Banks, Money, & The Dollar

HOW BIG IS THE RESERVE?

 If all the economists in the world were laid end to end they wouldn’t reach a conclusion.

 -- Old proverb

Only confusion can result from listening to economists, especially those who shill work for central banks like the Federal Reserve.  You’ll just break your brain for nothing trying to follow M1, M2, M3, MZM etc., etc.  I wanted a simple handle for the fragility of our fractional reserve banking system.

You know, fractional reserve – they only keep a fraction in reserve against what they owe you.  You deposit money in the bank, and they loan it out, keeping only a fraction in reserve against withdrawals.

But just try to find out what the reserve percentage is.  The reserve requirement on deposits at “country banks” with assets under ten million is zero, while other classes of deposits on sliding scales require reserves at varying levels.  It’s the old “shooting skeet off the end of a bass boat in a storm” trick, and you never can figure out where you stand.

Nothing deterred, I figured out a few years ago that if I just added up all deposits at banks and then calculated the total required reserves, I would be on the right road.  Total required reserves divided by total bank deposits would tell me exactly what the percentage reserves were for the whole banking system. 

Also, that percentage reserve requirement would tell me something else:  the implied multiplier.  It’s complicated to explain, but when you know what the reserve requirement is, you can also tell exactly how much money the banking system can create out of thin air.  The reciprocal of the reserve requirement is the implied multiplier.  For instance, if the reserve ratio were 10% (10/100), the implied multiplier would be the reciprocal, 100/10 or ten times.  So under a 10% reserve requirement, the banks could loan out (pyramid) $1,000.00 for every hundred dollars deposited. 

Now the public generally believes banks hold some huge reserve against their deposits.  Some people even still believe that whenever you deposit $50 in the bank, they put it in an envelope with your name on it and place it carefully on a shelf in the vault.  Some people still believe in the Tooth Fairy, too. 

But the banks hold almost no reserve whatever against your deposits, and that’s what the law allows.  (It’s the best law money can buy.)  How big is the reserve?  As of June 30, 2003 this year, it stood at 0.74% -- that is zero point seven five percent, less than one percent.  The implied multiplier is 132.79, so for every $100 you deposit in the banking system, banks can create $13,526.48.

Does the phrase “engine of inflation” begin to ricochet around inside your head?  I know this may seem like very elementary information, schoolbook stuff, and it is.  Problem is, most people don’t know it.  When I say the financial system is “inherently vulnerable,” this is exactly what I mean.  If everybody lined up in front of the bank to withdraw his money today, either the first 75 people out of 10,000 in line would get all their money on deposit, or all the folks lined up would get seventy-four cents for every $100 they had on deposit.

That is your rock-solid fractional reserve banking and financial system.  Since the banks don’t have any reserve, you had better stash one away.

It gets worse.  I first began calculating “How Big Is The Reserve” in August, 1998, when it was 1.17%.  Look at the chart, “The REAL Reserve Requirement.”  You can see that since August, 1998, the real reserve requirement has fallen from 1.17% to 0.75%.  In other words, the ‘margin of safety” (Ha. Ha.) in the banking system has fallen by 42%.

(I ought to give the devil all his due. Since 1998 every time that I have examined these numbers, the reserve requirement has fallen – except this last time.  When I last calculated the requirement in December 2002, it was 0.74%, so in the last six months the actual reserve has climbed by one one-hundredth of one percent.) 

The lesson?  The fractional reserve banking system by its nature tends to ever narrower margins of safety until finally it collapses.  If you don’t believe that, then read again the words of Federal Reserve governor Ben Bernanke.  “The U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost.” 

This is the reality that you live under, and you had best defend yourself as you are able.

-- F. Sanders

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