37 votes

Fractional Reserve Banking is Fraudulent - Ron Paul on CNBC

Forward to 7:47:


A basic truth is that we may only loan what we have. If we have a dollar, we may loan a dollar. Yet, under the fraud of fractional reserve banking, banks loan ten times the money they actually have.

Fractional reserve banking is a Ponzi scheme whereby banks create money out of thin air through fraudulent book keeping, loaning non-existent money out at interest. It is no different than counterfeiting. In collusion, factional reserve banks counterfeit up to 10 times the amount of money that they actually have deposited, and charge interest on it all. Since money represents labor, fractional reserve bankers are effectively robbing the value of everyone's labor through this fraudulent scam.

9 minute video explaining the fraud of fractional reserve banking combined with fiat currency using the Federal Reserve's own documents:


47 minute video explaining the history of fractional reserve banking:


"Bank runs instruct the public in the essential fraudulence of fractional reserve banking, in its essence as a giant Ponzi scheme in which a few people can redeem their deposits only because most depositors do not follow suit."


Trending on the Web

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.

I don't agree that

if you put $100 deposit in the bank on a three month term that the bank should be able lend it out for three months. This thinking is a result of banking laws that are skewed in favour of the banks giving them ownership of retail savings deposits. These deposits should be legally the property of the depositor.

I believe a distinction should be made between investment banking and custodial banking. If you have sound money, i.e. zero price inflation, then custodial banking will protect short term savings with full reserves. There will be no interest payable on these deposits.

If a customer wants to generate interest on their savings then they should invest in interest bearing securities that may be issued by the same bank but will be treated differently and segregated from custodial deposits.

The risk is then openly declared to the investor and the nature of the loan being made will be known by them e.g. mortgages. Terms should always be matched and one year investments would be put at risk in one year loans. This does not happen at present and contributes, along with fractional reserve banking to the inherent instability of the financial markets.

The FDIC should be shut down since it creates moral hazard and gives the bank an incentive to play fast and loose with the deposits of its customers. In any event with secure custodial banking and sound money it will be redundant.

With free banking there will be many other options available including peer to peer lending and equity purchase through a secure web site in an open market. The present security laws are unwieldy and should be largely repealed. They are simply a gravy train for the legal profession and cause capital constipation with vast amounts of time and money being lost in bringing products to market. This only serves the purposes of existing companies in the marketplace by erecting barriers to entry and reducing competition.

"Jesus answered them: 'Truly, truly, I say to you, everyone who commits sin is a slave to sin. The slave does not remain in the house forever; the son remains forever. So if the Son sets you free, you will be free indeed.'" (John 8:34-36)

Ron Paul is actual talking about Cash Deposits (CDs)

When Ron Paul talks about putting $100 in the bank for three months and allowing the bank to loan it out for three months this is the equivalent of a CD. Once you commit to leaving the money deposited for a specified time, then the bank can contract with you to loan such deposits for the specified time.

In other words, if you agree to leave the money in the bank for three months, then the bank may loan it or invest it for three months.

I have no problem

with this so long as the depositor/investor is aware of the risk. Most of them I believe are not aware, nor do they care, that the bank will often use any funds on deposit for any purpose, including 30 year mortgages, since they "own" the account. At the same time from the depositor/investor's standpoint the deposit is insured up to a certain level by the FDIC so the depositor/investor and the bank are off the hook and the taxpayer is on it without their permission. This makes the depositor/investor an often unwitting accomplice in the fraud against the taxpayer. This is why I suggest that the two purposes be segregated and customers be made aware of the difference.

What most people do not realise is that the law has been written by and for the banks to give them maximum leverage and minimum exposure. This has led to the excesses that have occurred and why the taxpayers are on the hook for trillions of dollars in Fannie and Freddie alone who have bought up a lot of these dud securities. These laws have been the practice in general for at least one hundred years so it is not as though it has just happened overnight.

The most important issue is moral hazard and that must be the province of the investor who should shoulder all the risk of an investment provided only that no fraud occurs. If there is fraud or misrepresentation then the institution offering the security must be held accountable to recompense the injured party. This is certainly the case with many of the loans made during the past ten years to householders who used their homes as piggy banks and who were sold and resold mortgages by unscrupulous agents of the big banks. All those involved in those frauds must be held accountable and THEY, not the government i.e. the taxpayer, must recompense the victims

There are many fatal flaws within the financial system and they all trace back to the central banking model and fractional reserve banking. These must be dealt with and not by more regulation. Once the financial system is on a sound footing the need for regulation will be minimal. As Ron Paul says, in the free market the market is the regulator.

"Jesus answered them: 'Truly, truly, I say to you, everyone who commits sin is a slave to sin. The slave does not remain in the house forever; the son remains forever. So if the Son sets you free, you will be free indeed.'" (John 8:34-36)


if i give the bank $100 - they immediately have $190.

- Fractional Reserve Banking

The slogan press on has solved and always will solve the problems of the human race. No person was ever honored for what he received. Honor has been the reward for what he gave.

- Calvin Coolidge

Yep. Two forms of counterfeiting:

1) Fiat Currency
2) Fractional Reserves

At the core of our problems.

Holy shit. This is like

Holy sh!t. This is like watching a decathalete compete in the event he/she is best at. People say Newt is the smartest man in the race. Bull doo doo. Sure Newt is a historian, teach me some history fat man. What the hell does that get me? Dr Paul is light years ahead of his class on economics and monetary policy, and he's really in his element here, I'm really just speechless right now, everyone in America should watch this video.

I have to return some videotapes...

After I busted a gut over your comments

'Teach me some history fat man' LMAO

I decided to state this one thing.. Newt has twisted a few things in history.. gotta watch his take on historical "facts"

Patriot Cell #345,168
I don't respond to emails or pm's.
Those who make peaceful revolution impossible will make violent revolution, inevitable.


No other candidate has Dr. Paul's knowledge of our monetary system. It's the key to fixing our economy. By the end of the interview the CNBC financial guys are giddy almost begging him to come back so they can sit at the feet of he master and hear his wisdom. MAJOR PRESIDENTIAL MATERIAL!

"It is terrible to contemplate how few politicians are hanged." G.K. Chesterton

This is the way I see it.

As long as we must use some government currency, they better make it a hell of a good one and back it up. However if we could pick and chose our money like any consumer good; then there could be bad currencies, good currencies, gold standard currencies, fiat currencies, sound currencies, risky currencies, green currencies and red currencies! Banks would just have to disclose what backs up their currency (if anything), to avoid fraud.

It is an enormous simplification to speak of the American mind. Every American has his own mind.

~Ludwig von Mises

You cannot issue more notes, or obligations without consent

You cannot engage in factional reserves just because you choose to. Just as you cannot steal from people just because you choose to.

Fractional reserves are practically impossible to engage in without theft, unless it is so limited in use that it cannot really even circulate as currency anyway.

If I willfully agree to have

If I willfully agree to have a thief steal from me, is it really theft anymore? Or just a legal agreement?

It is an enormous simplification to speak of the American mind. Every American has his own mind.

~Ludwig von Mises

If you agree to have someone take something it's not theft.

But when banks print more notes or engage in fractional reserve lending, they don't get an agreement from everyone holding their existing loans and notes.

Therefore, it is theft.

It's theft if we have one

It's theft if we have one national currency and the banks wreck it and steal life savings. If however the government didn't force one currency on us and we could pick and choose; then banks could wreck their own currency as long as they inform the populace that their currency is not backed up. Just like car companies can't pretend their car is something it isn't the same goes for banks and their currencies.

It is an enormous simplification to speak of the American mind. Every American has his own mind.

~Ludwig von Mises

They started to LOVE Ron..he

They started to LOVE Ron..he needs to go back, let them advertise it..:)

Fractional reserve banking is not fraudulent

I am sorry to see Ron make such a statement.

During the Scottish free banking era, banks typically ran on 2% reserves which meant they loaned out 50 times the money that they had on deposit. See freebanking.org

The borrower, not the bank, creates money by signing a pledge of collateral.

Ron would do better to rail against FDIC insurance, which encourages bad loans, or inflation, which is caused by too low interest rates.

Famous Quote from Justice William O. Douglas

"The Constitution is not neutral.
It was designed to take the government
off the backs of people."

Fractional reserve banking is no different than counterfeiting

You simply cannot produce labor, product, value, or real money, out of thin air, even with collateral.

The only way to produce is through labor.

you obviously have no clue

you obviously have no clue what your talking about. Fractional reserve banking inflates our money supply just like the TARP funds did.

Yes it is.

It's almost like counterfeiting; it increases the money supply drastically. In a true Libertarian society however, there would be many different types of bank notes issued by different banks. In that case FRB is okay, because if the currency gets wrecked it only affects those who have accepted that risky currency as payment. But in a country where there is only one currency dictated by the government, banks who increase the money supply hurt everyone in the country because now those dollars are worth less.

See my below posts.

It is an enormous simplification to speak of the American mind. Every American has his own mind.

~Ludwig von Mises

Increasing obligations without approval is always fraud.

No matter what kind of society.

Issuing more notes without the express consent of all existing holders of notes is fraudulent in all cases, even your "Libertarian" society.

I agree

Banks would have to disclose to their holders that their currency is not backed up. I'm just saying that if people still use it anyways, government shouldn't stop them.

It is an enormous simplification to speak of the American mind. Every American has his own mind.

~Ludwig von Mises

If the bank implies their currency has value when it doesn't

That is fraud.

So yes, if the bank states up front that their currency is backed by nothing, and they intend to print as much as they want, and somebody is still foolish enough to take it, then that is their own fault.

I doubt anyone would though. Encouraging people to accept fractional reserves and fiat currency usually involves the fraud of promoting that the currency or notes do have value when they don't. It's all based upon falsely gaining trust, as any scam does, which is why it collapses when people figure out the truth and ask for their money.

It's like the automobile industry.

There are favorable currencies and unfavorable currencies. Just like there are favorable cars and unfavorable cars. But you let the market decide which car/currency they want to hold and the best will come out on top. We don't need regulations to keep unfavorable cars out, just like we don't need regulations for unfavorable currencies.

If however a country has a socialized car industry/ socialized currency. Then they better try to make the best car/currency possible and outlaw faulty transmissions/ Fractional Reserve Banking.

EDIT: Found a great article about the free market deciding what currency we should use and not the government. http://lewrockwell.com/rozeff/rozeff360.html

It is an enormous simplification to speak of the American mind. Every American has his own mind.

~Ludwig von Mises

Ultimately, here is my beef

Ultimately, here is my beef with this sytem. If you claim to protect the deposits of your customers, then you cannot fractionally reserve; you must have full reserve. If you don't, then you can fractionally reserve all you want, as long as you are never bailed out and make clear to customers that all their money can evaporate if the bank goes bankrupt.

Plan for eliminating the national debt in 10-20 years:

Overview: http://rolexian.wordpress.com/2010/09/12/my-plan-for-reducin...

Specific cuts; defense spending: http://rolexian.wordpress.com/2011/01/03/more-detailed-look-a

I understand

The FRBs would have to disclose that investing in and accepting their currency is very risky, and of course no one should be bailed out. However if people really want to go ahead anyway, that's fine. We don't need government protecting us from ourselves.

It is an enormous simplification to speak of the American mind. Every American has his own mind.

~Ludwig von Mises

You cannot engage in fraud even if people agree to it.

Fraud is still fraud.

The fraud occurs at the basic monetary level. Money is a representation of labor, and labor simply cannot be printed.

The only sound money is money backed by something which must be produced through labor, if the money supply is never increased, or if all holders of money agree to an increase.

Fraud is basically taking

Fraud is basically taking wealth without the holder's consent. If however the person does agree, maybe because of some incentive offered by the bank, then it's not fraud anymore, just a gamble.

Note: this method only works when there isn't a national currency dictated by the government; because then we can't decide which notes we will use.

It is an enormous simplification to speak of the American mind. Every American has his own mind.

~Ludwig von Mises

Fraud, Consent, and Fractional Reserves

This is true, but has a bank ever obtained permission from all note holders before printing another note?

It's the fractional reserve system and paper currency themselves which are inherently susceptible to fraud. It's simply too easy for a banker to print up new notes without anyone knowing about it or being able to hold them accountable. I don't think there's ever been a case of a bank using fractional reserves that were not fraudulently issued, it's practically impossible.

There is no substitute for real money.

All they need to say is "our

All they need to say is "our currency is not backed up by a commodity in our vaults and we can print as much as we want". They could also set some limit on how much they could print if they wanted too.

It is an enormous simplification to speak of the American mind. Every American has his own mind.

~Ludwig von Mises

Theoretically, yes.

But then nobody is going to take it as anything of value anyway.