0:08 over the years the fractional Reserve
0:10 System and its Integrated Network of
0:12 banks backed by a central bank has
0:15 become the dominant money system of the
0:17 world at the same time the fraction of
0:20 gold backing the debt money has steadily
0:22 shrunk to
0:25 nothing the basic nature of money has
0:28 changed
0:30 in the past a paper dollar was actually
0:32 a receipt that could be redeemed for a
0:34 fixed weight of gold or silver in the
0:37 present a paper or digital dollar can
0:40 only be redeemed for another paper or
0:42 digital
0:46 Dollar in the past privately created
0:49 Bank credit existed only in the form of
0:52 Private Bank notes which people had the
0:55 choice to refuse just as we have the
0:57 choice to refuse someone's private check
0:59 today
1:01 in the present privately created Bank
1:03 credit is legally convertible to
1:05 government issued fiat currency the
1:08 dollars loonies and pounds we habitually
1:10 think of as money fiat currency is money
1:14 created by government Fiat or decree and
1:17 legal tender laws declare that citizens
1:19 must accept this Fiat money as payment
1:21 for debt or else the courts will not
1:24 enforce the
1:26 obligation so now the question is if
1:30 governments and Banks can both just
1:32 create money then how much money
1:36 exists in the past the total amount of
1:39 money in existence was limited to the
1:42 actual physical quantities of whatever
1:44 commodity was in use as money for
1:47 example in order for new gold or silver
1:49 money to be created more gold or silver
1:52 had to be found and dug out of the
1:56 ground in the present money is literally
1:59 created
2:00 as debt new money is created whenever
2:03 anyone takes a loan from the bank as a
2:06 result the total amount of money that
2:08 can be created has only one real limit
2:11 the total level of
2:20 debt governments place an additional
2:23 statutory limit on the creation of new
2:25 money by enforcing rules known as
2:28 fractional Reserve requirement
2:30 requirements essentially arbitrary
2:33 fractional reserve requirements vary
2:35 from country to Country and from time to
2:38 time in the past it was common to
2:40 require Banks to have at least $1 worth
2:43 of real gold in the vault to back $10
2:46 worth of debt money created today
2:49 Reserve requirement ratios no longer
2:52 apply to the ratio of new money to gold
2:54 on deposit but merely to the ratio of
2:57 new debt money to existing debt money on
2:59 deposit in the
3:03 bank today A bank's reserves consist of
3:07 two things the amount of government
3:10 issued cash or equivalent that the bank
3:12 has deposited with a Central Bank Plus
3:15 the amount of already existing debt
3:17 money the bank has on
3:20 deposit to illustrate this in a simple
3:23 way let's imagine that a new bank has
3:26 just started up and has no depositors
3:28 yet however the bank's investors have
3:30 made a reserve deposit of
3:34 $1,111 12 of existing cash money at the
3:38 Central Bank the required Reserve ratio
3:41 is 9
3:43 to1 step one the door is open and the
3:46 new bank welcomes its first Loan
3:48 customer he needs $10,000 to buy a car
3:53 at the 9 to1 Reserve ratio the new
3:55 bank's Reserve at the Central Bank also
3:57 known as high-powered money allows it to
4:00 legally conjure into existence nine
4:02 times that amount or $10,000 on the
4:05 basis of the borrower's Pledge of debt
4:08 this $10,000 is not taken from anywhere
4:12 it's brand new money simply typed into
4:14 the borrower's account as Bank credit
4:17 the borrower then writes a check on that
4:19 bank credit to buy the used
4:23 car step two the seller then deposits
4:27 this newly created $10,000 at her bank
4:31 unlike the high-powered government money
4:33 deposited at the central bank this newly
4:35 created credit money cannot be
4:37 multiplied by The Reserve ratio instead
4:40 it's divided by The Reserve ratio at a
4:43 ratio of 9 to1 a new loan of $9,000 can
4:46 be created on the basis of the $10,000
4:52 deposit step three if that $99,000 is
4:56 then deposited by a third party at the
4:58 same bank that created it or at a
5:00 different one it becomes the legal basis
5:02 for a third issue of bank credit this
5:05 time for the amount of
5:07 $8,100 like one of those Russian dolls
5:10 where each layer contains a slightly
5:12 smaller doll inside each new deposit
5:15 contains the potential for a slightly
5:17 smaller Loan in an infinitely decreasing
5:24 series now if the loan money created is
5:26 not deposited at the bank the process
5:29 stops that's the unpredictable part of
5:31 the money creation
5:34 [Music]
5:36 mechanism but more likely at every step
5:39 the new money will be deposited at a
5:41 bank and the reserve ratio process can
5:43 repeat itself over and over until almost
5:46 $100,000 of brand new money has been
5:49 created within the banking
5:52 system all of this new money has been
5:55 created entirely from debt and the whole
5:57 process has been legally authorized Ed
6:00 by the initial Reserve deposit of just
6:05 $1,112 which is still sitting untouched
6:07 at the Central Bank what's more under
6:10 this ingenious system the books of each
6:13 Bank in the chain must show that the
6:15 bank has 10% more on deposit than it has
6:18 out on loan this gives Banks a very real
6:21 incentive to seek deposits in order to
6:23 be able to make loans supporting the
6:26 general but misleading impression that
6:28 loans come out of
6:31 deposits now unless all the successive
6:34 loans are deposited at the same bank it
6:37 cannot be said that any one bank got to
6:39 multiply its initial high-powered money
6:41 Reserve almost 90 times by issuing Bank
6:44 credit out of nothing however the
6:47 banking system is a closed loop Bank
6:50 credit created at One Bank becomes a
6:52 deposit in another and vice
6:55 versa in a theoretical world of
6:57 perfectly equal exchanges the the
6:59 ultimate effect would be exactly the
7:01 same as if the whole process took place
7:03 within one bank that is the bank's
7:06 initial central bank reserve of a little
7:09 over
7:09 $1,100 allows it to ultimately collect
7:12 interest on up to
7:14 $100,000 the bank never
7:22 had if that sounds ridiculous try this
7:26 in recent decades as a result of steady
7:28 lobbying by the bank Banks the
7:30 requirements to make a reserve deposit
7:32 at the nation's Central Bank have all
7:34 but disappeared in some countries and
7:36 actual Reserve ratios can be much higher
7:38 than 9:1 for some types of accounts 20
7:42 to1 and 30 to1 ratios are
7:46 common and even more recently by using
7:49 loan fees to raise the required Reserve
7:51 from the borrower banks have now found a
7:53 way to circumvent reserve requirement
7:56 limitations entirely so while the the
7:59 rules are complex the common sense
8:01 reality is actually quite simple Banks
8:04 can create as much money as we can
8:07 borrow
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