- [NOTE: Although this information refers to Canada it applies to all countries with a Central Bank. They all work the same way. If your country has a Central Bank it is contributing to the total global debt no matter how wealthy it appears.]
If there’s one thing a politician should know it’s, “Where does money come from?” So, for all you politicians or want-to-be politicians now’s your chance to test your knowledge. Before reading further, jot down a note outlining your belief concerning money creation. Are you ready? Okay.
The Biggest and Slickest Scam in the World – The Creation of Money
You’ve been told, or maybe just led to believe, that banks have a vault full of money ready to lend to all credit worthy clients. That is simply not the case. The Bank of Canada, believe it or not, is merely a publishing house. It has no money to lend at any time. Chartered Banks merely offer you a web site and a computer terminal to transfer “funds” (numbers) from one account to another. They have no money to lend.
To explain this, let’s start somewhere close to the beginning. Imagine entering a Chartered Bank and requesting a loan of twenty thousand dollars for one year to purchase a new car. The first thing that the bank loan manager will do is ask that you fill in a loan application form. So you do that and place your signature on the bottom line and guess what? You just created the asset that the bank will use to buy the money from the Bank of Canada. The bank didn’t have this asset prior to your signature being placed on the application form. They don’t even have it now that your signature is on the application form; you have to slide the application form across the desk first. By that action you give the Chartered Bank the asset they’ll use to “buy” the needed money to “lend” to you so that you can buy a new car. Put simply, you gave the Chartered Bank the money that they’ll now “lend” you. You have to not like how this is sounding already. We know that this must bring up many questions for you but let’s stay with the application for now.
What is a loan application form?
A loan application form is a bond or a promise to pay. By filling out a loan application form you are issuing a bond; issuing your promise to pay. Literally, you are creating money. A promise to pay is just a note signed by one individual that promises to pay a specified amount, thing or service to another individual. There’s absolutely no difference between a Government Bond and your loan application form. Your loan application is a promise by you to pay the amount of the loan as well as any stipulated interest charges to the bank at some future date. A Government bond is a promise to pay a stipulated amount at some future date. Your credit worthiness determines if your promise to pay has any value. Once the bank assures itself that you will fulfill your promise the application is accepted as valuable. The value of your bond is set at the amount you have promised to pay.
[NOTE: The first promise to pay that must be in place is your employer’s. Your employer’s hiring agreement is also a promise to pay. The employer has promised to pay you a set amount in return for the hours you work.]
What happens next proves your promise to pay has value. The Chartered Bank submits your promise to pay to Canada’s central bank, the Bank of Canada, and purchases, that’s right, the Chartered Bank buys the funds you requested from the Bank of Canada!...and buys them with your promise to pay!
The Bank of Canada accepts your promise to pay as having value and agrees to print the $20,000 you requested. The actual printing necessary to facilitate your request will probably be less than one hundred notes that may total $2,000. The rest will be transferred through computer entries (electronically) on the Chartered Bank’s web site. It costs about five cents per note so the total cost to the Bank of Canada associated with the printing of the bills necessary to fulfill your request will be a grand total of five dollars ($5.00).
The Bank of Canada then transfers these funds ($20,000) to the Chartered Bank and with a simple computer entry the Chartered Bank credits your account with $20,000. Now with another computer entry the $20,000 is transferred to the auto dealership and you drive away with your new car. The only thing left is for you to fulfill your promise to pay by making your monthly payments. As you return each payment to the Chartered Bank they in turn return that payment to the Bank of Canada. Each payment reduces the value of your promise to pay by the amount of the payment. When you have fulfilled your obligation by making all your payments the value of your promise to pay is zero.
Now let’s assume that the total interest you were charged for these funds is 7%; the Chartered Bank interest charge is 4% and 3% is charged by the Bank of Canada. Seven percent on $20.000 over one year equals $1,400, so the total cost of your new car will be $21,400 and you’re happy, right? But should you be?
Let’s look at what the Chartered Bank actually did to receive the eight hundred dollars it “earned”. All it did was provide you with a web site to transfer funds from one account to another. It provided no money, it printed no money. It merely charged you $800 to access its web site for probably less than an hour. What a great business!
Now let’s look at what the Bank of Canada did for the $600 it “earned”. It spent at the most $5.00 to print a few bank notes. And it gets to keep the $20,000 you returned to it. Now this is a great business! Actually, it’s a scam, a fraud, disguised as an honourable business.
You’ve merely been programmed to believe that banks “give” you something. The only giving in this arrangement comes from you. Both the Chartered Bank and the Bank of Canada had no money before you applied for this loan. Now the Chartered Bank has $800 and the Bank of Canada has $600 plus the $20,000 created by your promise to pay. This is money laundering at its finest!
Your homework, should you choose to accept it, is to study the articles on this site;
http://members.shaw.ca/theultimatescam/index.htm, and read http://www.michaeljournal.org/myth.htm, and http://formulafordebt.blogspot.com/2010/12/bond-is-simply-promise-to-pay.html.
2% Inflation -- Exponential Growth
The following link will take you to a video presentation by Dr. Albert A. Bartlett.
http://www.youtube.com/watch?v=F-QA2rkpBSY. This video will give you a firm understanding of exponential growth. Understand this and you will understand why 0% inflation is not only desirable but necessary. The exponential function is used to describe the size of anything that’s growing at a steady rate. If it takes a fixed length of time to grow five percent, then it follows that it takes a longer fixed length of time to grow by 100%. This longer time is called the doubling time.
How does one calculate the doubling time? Just take the number 70 divide it by the percent growth per unit of time and that gives you the doubling time. For example if the percent growth per year is 5%, divide 5 into 70 and you get fourteen. Thus, the time it takes anything to double that has a steady growth of 5% per year is 14 years. Where did the 70 come from? Well, it’s approximately 100 divided by the natural logarithm of two. Watch the video and Dr. Bartlett will explain it to you.
Two percent inflation will double prices in 35 years, 6% in 11.6 years, and 10% will double prices in 7 years. [As of April 19, 2011 Canada’s inflation rate has risen to 3.3%. At this rate prices will double in 21.2 years.]
Now let’s talk about the Bank of Canada’s plan to hold the inflation rate at a constant two percent. Most of us have no idea what that means for our children or grandchildren. To find out what two percent inflation means for the future all we need to do is find the doubling time of prices with a 2% yearly growth rate. By dividing 2 into 70 we find that with inflation at a constant 2% prices will double in 35 years. If our starting year is 2011 prices will double by 2046, double again by 2081 and double again by 2116. If the price of gasoline in 2011 is $1.35 it will be $2.70 in 2046, $5.40 in 2081 and $10.80 in 2116. I have a minivan with a 110 litre fuel tank. I complain at having to pay $148.50 to fill it. With a steady 2% inflation rate, in 2116 my great grandchildren will have to pay over $1,188.00 for the same amount of fuel.
Pick any product today and use this simple arithmetic function and see what the price will be in 2116. Let’s pick an automobile priced at $45.000 today. In 2046 that car will by $90.000, in 2081 it will cost $180.000 and in 2116 it will cost $360,000. A home that costs $250.000 today will cost $500,000 in 2046, $1,000,000 in 2081 and $2,000.000 in 2116.
Now ask yourself if this is really what you want your children, grandchildren and great grandchildren to face. And remember, this is if the Bank of Canada holds inflation at 2%. Do the math to see what prices will be if inflation averages 5%.
The doubling time when growth is 5% is 14 years. At that rate prices will double by 2035, and again by 2059, then by 2083 and again by 2109. That litre of fuel will rise to $2.70 in 2035, $5.40 by 2059, $10.80 by 2083 and $21.60 by 2109. And my great grandchildren will have to pay $2,319.90 to fill up my old van. The car will be $720.000 in 2109 and the home $4,000,000. Can you see what the hourly wage will have to be to be able to afford these prices? Today with a wage of $15 per hour it takes ten hours work to fill my tank. If it took ten hours work to fill my tank in 2109 wages would have to be $231.99 per hour. Inflation at any rate is bad. Interest plus inflation always equals greater debt over time.
Consider to following from section 5.41 of the Auditor General’s 1993 report.
The cost of borrowing
The cost of borrowing is the third area that affects the annual deficit. In 1991-92, the interest on the debt was $41 billion. This cost of borrowing and its compounding effect have a significant impact on Canada’s annual deficits. From Confederation up to 1991-92, the federal government accumulated a net debt of $423 billion. Of this, $37 billion represents the accumulated shortfall in meeting the cost of government programs since Confederation. The remainder, $386 billion, represents the amount the government has borrowed to service the debt created by previous annual shortfalls.
Translated into Math, this means:
Actual loans to government (Principal) $ 37,000,000,000
Usury by banking system (Interest) $ 386.000,000,000
Total debt (1993) (Debt) $ 423,000,000,000
What this indicates is that the Canadian Government issued a number of bonds over a 125 year time period that totalled $37,000,000,000. In other words, our Canadian Government gave some financial institution $37,000,000,000 and then agreed to pay interest if the financial institutions would lend this money back to it. This is a perfect example to show the truth of the formula P + I = D, Principal plus Interest equals Debt.
P + I = D
$37,000,000,000 + $386,000,000,000 = $423,000,000,000
From July 1st, 1867 until 1992 Canada “borrowed” thirty seven billion dollars. That $37,000,000,000 Principal grew to a debt of $423,000,000,000 in 125 years. And did you notice that the interest on that debt (in 1991-92) is greater than the total principal borrowed – the wonders of compound interest.
Consider Africa. Between 1970 and 2002 the poorest African countries received $294 billion in loans, paid back $298 billion in interest and principal, but still owed more than $200 billion.
Are you beginning to see how debt drowns countries? Are you beginning to see that Central Banks, the International Monetary Fund, World Bank and the grand parent of them all, the Bank for International Settlements must know what they’re doing? And they must know the guaranteed future result for us all – debt.
Here’s a question for all Federal and Provincial politicians:
If you had personal assets totalling hundreds of trillions of dollars, (Canada does) would you give me one billion dollars ($1,000,000,000) so that I could lend it back to you whenever you had a need to purchase anything? Oh yes, I would also require you to repay this loan back over let’s see, shall we say ten years. And one more thing, you would be required to put something up as security, you know, just in case something unforeseen changed in your cash flow situation and you were unable to repay the loan. In the event that, sometime in the future, you did not meet your commitment to me I would be forced to seize the property you put up as security.
I’m sure you understand and agree that this would be fair and justified on my part if and when these events were to transpire. Oh, I almost forgot, there would also be one more small detail of which you would undoubtedly also agree is necessary. Because of the cost of all the services I would be performing for you at your request, it would be necessary that one last obligation be placed on you. You would be obliged to pay a small yearly interest fee. On my part I would bind myself to the commitment that this said interest would never exceed ten per cent (10%) per year.
Oops, almost forgot again. Keeping with the common sense of the above, and because of the great investment I have in this agreement you would have to agree that you would come to me for all your future money needs. In the event that you may one day require additional financing of an amount over and above the original $1,000,000,000 you initially gave me you would be obliged to forward these additional funds to me in advance to the loan being granted. Other obligations that would be bound only to you may be added to our contract at my discretion at the time of signing.
[NOTE: This is our monetary system in a nutshell. This is what all Canadian Governments agree to each time they ask a private financial institution to print the evidence of its promise to pay.]
Under what some call the Private Debt Money System debt is the only guaranteed result. Important and intelligent people have been telling you this for a very long time.
People [private Federal Reserve Corporation stockholders] who will not turn a shovel full of dirt on the project (Muscle Shoals Dam) nor contribute a pound of material, will collect more money [usury] from the United States than will the People who supply all the material and do all the work. This is the terrible thing about interest …But here is the point: If the Nation can issue a dollar bond, it can issue a dollar bill. The element that makes the bond good makes the bill good also. The difference between the bond and the bill is that the bond lets the money broker collect twice the amount of the bond and an additional 20%. Whereas the currency, the honest sort provided by the Constitution pays nobody but those who contribute in some useful way. It is absurd to say our Country can issue bonds and cannot issue currency. Both are promises to pay, but one [Federal Reserve Notes] fattens the usurer and the other [U.S. Notes] helps the People. If the currency issued by the People were no good, then the bonds would be no good, either. It is a terrible situation when the Government, to insure the National Wealth, must go in debt and submit to ruinous interest charges at the hands of men [International Bankers] who control the fictitious value of gold. Interest is the invention of Satan.
Thomas A. Edison
The youth who can solve the money question will do more for the world than all the professional soldiers of history. Henry Ford, Sr.
All the perplexities confusion and distress in America arise, not from defects in the Constitution or confederation, not from want of honour or virtue, so much as from downright ignorance of the nature of coin, credit and circulation. President John Adams
Once a nation parts with the control of its currency and credit, it matters not who makes the nation’s laws. Usury, once in control will wreck any nation. Until the control of the issue of currency and credit is restored to government and recognized as its most sacred responsibility, all talk of the sovereignty of parliament and of democracy is idle and futile.
William Lyon Mackenzie King, Prime Minister of Canada, 1921 – 1930, 1935 – 1948
Isn’t it time you listen?
As we have seen from the above, our present method of bringing money into existence has one guaranteed result – debt. Once we see how this present system works there can be little doubt that the creators and controllers of this system know exactly what they’re doing. Today, banking is in the hands of a group more corrupt than any known mafia organization. But our hands are not without traces of the blood of those who suffer for our creature comforts. We voluntarily use Central Banks “money” and by that action we unwittingly participate in the vilest game in town. We create the debt and then shut our eyes to the harm that debt causes others.
Here’s a question for all politicians of all countries, “If the debt created by our present economic system never goes away, what happens to it?”
Bankers, believe it or not are not after profit, although that’s a big part of their game. Their primary goal is the creation of debt. Debt is the lever bankers use to force governments to pass legislation that the people know will be detrimental to their country. As we have seen already the inevitable debt that is associated with all money “borrowed” from a Central Bank at interest will always equal principal plus interest, P + I = D. When at last you see how debt is the only guaranteed result from our present economic system there is but one more learning hurdle yet to accomplish. This one may be more difficult and take more effort to see than the first. You must see that the debt created by your use of Central Banks “money” at interest never goes away; that it merely filters down to the weakest within our society and ultimately to the weakest and poorest countries in the world. That debt that we have all unwittingly participated in creating has today filled this world of abundance with unemployment, poverty, homelessness and the starvation death of over 35,000 children a day. The elimination of all of these can only be the loftiest goal you can aim at achieving. Until you do the total global debt will continue to rise until even Canada will be placed under the International Monetary Fund’s “austerity measures” and each day the number of children starving to death will continue to rise.
It (the banking problem) is the most important subject intelligent persons can investigate and reflect upon. It is so important that our present civilization may collapse unless it is widely understood and the defects remedied very soon. Robert H. Hemphill, for 8 years credit manager of the Federal Reserve Bank of Atlanta
If all bank loans were paid...there would not be a dollar of coin or currency in circulation. Someone has to borrow every dollar we have in circulation. We are absolutely without a permanent money system. Robert Hemphill, Federal Reserve Bank in Atlanta, in forward to, 100% Money, by Irving Fisher.
These last quotes from a banker should give you reason to investigate this issue.
The Solution
The solution to our common dilemma is Mathematically Perfected Economy (MPE). Your homework just got a little harder but far more rewarding than anything else that you could do.
Watch these twenty videos in this play list, approx. two and a half hours in length and read the following and your education will just be starting. You will soon learn how dumbed down we have all become when it comes to economic and financial matters.
Continue your study with: http://perfecteconomy.com/pg-synopsis.html and http://perfecteconomy.com/pg-if-i-were-president.html at: http://perfecteconomy.com/.
John Kenneth Galbraith once famously said, The process by which money is created is so simple that the mind is repelled. Is your mind repelled yet now that you know what he meant by this statement?
Have you noticed that the Central Banks start with nothing? And do you see that if you refuse to stop them they'll end up with everything? Are you up for the challenge?
Have you noticed that the Central Banks start with nothing? And do you see that if you refuse to stop them they'll end up with everything? Are you up for the challenge?
You can contact this author at: david.ealing@gmail.com.
The following is a simple explanation that may help the reader see why debt once created never goes away.
Foreign Exchange
Oh Canada Documentary
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The Eternal Nature of Debt
If all the bank loans were paid, no one could have a bank deposit, and there would not be a dollar of coin or currency in circulation. This is a staggering thought. We are completely dependent on the commercial Banks. Someone has to borrow every dollar we have in circulation, cash or credit. If the Banks create ample synthetic money we are prosperous; if not, we starve. We are absolutely without a permanent money system. When one gets a complete grasp of the picture, the tragic absurdity of our hopeless position is almost incredible, but there it is. It is the most important subject intelligent persons can investigate and reflect upon. It is so important that our present civilization may collapse unless it becomes widely understood and the defects remedied very soon.
Robert H. Hemphill, for 8 years credit manager of the Federal Reserve Bank of Atlanta
Under a private debt money system debt, once created, never goes away. A borrowed dollar becomes a debt the instant it is borrowed. Interest charged on that borrowed dollar increases the debt. Repay that borrowed dollar and there is no money for the economy to function so new loans must be taken out as old ones are paid off. In every economy there is a vital amount of money needed to facilitate trade and commerce. As loans (principle) are repaid the vital circulation is reduced. In order to maintain a vital circulation new funds (principle) must be borrowed thereby increasing the total debt. The vital circulation is also reduced as existing principle is used to pay interest. This also mandates that new loans (principle) must be borrowed to replace the principle used to pay interest thereby further increasing the debt. Don’t think this is true? Well, let’s look at a ledger sheet for some small un-named country to see for sure.
The following ledger page covers one year in the life of a country that maintains a vital circulation of one million dollars ($1,000,000) and that the interest charged on that vital circulation is five percent (5%). We also see that the payment made to the central bank to repay principal plus interest is ten thousand dollars ($10,000) per month. Note that right from the beginning the amount owed by this country is more than the total amount of money in circulation. Note also that because it is essential that $1,000,000 be circulating within this economy, when a payment reduces that amount by $10,000, that amount must be immediately re-borrowed to maintain that vital circulation and as the $10,000 is re-borrowed and additional interest of $500 is added to the total debt.
We see in this example that maintaining a vital circulation of $1,000,000 for one year creates a debt that equals $61,500 more than the amount of money in circulation and this occurs where inflation is zero. Adding inflation of any amount would increase the amount needed for a vital circulation. If inflation over this year was 10% the amount needed to maintain a vital circulation would be $1,100,000.
Date | Money in Circulation | Money Borrowed | 5% Interest Charged | Payments Made | Total Debt |
Jan. 1, 11 | $1,000,000 | $1,000,000 | $50,000 | $1,050,000 | |
Feb. 1, 11 | $1,000,000 | $10,000 | $1,040,000 | ||
Feb. 1, 11 | $1,000,000 | $10,000 | $500 | $1,050,500 | |
Mar. 1, 11 | $1,000,000 | $10,000 | $1,040,500 | ||
Mar. 1, 11 | $1,000,000 | $10,000 | $500 | $1,051,000 | |
Apr. 1, 11 | $1,000,000 | $10,000 | $1,041,000 | ||
Apr. 1, 11 | $1,000,000 | $10,000 | $500 | $1,051,500 | |
May 1, 11 | $1,000,000 | $10,000 | $1,041,500 | ||
May 1, 11 | $1,000,000 | $10,000 | $500 | $1,052,000 | |
June 1, 11 | $1,000,000 | $10,000 | $1,042,000 | ||
June 1, 11 | $1,000,000 | $10,000 | $500 | $1,052,500 | |
July 1, 11 | $1,000,000 | $10,000 | $1,042,500 | ||
July 1, 11 | $1,000,000 | $10,000 | $500 | $1,053,000 | |
Aug. 1, 11 | $1,000,000 | $10,000 | $1,043,000 | ||
Aug. 1, 11 | $1,000,000 | $10,000 | $500 | $1,053,500 | |
Sept. 1, 11 | $1,000,000 | $10,000 | $1,043,500 | ||
Sept. 1, 11 | $1,000,000 | $10,000 | $500 | $1,054,000 | |
Oct. 1, 11 | $1,000,000 | $10,000 | $1,044,000 | ||
Oct. 1, 11 | $1,000,000 | $10,000 | $500 | $1,054,500 | |
Nov. 1, 11 | $1,000,000 | $10,000 | $1,044,500 | ||
Nov. 1, 11 | $1,000,000 | $10,000 | $500 | $1,055,000 | |
Dec. 1, 11 | $1,000,000 | $10,000 | $1,045,000 | ||
Dec. 1, 11 | $1,000,000 | $10,000 | $500 | $1,055.500 | |
Jan. 1, 12 | $1,000,000 | $10,000 | $1,045,500 | ||
Jan. 1, 12 | $1,000,000 | $10,000 | $500 | $1,056,000 |
Your homework, should you be willing to accept it, is to find a way that this little country can repay its entire debt and still have money left over. One doesn’t need to know too much about math to see that this is an impossible task. Debt will increase as a vital circulation is maintained.
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The following is an example as to how central banks keep track of the amount of money in circulation and where it is: Is it in a bank account or is it bank notes in someone’s pocket.
Note: The examples apply when read in sequential order.
M0
- Laura has ten US $100 bills, representing $1000 in the M0 supply for the United States. (MB = $1000, M0 = $1000, M1 = $1000, M2 = $1000)
- Laura burns one of her $100 bills. The US M0, and her personal net worth, just decreased by $100. (MB = $900, M0 = $900, M1 = $900, M2 = $900)
M1
- Laura takes the remaining nine bills and deposits them in her checking account at her bank. (MB = $900, M0 = 0, M1 = $900, M2 = $900)
- The bank then calculates its reserve using the minimum reserve percentage given by the Fed and loans the extra money. If the minimum reserve is 10%, this means $90 will remain in the bank's reserve. The remaining $810 can only be used by the bank as credit, by lending money, but until that happens it will be part of the banks excess reserves.
- The M1 money supply increased by $810 when the loan is made. M1 money has been created. ( MB = $900 M0 = 0, M1 = $1710, M2 = $1710)
- Laura writes a check for $400, check number 7771. The total M1 money supply didn't change, it includes the $400 check and the $500 left in her account. (MB = $900, M0 = 0, M1 = $1710, M2 = $1710)
- Laura's check number 7771 is accidentally destroyed in the laundry. M1 and her checking account do not change, because the check is never cashed. (MB = $900, M0 = 0, M1 = $1710, M2 = $1710)
- Laura writes check number 7772 for $100 to her friend Alice, and Alice deposits it into her checking account. MB does not change, it still has $900 in it, Alice's $100 and Laura's $800. (MB = $900, M0 = 0, M1 = $1710, M2 = $1710)
- The bank lends Mandy the $810 credit that it has created. Mandy deposits the money in a checking account at another bank. The other bank must keep $81 as a reserve and has $729 available for loans. This creates a promise-to-pay money from a previous promise-to-pay, thus the M1 money supply is now inflated by $729. (MB = $900, M0 = 0, M1 = $2439, M2 = $2439)
- Mandy's bank now lends the money to someone else who deposits it on a checking account on yet another bank, who again stores 10% as reserve and has 90% available for loans. This process repeats itself at the next bank and at the next bank and so on, until the money in the reserves backs up an M1 money supply of $9000, which is 10 times the M0 money. (MB = $900, M0 = 0, M1 = $9000, M2 = $9000)
M2
- Laura writes check number 7774 for $1000 and brings it to the bank to start a Money Market account (these do not have a credit-creating charter), M1 goes down by $1000, but M2 stays the same. This is because M2 includes the Money Market account in addition to all money counted in M1.
Foreign Exchange
- Laura writes check number 7776 for $200 and brings it downtown to a foreign exchange bank teller at Credit Suisse to convert it to British Pounds. On this particular day, the exchange rate is exactly USD 2.00 = GBP 1.00. The bank Credit Suisse takes her $200 check, and gives her two £50 notes (and charges her a dollar for the service fee). Meanwhile, at the Credit Suisse branch office in Hong Kong, a customer named Huang has £100 and wants $200, and the bank does that trade (charging him an extra £.50 for the service fee). US M0 still has the $900, although Huang now has $200 of it. The £50 notes Laura walks off with are part of Britain's M0 money supply that came from Huang.
- The next day, Credit Suisse finds they have an excess of GB Pounds and a shortage of US Dollars, determined by adding up all the branch offices' supplies. They sell some of their GBP on the open FX market with Deutsche Bank, which has the opposite problem. The exchange rate stays the same.
- The day after, both Credit Suisse and Deutsche Bank find they have too many GBP and not enough USD, along with other traders. Then, to move their inventories, they have to sell GBP at USD 1.999, that is, 1/10 cent less than $2 per pound, and the exchange rate shifts. None of these banks has the power to increase or decrease the British M0 or the American M0; they are independent systems.
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The following describes the banking system as it operates in Canada.
Fractional Reserve Deposit Expansion
Fractional reserve deposit expansion is a descriptive name for the banking system currently being operated here in Canada and many other countries throughout the world. The term “fractional” refers to the fact that the actual amount of “money” held by a bank in reserve against deposits is only a fraction of the amount of money, which a bank can create and lend or spend into circulation. “Deposit” refers to loans created by banks and “expansion” identifies the fact that the banks expand the quantity of credit available to the public in a manner unique to the banking system. (A private individual can lend only what he possesses, he cannot “expand” or lend more than he has unless he becomes a fractional reserve deposit banker.)
In Canada, the banks were, at one time, required to hold “reserves” of 50%, which meant they could “create” new loans (deposits) twice over the totals of their deposits. Through a series of amendments to the bank act, this reserve requirement was steadily reduced to 10% (allowing for new loans (deposits) of 10 times the amount of deposits on hand), then to 8% (which allowed for new loans (deposits) of 12.5 times the amount of deposits on hand, then to 3% (33.3 times) and then to zero. On Dec.9, 1991, the Federal Parliament amended the Bank Act (Bill C-19) to provide for the reduction of any reserve requirement by the banks over the next 3 years to zero and came into full effect January 1, 1994. The banks were no longer required to hold any reserves. This meant the banks had unlimited power to create new loans (deposits) through deposit expansion. On page 257 of the Canadian Bank Act, Section 457 (4) states the following:
"On the first day of the first month following the month this section comes into force, the primary reserve referred to in subsection (2) shall be reduced by 3 per cent, and thereafter on the first day of the first month of each of the next three succeeding six month periods, the primary reserve as modified by this subsection shall be reduced by 3 per cent, and on the first day of the twenty-fifth month following the month in which this section comes into force, the primary referred to in subsection (1) shall be NIL."
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