Leaps of Consciousness

We live in a world of fractional reserve banking.

The bankers realised long ago that depositors (or creditors) rarely wanted all their money in the bank at the same time (as happened to Northern Rock in 2007), so the bank could lend out a high percentage of it to its customers (or debtors). They charged interest on these loans and mortgages. This is why deposits always have a lower interest rate than loans. The difference is the bank’s profit.

The fraction refers to the percentage of the deposit the bank retains in case of runs.

It’s actually a form of pyramid scheme because if the man/woman who received the loan deposited it in a bank, that bank can create a second loan using the same fraction ad infinitum. This is how the money supply grows and inflation occurs.

For example, after receiving a $100,000 deposit, the bank can lend out $90,000 of it (on a 10% reserve basis) since the holder is very unlikely to want all its money back at the same time—while confidence is high. The borrower of the $90,000 can deposit it at another bank, which can lend 90% x $90,000 = $81,000 out again—ad infinitum.

It doesn’t take long until the initial $100,000 deposit is backed by $900,000 of debt for a total money supply of $1 million.

In 2022, ‘of all the money in the world today, 97% of it is debt.’

‘All paper money eventually returns to its intrinsic value - zero.’ Voltaire