These paper receipts soon became popular for trade as they were less heavy to carry around than gold and silver coins.
After a while, the goldsmith’s must have noticed that only a small percentage of their depositor’s ever came in to demand their gold at any one time. So cleverly the goldsmith’s made out some extra receipts for gold which didn’t even exist, and then they loaned it out to earn interest.
A nod and a wink amongst themselves, they incorporated this practice into the banking system. They even gave it a name to make it seem more acceptable, christening the practice ‘Fractional Reserve Banking’ which translates to mean, lending out many times more money than you have assets on deposit.
For example, if Person A deposits $100 in Bank A. The bank shows the $100 as a Liability. Bank A keeps 20% in Reserve and loans out 80% ($80) to Person B. The loan is an $80 Asset to Bank A. Bank A charges interest for this 80%. Person B spends the $80 with Person C who in turn deposits the $80 in Bank A. Bank A keeps 20% of the deposit ($16) in reserve and loans out 80% ($64) to Person D and charges person D interest on the $64. The $64 is added to the Assets of the Bank; now totaling $100 (original deposit)+$80(Loan A)+$64 (Loan B)=$244 . Person D spends the money with Person E who deposits the $64 …
As this process continues, more commercial bank money is created out of thin air!
The amounts in each step decrease towards a limit. This limit is the maximum amount of money that can be created with a given reserve rate. When the reserve rate is 20%, as in the example above, the maximum amount of total deposits that can be created is $500 and the maximum increase in the money supply is $400.
So we can see that the original $100 is inflated to $400… thus we have Inflation. And don’t forget they make more money with the Interest they charge for the loans.
It gets worse… today banks are allowed an 8-10% reserve and can loan out at least ten times the amount they actually are holding, so while you wonder how they get rich charging you 11% interest, it’s not 11% a year they make on that amount but actually 110%.
In 1100A.D. King Henry of England realised what the Money Lenders were up to. There had to be a better way – So good was the system he created, it lasted until 1854! He had introduced Tally Sticks – this is a real key to solving the question of how to survive a financial crisis today.
So, what were Tally Sticks?