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March 24, 2023 - Ron Paul Liberty Report
28:13
Fractional Reserve Banking Is Legalized Counterfeit

With bank failures occurring once again, the topic of "fractional reserve banking" is getting some much needed attention. How do banks work in the current "system"? Is it how banks should work? Banking is a legitimate and valuable service. However, when banks work in collusion with government, it produces nothing but trouble. Business and government must be kept separate. Banking is certainly not an exception.

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Legalized Counterfeit? 00:04:17
Hello everybody and thank you for tuning in to the Liberty Report.
With us today is Chris Rossini, our co-host.
Chris, welcome to the program.
It's great to be with you, Dr. Paul.
Good.
We'll be talking about money today, real money, and bad money and counterfeit money.
And a lot of people have sorted this out already, but there are a few people who still wonder about it.
And the principle we want to deal with today is fractional reserve banking.
And the title of our program today is talking about legalized counterfeit.
And most of the people that come to our station and our report here understand that there's a lot of fake money going around, the whole thing is, and they understand what fiat money is.
And when that was delivered to us on a platter way back in 1971, and now we're seeing the consequence of it.
So we're in the midst of financial and banking crises.
We're in the midst of inflation, which is really the excessive creation of new money by government and the Federal Reserve.
But the people see it as the increase in prices.
And we're seeing a lot of that.
A lot of people are concerned.
The irony of all this is over the last 10 years, the Fed policy was they were working hard to get price inflation stimulated.
They were worried about that.
No price inflation means the economy must be weak, and we have to do it.
But they also knew that if you inflate the currency and debase the currency with some counterfeit, it also reduces real debt, but it reduces real wages as well.
So it's a big issue, and they've been operating on that, especially since 1971.
But inflation has been around the inflating of the money supply and not having the money in the bank when we're told, oh, the bank's holding my money, we find out.
But it also has a lot of impact on, you know, the price of gold, the real unit of account that's been around for four or five thousand years.
You know, people have used gold.
It's been a natural money.
And it does respond to what governments do to the money.
And we had a period of time relatively well from the time of our Constitution when only gold and silver could be legal tender.
But that was whittled away with the Federal Reserve.
And now we're in the midst of this that since 1971, we admitted we were bankrupt, that the last vestige of the gold standard was to maintain a little credibility in the reserve currency of the world.
We would pass out our gold.
We still had a lot of gold because we sort of accumulated that gold after World War II.
So we could print at leisure.
And if foreigners had a lot of dollars and they get a little worried about it, they could always turn in $35 Federal Reserve notes and get an ounce of gold.
And most free market people knew over those years that would not last and it didn't last.
And now we're seeing these consequences.
But many of us look to the older measurement of real value and real currency, and that is in gold.
So gold becomes very important.
It is a commodity.
It's used as jewelry and so many other things.
But it's been used as a monetary unit and a unit of account, you know, for literally centuries, if not many centuries, to watch what's happening.
So when things get stimulated, people say, you know, I maybe should own some gold.
And some people know it early and they have it early and some people work on it.
Right now we're going through this period.
And the interesting that's happening this time, there's a lot of individuals caring about gold, which was not the case in 1934 when FDR took in the gold from the American people.
But right now there's a lot of people who know about it and they understand it.
Central banks are buying gold.
A Little Bit Can Go a Long Way 00:12:07
Our government's official position is, I got the word.
I asked Bernanke.
He says, gold is not money.
Quit worrying about it.
But if you have a little bit of concern, you want to get a little bit more information, my suggestion is to take a look at the text number, Ron Paul Tex 989898, to get some information from Birch Gold because they're in the business, they're involved in investments and understanding about the issue is.
So they're inviting you to just text that number and they will mail you some information and they won't charge you for it.
So you can't, it's not overly risky.
You know, if they're not going to charge for you, you've got to take a look at it, then you get to decide about it.
So that's text Ron 989898 and take a look at their information.
In the meantime, Chris and I are going to talk about where we stand on this whole issue because we want to concentrate on one of the principles of monetary inflation.
We know the Fed can do it, they can print money out of thin air, but there's something else that we don't talk about a lot, and it's probably every bit as significant, if not more, because it's so massive.
And that is we can take dollars that we get from the Fed and put it in a bank and say, oh, well, that's good.
The banks are safe.
The government's watch us.
They regulate it.
So we'll be all right.
And if you get a little nervous, just put your money in the bank and it'll be all right.
Well, more and more people are starting to realize that it doesn't work quite that way.
Because the fractional reserve banking essentially is when an individual uses our banks, which they do, every one of us have to have some use of it.
But if you put your money in a savings account, and let's say you put $100 in the bank and you know, oh, good, that'll be in there.
Will you earn interest?
Well, it used to be that when I was raising our kids and when I was small, putting a couple dollars in the bank was worthwhile.
We'd earn a little bit of interest and we understood what money was all about.
But now you put a little money in the bank, you don't earn any interest on it.
And the federal government then, the Federal Reserve, and the banks, what they're permitted to do, the law permits them to do it.
They violate the Constitution.
They violate morality.
They violate Jeffersonianism and say, oh, we have the banks, they trust us, and we're such good people.
And we run banks, so we have to be trustworthy.
So they sent me $100, and they say, well, I'll bet he's not going to use that $100 for a couple weeks or a couple months.
So I'm going to loan it out again.
So they loan out the $100, hoping that the person whose money it really is doesn't come in the next day and demand his $100.
Under these circumstances, there's so much creation of money that a little bit of that may get away with it.
But the whole principle is fractional reserve banking metastasizes.
It's like cancer.
It goes out there because the next guy that gets, if the bank loans out my money to somebody else and they put it in the bank, they can do the same thing.
Before you know it, there's a multiplier on that.
And a lot of times over the years, nobody knows the exact number depending on circumstances.
Basically, people say if you put $100 in the bank and the bank is supposed to hold it for you and they loan it out once, twice, two, three times, it'll turn into $700.
And where did the money come from?
Helicopters.
But these invisible helicopters.
It's just magic.
It's fraud.
And the fraudulent system of money reminds me of the great law of Bastia.
And Bastia, in the law, says that individuals can't steal, they can't counterfeit money, and they can't do things that are illegal or unconstitutional.
But what happens is governments can do it.
Some people say, oh, yeah, I can't do it, but I want the government.
I can't steal from my neighbor, but my congressman can.
And so they use the congressman to do the things that are illegal.
Money works like that.
They get the government to do it.
And that's why the philosophy of our current system of money is corrupt and it's wrong.
And there's a lot of pain and suffer to come.
And we're witnessing the beginning of that pain and suffering.
And it's going to be a big time because the bubble out there is still growing and it's very, very dangerous because all bubbles eventually burst.
Chris.
Very good, Dr. Paul.
Yes, our system is very corrupt.
It doesn't have to be, but when you mix banking with government, which is what we have, mix anything with government.
That's why they say it destroys everything.
You know, you've got to keep business separate, religion separate, money separate.
Once you intermingle with government, you have problems.
And that's what we had, you know, in 1913 with the Federal Reserve Act.
Banking and government attached to each other, and we have this fractional reserve system.
And I'd like to use an analogy when I try to explain this.
One that I like is: let's say you had a lamp for a chair, you know, from a great-grandmother that you want to put into storage.
You know, those public storage places you go, you pay a fee.
And you take your lamp there, and the guy says, Okay, I owe you one lamp.
You may think there's a owe me.
This is not a loan.
I'm not loaning you this lamp.
This is my great-great-grandmother's lamp.
I want to store it here.
It's mine.
It better not move from here.
And I'm going to pay you a storage fee.
Well, now let's think about banking and how people think about banking.
They think that when they get their paycheck, that they're going to store their money in the bank.
Well, the bank says, Okay, Mr. You know, Mr. Rossini, I will take this money, and now I owe you X amount of money.
And I'm thinking to myself, No, you don't owe me.
I am not loaning you.
I am storing this here, and if I want to come get it, I'm going to come get it.
Well, that's not how it works.
They loan it out, and they anticipate that I'm not going to come back and take it all.
And if they do, they have all these little tricks that they have enough money on hand at times to where if not too many people come in to want their money, everything will be able to clear.
But as Dr. Paul said, this is a fraudulent system.
We're not making loans, even though that's what's essentially happening.
They owe us the money, and that's just not right.
Very good.
You know, one of the arguments that they've used over the many, many years is that, yes, theoretically, that's good.
And when the economy is small, small population, you can use gold and exchange gold, and there's no problem.
But the truth is, the argument that there's not enough gold because the economy is bigger is not a legitimate argument.
Because if the market is free and the money is sound, there's an adjustment that happens automatically without counterfeit.
And the first thing is, if an economy is growing, if a population is growing, there's lots of things that happen.
If there's a greater demand for money because the money, the purchasing power is going up, you know, it might stimulate mining of gold.
And it has.
They have records to show that when the value of gold, purchasing power goes up, it's worthwhile mining gold.
And they, you know, in a way, increase the money supply at a market rate rather than at an artificial rate by the politicians and the bankers get to do this.
And also, that if people think the market is static, that if you have to buy a house, you have to carry a bag of gold in there to buy a house.
But the gold, the unit of account, to me, in a way, this is not perfect, but it helps me understand that it's sort of like it's the unit of account.
It's how you measure things.
It's how you measure value.
So if two people are going to exchange properties, they might say, well, I think my property is worth 100 ounces of gold.
And the other one says, oh, no, 98.
But they can measure and think about it, and it's real.
But they don't have to carry bags back and forth.
It's sort of like how many rulers and how many yardsticks you have to have to build a house.
No, one real good one you have to do to know what the unit is and what you're counting about.
And the one thing happens, sometimes artificially and sometimes in a natural way, if there's some type of excitement or need for more cash, you know, a dollar, if you spend a dollar in the morning and the person who got that dollar, he spends it in the afternoon, the money supply was doubled.
But there was no cheating, there was no inflation.
It was the same dollar, but it was just used as a measurement and it moves along.
So velocity, the propensity to hold or spend is very, very important.
And it's used for, you know, the adjustments.
And the other thing that happens on a gold standard, you say, well, there's not enough gold, the prices are going up.
How are we going to pay off?
But traditionally, if you look at the latter part of the 19th century, in the early part of the 20th century, when there was about a 30 or 40 years of a pretty sound gold standard, guess what?
Prices went down.
Today that'd be hysterical.
Deflation is coming.
Deflation is coming.
But if you had money that was real and all of a sudden, you know, a loaf of bread went from a dollar down to 50 cents, they say, well, hey, this is a pretty good deal.
So prices do adjust, adjust according to the needs.
And yet, no, they use this as an excuse for the people who want to manipulate and make money because there's a lot of profit to be made in the banking business, but a lot of profits to be made in the military-industrial complex and all the people, the welfare state, to get hold of that money first because anybody's paying attention.
Where's this money coming from?
Maybe this is counterfeit.
And for a while, it works pretty well.
So it's easy to deceive the people.
To me, I think the best analogy for me to understand this.
It's like addiction.
It's like a drug addiction.
Yeah, I'm getting a little bit nervous here.
I think I need some drugs.
So you give the person the drugs.
They say, well, I feel a lot better, and I think I'll just be more cautious.
And they get by until the drug addiction destroys the individual.
So, and people can die from overdoses.
Economies can die from the overdose of the inflation, the manipulation, the size of government, too many wars and too much welfareism, and too many special interests.
That's what eventually kills the robust economy that everybody was bragging about.
But right now, they're facing, they're getting a little bit more nervous than they have been over the years.
But it was all preventable, and that is what is so sad.
It's just like all the wars, almost all, are preventable, and we initiate so much trouble that we're involved.
Same way with monetary policy.
We initiate these problems, create the price inflation, create the bubbles, and then create the market demand that we correct this, and that is liquidation of debt and liquidation of malinvestment.
So, in a way, the correction is fighting those people who want to continue to do it.
And right now, you know, it's pretty amazing.
You know, as bad as things are, you know, well, we have another day or two.
Banks And Bubbles Boom 00:02:46
We might be able to get time to do something else with our money.
So, it's unsound and it's coming to an end.
And it's related to an obsession with big government, which we shouldn't have anyway.
Chris?
Yes, absolutely, Dr. Paul.
And you know, we face two camps that are difficult in this situation.
I mean, it should be obvious that this is a fraudulent system.
But you'll have some people say, oh, no, this is how banking is supposed to be.
This is what makes everybody rich.
And then you'll have other people on the other extreme will say, well, get rid of all banks altogether.
They're all bad.
And neither one are correct.
Banking is a legitimate and very important service, and they could legitimately make money.
One, by charging storage fees.
If I take my paycheck and put it in a bank, they can charge me a fee for storing the money.
And I could pay my bills.
I could do what I want.
But that money doesn't move.
That's my money that's being stored, and they're earning money for providing the service of storing it.
So I don't have to put it under my mattress.
They could also legitimately lend.
If I put aside some of my paycheck that I cannot touch, that the bank can then lend.
The bank will give me an interest payment for it.
And then they will charge interest to the lender.
And the difference the bank is going to make is profit.
And no counterfeiting occurs here.
No booms and bust cycles.
This is legitimate banking.
This is how banking should be.
This is not how banking is today.
We have the exact opposite where everybody, I could go put my money in a bank, but I could go get it, but that same money has been went out to somebody else.
Now, that makes no logical sense.
And that's what creates all these booms and busts that creates all these bank panics.
People go rush for their money and find out it's not there.
You know, banking is legitimate, but it's got to separate itself from the state and be legitimate business once again.
And the way this would be approached in a free market, they would make use of contracts.
That's an important part of free markets is a contract between two individuals for a voluntary transaction.
But to clarify, what are you going to do?
You know, you should have a bank you trust.
Hopefully you don't have to get 10 attorneys to prove that.
But there wouldn't be anything wrong with a voluntary contract for a bank putting it on the line.
This is what I'm going to do.
I'm going to take your money for 90 days.
I'm going to do my best.
And this is where I will invest it.
And after 90 days, you can have it back and we're going to split the profits, something like that.
And the contract would be very beneficial.
But now the contract now is not real.
Contract Benefits 00:08:48
If there's a contract, it's run by the government.
The government controls it.
And they can also break the contract anytime they want because they do have certain rules.
It's amazing.
They have a system that they know is not going to work.
And when the Fed was first created, it was mainly to have a sound dollar and work for full employment.
They had things like that.
But it didn't work that way.
Nobody should have expected it to work.
But what happens is a lot of problems exist, and banks do dumb things and they're unregulated.
My goodness, two people can't regulate it by a contract.
But it gets together and they know there's going to be conflict and problems.
So you have to have regulators.
So that's why, guess who the biggest regulator is in the country?
And that's the Federal Reserve.
And guess what?
They're not really independent.
You know, one of the things I worked on for years was the Audit the Fed bill and find out what they're doing.
And they say, well, we keep good books.
We spent money here and here.
And they'll say, well, there is the audit.
But what they won't reveal are the discussions and the negotiations and what we do with international banks and what we do in these crises.
Because I think they are facilitators and I think they are quite capable.
But because we can't see all the agreements, we don't know exactly who are their partners.
But they're capable of bailing out banks around the world without the taxpayers knowing, without appropriations.
And that is one of the things that I think is, you know, just so big.
And that is also the reason they get hysterical because we did have some success on audit the Fed.
One time we had all the Republicans agree with it.
A bunch of the Democrats agree.
Well, we ought to at least have an understanding of what they're doing.
And they would say, yeah, let's have an audit.
But that makes the Fed very, very, very, very nervous.
And what they said, you know, the argument that won a lot of people over is, you should have transparency.
But the Fed's answer was always the same, no matter which chairman was doing it.
Their answer was, you got to have independence.
You can't have Snoopy noses around there and Congress trying to find out who made the deals and why have we sent money to Ukraine in bushels, even with voting for it, and then sometimes we don't vote for it.
So they want independence.
You can't have Congress meddling with these complicated details.
So the word independence, you have to have an independence because you have to trust those Federal Reserve Board chairmen.
Well, right now, the trust in the Federal Reserve Board is not as great as it once was.
And when they say transparent, when they use the word independency and transparency, what I always said to myself and to them too, I said, you know, when you talk about, when you talk about independent, you don't want anybody interfering with their decision making.
I said, what you're talking about is secrecy.
That was the code word for secrecy.
They never said, we have to be secret.
We don't want people to know what we're doing.
They always say, we have to be independent.
We don't want you to know what we're doing.
But that's going on and on.
But someday, right now, eventually the truth comes out and the truth is coming out about the Fed.
People are becoming more knowledgeable about it.
And it is so significant and universal because it affects everything because the monetary unit is what we measure all value in internationally still.
So manipulating the measurement rod is sort of like trying to build skyscrapers with a measuring rod that changes every hour or two and the building didn't come out so well.
So right now, our building, our economy, hasn't turned out so well.
Chris.
Very good, Dr. Paul.
I will finish up.
For those who have followed Dr. Paul's career and the Ron Paul Liberty report up to even this present moment, you know, there are two, first off, there are hundreds, thousands of issues out there.
Everybody has their own pet issue.
But when you think of Ron Paul, you think of sound money and the Fed, and you think of a non-interventionist foreign policy instead of empire.
Because those are two of the biggest and most important issues that affect all of our lives.
And they're both easy to ignore.
You know, the war and the empire is very easy to ignore.
Just don't pay attention.
Until it becomes an issue, like if our country gets involved with a war with Russia or China, then you're not going to be able to ignore it anymore.
It'll be right on our doorstep.
And sound money is also another thing to, you know, not pay attention.
Who cares?
You know, I have a paycheck, it's in the bank, and you go on with your life until you find out that the banks are in trouble.
And then people are, what's this?
What's fractional reserve banking?
What is this?
And that's the whole point of all this, to understand these two very important issues and then be able to explain them to people because people are going to want to know.
Sound money is something that affects all of us.
I have a lot of leftist friends who are nothing like me politically.
But I could explain to them, you know, about the banking system.
And it doesn't matter if they're leftist, right, what their political persuasion is.
They care about their money and don't want to hear this kind of stuff.
So it matters for all of us.
And you have to be able to understand it and then be able to explain it.
Hopefully, you know, we are helpful in helping you to do that.
Very, very good, Chris.
You know, just recently there was an article out that made a point, which I found interesting, because the author was arguing the case, yeah, we're talking about fractional reserve banking.
We shouldn't have that because they manipulate everything with how much reserves do they have to hold.
So if they're manipulating the economy, they might argue for easier money and lower interest rates and lower reserves that you have to hold.
It's just a tool for monkey business.
But the reserves are, you know, there.
But this writer was saying, he says, we need to stop calling it a fractional reserve because we just noticed this, you know, in the last couple of weeks with the banking crisis, there are no reserves.
I mean, the banks are getting wiped out.
So we're really talking about zero reserves.
And we depend.
This past week, there was a tremendous use of the discount window.
That means when a bank gets into trouble from the very beginning, they had the discount window, which means the bank can go and get a rescue loan and prop them up.
So in many ways, since they're going to do what they need to do, even though we have Yellen sort of yelling out a lot of stuff that's confusing people, they still need to know exactly what the discount rate is.
And they can always go there and they've been able to, but that's just inflation.
That's real inflation because they created it out of thin air.
But it's been used for years of manipulating the reserves.
At the same time, they manipulate interest rates and they manipulate money supply.
And it doesn't work.
And it's failing, and that's why we'd like to get more and more people interested and exciting.
And I want to leave, I want to finish just by making one suggestion.
Because over the years, I've tried to read as much as I could, and I've read as much of Mises as I could.
And Mises is great and has a lot of answers.
But the person that was easiest for me to read and understand on this money issue was Murray Rothbard.
So he talks about 100% gold reserve standard, and he can argue the case.
He was actually an assistant and a researcher for the Gold Commission when I was on the Gold Commission.
So that would be worthwhile.
And if you don't know where to find Murray Rothbard's material, go to the Mises Institute because they'll have plenty of material on Murray Rothbard, who worked a long time with Louis Rockwell with the Mises Institute.
I want to thank everybody for tuning in today to the Liberty Report.
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