destroy the value of our currency, drain the wealth of the American public and enslave the federal government to perpetually expanding national debt by means of the so called Fractional Reserve Lending system. So what is Fractional Reserve Lending?

Fractional Reserve Lending

When the government spends more on wars than they collect in taxes (our money), it has to borrow the difference from a bank. When a bank gives credit / makes a loan, that received loan is then paid into another bank. Under the current economic system, that second bank is allowed to loan out a huge fraction (90% if the reserve is 10%) of that very same money again, which again is paid into another bank and lent out again, and so on and so forth. This legal practice is called Fractional Reserve Lending. The result is an artificially bank-created increase in in the money supply, the very cause of inflation. As most bank deposits are treated as money in their own right, fractional reserve banking increases the money supply, and banks are said to create money out of thin air.

Watch the video below for a more detailed explanation.

“Americans are being robbed blind, and they don’t even know who is doing the robbing.” - Joseph Farah Founder –

What Does That Mean?

Banks can multiply money by lending part of the same money over and over again. The trouble is that artificially increasing the money supply causes inflation to rise. Banks also, each and every one of them, keep making interest on a part of the same initial $100. That gain is then also used to lend out more money and so on. I found this hard to comprehend, to believe and even harder to accept. For those of you who are not interested in economics because you believe the subject of economics is beyond any ordinary citizen’s comprehension, I have written the short children’s story below to illustrate exactly what happens in Fractional Reserve Lending.

Not an uncommon sight in the U.S. Homeless children begging in the streets.
Not an uncommon sight in the U.S. Homeless children begging in the streets.

Fractional-Reserve Banking - Children Story

Pretend for a moment that the central bank is Dad and the eleven banks featured in the above example are his 11 children OK? We shall call the 11 children John, Peter, Henry, Bernadette, Theresa, Mandy, Josh, Miranda, Karl, Anna and Edward in my story.

Are you sitting comfortably?


Then I shall begin.

“Once Upon a Time...

John wants to borrow $100 from Dad, but his father says:

“OK John, on one condition. You put $20 of that money into your piggy bank (20%reserve).”

“Oh, all right Dad, I’ll do that. Can I have the $100 now?” And Dad gives John the money.

The next day, Peter who is broke, asks his brother John if he can borrow $100 from him till he gets paid on Friday.

“Sorry mate, I borrowed $100 from Dad yesterday, but he said that I have to keep $20 of it in reserve. So I can only lend you $80. How much interest will you pay me?”

“I can give you $90 dollars on Friday if you like, that’s 10 bucks interest.

“OK bro.” John takes $80 out of his pocket. “Here’s your 80 bucks and pay me back $90 on Friday.”

"Cool, thanks."

Enters Father

Father who overhears the two boys says:

“But don’t forget the rule boys, of all borrowed money 20% goes into your piggy bank, your reserves.”

“Right, we heard Dad,” says Peter, “ what’s 20% of $80? How much of this money can I spend?”. John gets out his calculator.

“20% of $80=$16. So that leaves you with ...” he taps a few more keys., “$80-$16=$64. Sixty Four.”

“Ah well, better than a bird's fart in mid-air I suppose,” Peter sighs.

That Same Evening

Peter’s younger brother Henry is sitting on the stairs sobbing.

“What’s wrong with you Henry?” asks Peter and sits down next to him.

“I lost my brand new coat, Mum’s gonna kill me.”

Peter, who is very fond of Henry, takes pity on him and says:

“OK, stop crying. I’ll lend you the money to buy exactly the same coat. Mum won’t even notice that you lost it. It’ll be our secret. What do you say?” He puts his arm around his little brother’s shoulders.

With tears still glistening on his cheeks, Henry smiles up at Peter. It’s not the first time Peter got him out of a spot of trouble.

“Two things though Henry...” says Peter.


“You have to put 20% of the money that you borrow from me into your piggy bank, for reserve.”

“Yes, that’s no problem, and what else?”

“You have to pay me interest.”

“What’s Interest?” asks Henry.

“Interest means that you have to pay me back more than what you borrow.”

Henry raises his voice.

“But that’s not fair!”

“Take it or leave it, Henry, those are the rules.”

“Fine!” Henry shouts; can I have the money now?

“Wait. How much was the coat?” Peter asks.

“$51.20. I remember, cause mum said how cheap it was for such a good coat“

“OK,” says Peter pensively, If I lend you the $64 that I have left from the money I borrowed from John, and your coat is only $51.20, then you’ll still have the 20% of $64 ($12.80) to obey the reserve rule. Then you can put that $12.80 into your piggy bank.”

“Yeah, whatever, but how much is the interest?”

“10%”, that makes it... you have to pay me back $64+$6.40=$70.40

“You might have to wait for a long time...” says Henry.

“I don’t mind Bro, now go on, go get the coat.”

On The Way to the Coat Shop

Henry meets his little sister Bernadette on the way to the coat shop.

“Hi, Sis, how r' you doin'?”

“Oh I’m so glad you’re here Henry, I’m desperate. Can you lend me $40.96 that I owe Janine at school? She’s such a bully. She said if I’m not at the school gates today at 12:30 with the money, she’ll get heavy.”

“Bloody Janine! I’ve just about had enough of her,” Henry shouts. “What time is it?”

“12:15” Bernadette whimpers.

“Right, let’s go, come with me,” he says. And together, they resolutely march off to school.

Janine the Bully

Pimple-Faced Janine and a few of her low-life friends are standing at the school gates as Bernadette and her brother arrive. Henry positions himself wide-legged, arms at the ready, in front of the group.

“So you want your money back, hey?” Henry takes out his wallet and counts out the exact sum of $40.96. Looking Janine straight in the eyes, he slowly puts his wallet back into his pocket.

Hiding behind her big brother, Bernadette notices a big pile of freshly laid, almost still warm dog pooh on the pavement between Henry and Janine. You guessed right. Henry gently deposits Janine’s money on top of the smelly object.

To Cut a Long Story Short

Janine lends 80% of the money she fishes out of the dog pooh to Bernadette’s sister Theresa. Then, as you can guess, Theresa makes a loan of 80% of the money she borrows from Janine to Mandy, and Mandy ditto to Josh, etc.: Josh to Miranda, Miranda to Karl, Karl to Anna and Anna to Edward, until the original $100 dwindles as shown in the table below.

The End.

So What Happened to Dad's initial $100?

The Reality of the Story

At the end of the story, the initial $100 that John borrowed from his Dad multiplied almost five-fold. It generated $457.09 in cash (increased the money supply), of which $357.09 was lent out again.

If you have watched the first video, you will understand that the individuals in my story represent the banks who are left with:

  • their mandatory piggy bank reserves of 91.05
  • plus accumulated interest of 45.67% !

Now that is a clever way of multiplying (and thereby devaluing) money, don’t you think? This is happening now, under the current monetary system, and it is perfectly legal and known as Fractional Reserve Lending. It is the root cause of non-recoupable debts, inflation, foreclosures, unemployment, homelessness and all the misery we face today.

Many homeless people are war veterans.
Many homeless people are war veterans.

Now Do You Understand Fractional Reserve Lending?

Now do you understand how corrupt the current economic system is, with its rules on Fractional Reserve Lending? Surely there must be a better way of running the economy and there is. It’s called “Elected Government Controlled Debt-Free Money Supply”. Abraham Lincoln created it. Benjamin Franklin used it, Thomas Jefferson was all for it, but they were stopped in their progressive tracks by the financial powers that rule the world today. What can we do?

Bookmark this page to watch the video when you have time

What Can You Do?

The first thing you can do is educate yourself sufficiently to be able to explain clearly what is going on. Then share your knowledge with your friends, family and social media.

There are many ways for an informed public to stop supporting such a destructive economic system, simply by deciding where we put our money.

  • Boycott the Big Banks and join a locally run co-operative
  • Use BitCoin or another electronic currency
  • Keep a minimum amount of money in the bank, just enough to pay the bills

If you have a surplus:

  • Do NOT speculate (gamble) on the stock market
  • Turn your money into tangible, real local assets
  • invest in local businesses you approve of, for example, a local organic farm.
  • Support local charities, green enterprises etc.

I hope to have opened your eyes a little about how banks create money out of thin air and that you are now in a better position to manage your finances. Please share, and join the discussion in the comments on this very important issue.


© 2016 JULIETTE KANDO - You may link to this article, but you may Not copy it. Copied content will be reported with a DMCA notice and will be removed.



    0 of 8192 characters used
    Post Comment
    • Kristen Howe profile image

      Kristen Howe 

      3 years ago from Northeast Ohio

      Sue, this was an interesting hub about banks and money and how to save money. Voted up!

    • electronician profile image

      Dean Walsh 

      5 years ago from Birmingham, England

      It really is shocking when you lay it out like this with all of the numbers and your story to personalize it. Thumbs up and shared.

    • Mathew James profile image

      Mathew James 

      5 years ago

      bank reserves have been about 10% and the multiplier has been closer 9x

    • Sue Adams profile imageAUTHOR

      Juliette Kando FI Chor 

      5 years ago from Andalusia

      Thank you Sanny & all of you who voted up.

      I received an interesting message on my Pinterest account relating to this article which I am re-printing here for your information:

      Holli ( • 1 hour ago

      You're a "Renter" not a home owner! You signed a, "Promise to Pay" for thirty years, and you were NEVER loaned ANY money! The banks made copies of your Promissory Note (which is straight up counterfeit) They quickly destroy the original note, but not before making around 9+ copies which are now assets for them to sell. They sell these 9+ copies and the banks, using the fractional reserve banking method, make Millions of Dollars, "OFF OF YOUR SIGNATURE" in the first few months, thus paying for your home ten times over! And making them a boat load of profit off of your signature!

      Holli ( • 1 hour ago

      Not only that, they start the foreclosure process the very same day you sign at the Realtors office! The only reason you pay a, "Mortgage" is because you signed a, "Promise to Pay Note" That original note is now gone, it was destroyed to cover their COUNTERFEITING BUTTS! And the reason they can take your home if you default on your monthly payments is because you are a, "RENTER" If you were a true, "HOME OWNER" they could not take your home. This is the biggest fraud ever perpetrated against the American People!!! - Holli Diel

    • sannyasinman profile image


      6 years ago

      Voted up again! Keep posting.

    • Sue Adams profile imageAUTHOR

      Juliette Kando FI Chor 

      7 years ago from Andalusia

      I read your Hub Frugal Romance For Women. You are touching upon many interesting points that many of us didn't know. But will politicians learn from the past and be able to change anything as long as they are controlled and a part of the criminal bank cartels?

    • ElizaDoole profile image

      Lisa McKnight 

      7 years ago from London

      Hi Sue, I hopped over from the forums to read your hub. It is most excellent I did not appreciate how the reserve policy was causing this. I've written a hub called Frugal Romance for Women about Reagan and his impact on the US national debt. It was really President Reagan that started this tomfoolery. It is time people realised that. His work can be undone, and usury or interest only began in the 16th century, yet we all now assume interest on loans as the norm. It never used to be. Worth considering?

    • Sue Adams profile imageAUTHOR

      Juliette Kando FI Chor 

      7 years ago from Andalusia

      Yes Bob, you are quite right. Henry, like all the others who have borrowed money will have to earn the money to pay the interest with real work. G.Edward Griffin writes in his must read book: "The Creature from Jekyll Island : A Second Look at the Federal Reserve", the bank cartels have created a form of modern serfdom in which the great mass of society works as indentured servants to a ruling class of financial nobility."

    • Bob Green Innes profile image

      Bob Green Innes 

      7 years ago from Hamilton, Ontario, Canada

      That's a creative perspective on the money issue. There's lots more to delve into - like where would Henry get the money to pay the interest - especially after his Mom grounded him because he didn't get the coat because the money went to Bernadette! Your pictures suggest that fractional banking is wrong - the trap being that only a gold standard can solve the problem. Not untrue, but people are not aware of the dark side. The solution is simply better control. Here are some of my thoughts on the whole thing, albeit from a Canadian perspective. Great to have another voice on the money train - hope to hear more from you.

    • Sue Adams profile imageAUTHOR

      Juliette Kando FI Chor 

      7 years ago from Andalusia

      I have been quite upset discovering the truth about the economy. I shall try to become even more self-sufficient on my piece of land in remote Spain and hope that everyone does the same before the complete collapse of the present economic system. On the upside, it's more fun living in the wild with minimum dependence on the evils of establishment.

    • profile image

      Radha Jackie 

      7 years ago

      Hi Sue, very well thanks, and yourself?

    • Sue Adams profile imageAUTHOR

      Juliette Kando FI Chor 

      7 years ago from Andalusia

      Hi Radha, Long time no hear...How are you doing?

    • profile image

      Radha Jackie 

      7 years ago

      Thank you for this excellent hub Sue


    This website uses cookies

    As a user in the EEA, your approval is needed on a few things. To provide a better website experience, uses cookies (and other similar technologies) and may collect, process, and share personal data. Please choose which areas of our service you consent to our doing so.

    For more information on managing or withdrawing consents and how we handle data, visit our Privacy Policy at:

    Show Details
    HubPages Device IDThis is used to identify particular browsers or devices when the access the service, and is used for security reasons.
    LoginThis is necessary to sign in to the HubPages Service.
    Google RecaptchaThis is used to prevent bots and spam. (Privacy Policy)
    AkismetThis is used to detect comment spam. (Privacy Policy)
    HubPages Google AnalyticsThis is used to provide data on traffic to our website, all personally identifyable data is anonymized. (Privacy Policy)
    HubPages Traffic PixelThis is used to collect data on traffic to articles and other pages on our site. Unless you are signed in to a HubPages account, all personally identifiable information is anonymized.
    Amazon Web ServicesThis is a cloud services platform that we used to host our service. (Privacy Policy)
    CloudflareThis is a cloud CDN service that we use to efficiently deliver files required for our service to operate such as javascript, cascading style sheets, images, and videos. (Privacy Policy)
    Google Hosted LibrariesJavascript software libraries such as jQuery are loaded at endpoints on the or domains, for performance and efficiency reasons. (Privacy Policy)
    Google Custom SearchThis is feature allows you to search the site. (Privacy Policy)
    Google MapsSome articles have Google Maps embedded in them. (Privacy Policy)
    Google ChartsThis is used to display charts and graphs on articles and the author center. (Privacy Policy)
    Google AdSense Host APIThis service allows you to sign up for or associate a Google AdSense account with HubPages, so that you can earn money from ads on your articles. No data is shared unless you engage with this feature. (Privacy Policy)
    Google YouTubeSome articles have YouTube videos embedded in them. (Privacy Policy)
    VimeoSome articles have Vimeo videos embedded in them. (Privacy Policy)
    PaypalThis is used for a registered author who enrolls in the HubPages Earnings program and requests to be paid via PayPal. No data is shared with Paypal unless you engage with this feature. (Privacy Policy)
    Facebook LoginYou can use this to streamline signing up for, or signing in to your Hubpages account. No data is shared with Facebook unless you engage with this feature. (Privacy Policy)
    MavenThis supports the Maven widget and search functionality. (Privacy Policy)
    Google AdSenseThis is an ad network. (Privacy Policy)
    Google DoubleClickGoogle provides ad serving technology and runs an ad network. (Privacy Policy)
    Index ExchangeThis is an ad network. (Privacy Policy)
    SovrnThis is an ad network. (Privacy Policy)
    Facebook AdsThis is an ad network. (Privacy Policy)
    Amazon Unified Ad MarketplaceThis is an ad network. (Privacy Policy)
    AppNexusThis is an ad network. (Privacy Policy)
    OpenxThis is an ad network. (Privacy Policy)
    Rubicon ProjectThis is an ad network. (Privacy Policy)
    TripleLiftThis is an ad network. (Privacy Policy)
    Say MediaWe partner with Say Media to deliver ad campaigns on our sites. (Privacy Policy)
    Remarketing PixelsWe may use remarketing pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to advertise the HubPages Service to people that have visited our sites.
    Conversion Tracking PixelsWe may use conversion tracking pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to identify when an advertisement has successfully resulted in the desired action, such as signing up for the HubPages Service or publishing an article on the HubPages Service.
    Author Google AnalyticsThis is used to provide traffic data and reports to the authors of articles on the HubPages Service. (Privacy Policy)
    ComscoreComScore is a media measurement and analytics company providing marketing data and analytics to enterprises, media and advertising agencies, and publishers. Non-consent will result in ComScore only processing obfuscated personal data. (Privacy Policy)
    Amazon Tracking PixelSome articles display amazon products as part of the Amazon Affiliate program, this pixel provides traffic statistics for those products (Privacy Policy)