How the Federal Reserve Creates Money out of Thin Air Explained to 12 year Olds
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.”
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 –www.WorldNetfaily.com
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.
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.”
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.
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.
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.