Biblical Law and Government

Lesson Nine - Page 11

(44) On page 4 of Modern Money Mechanics we read, “bankers discovered that they could make loans by giv ing borrowers their promise to pay.” (A check is a promise to pay) “In this way, banks began to create money.” Where did the banker “discover” how to create money?

From the G ___ ___ ___ ___ ___ ___ ___ ___ (See pink page “b”)

Here is how the sleight of hand, rather sleight of pen, works. To illustrate we start with an oversim plified bank balance sheet as follows:

Savings Accounts

$25,000.

Cash on hand $25,000.

Liabilities

$25,000.

Assets

$25,000.

(Owed to Customers)

(vault cash customer savings)

The “demand deposits” are the savings accounts. These savings accounts are a liability of the bank. At the same time, because the bank has the use of that same money, the savings account money is also an asset. On the bank’s books, assets equal liabilities. Now watch what happens when the above bank makes a home loan for $25,000.

Savings Accounts

$25,000.

Cash on hand

$25,000. $25,000. ________ $50,000.

Loan to customer by check $25,000.

Mortgage on home

________ $50,000.

Liabilities

Assets

(Owed to customers)

(vault cash + mortgage)

Look what happened! After loaning the $25,000 the bank still has the $25,000! And the bank’s assets have doubled?

(45) Where did the $25,000 come from that the bank loaned to the customer? (See Modern Money Mechanics, page 3 - pink page “b”) ( ) a. The bank simply increased the borrower’s checking account by the amount of the loan. ( ) b. The bank went to another bank and borrowed the money.

(46) Modern Money Mechanics mentions that “this unique attribute was discovered several centuries ago.” Who made this discovery several centuries ago?

The G___ ___ ___ ___ ___ ___ ___ ___ (Pink page “b”)

This system is called “fractional reserve banking.” According to the bankers rules, a commercial bank may loan out several times its reserves. In the above example, the reserves are the $25,000 cash deposited by customers. Quoting from page 4 of Modern Money Mechanics as published by the Federal Reserve Bank of Chicago, pink page “c,” “If reserves (customer savings) of 20% were required, demand deposits (check book loans) could expand only until they were five times as large as reserves. Ten million dollars of reserves (cus tomer savings) would support $50 million of deposits (loans).”

In a Credit Union, reserves are a portion of the customer’s deposits. In a bank reserves are all the customer’s deposits. Banks never lend the reserves.

Now watch what happens when the bank makes another loan. A loan that would bring its total loans to five times its reserves. This time a loan of $100,000 to a business. (The bank loaned out five times more than it has.)

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Ten Commandments Bible Law Course Sovereignty Education and Defense Ministry (SEDM), http://sedm.org