The Big (Bank) Lie

Banking is rotten to the core.

It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning. -Henry Ford

A century later, this quote is still as true as the day it was written. And with all the information available at our fingertips, the overwhelming majority still haven't educated themselves on the function of the banking system. That's a tragedy, given the significant role banking plays in the modern economy, and the corruption at the very base of the industry.

Banking is built on a lie. It's a big lie. Not in the sense of how false it is, but in the sense of the harm caused. It's more of a “weasel words” type of lie, a lie of omission and misdirection, the kind of lie a sleazy lawyer would use to get a guilty client off the hook. My goal is to explain, as clearly as possible, how the modern banking system works. Why you should care will be a topic for another day.

I want to start off with a big thank you to whoever created the website https://banklies.org/. If you aren't familiar with this gem, bookmark it now. There's no better place on the internet to get detailed documentation on this particular subject. Everyone should spend an afternoon reading and listening to the information there. You'll never be able to see the world the same way if you absorb it and understand the implications.

Where Does Money Come From?

There's been a lot of talk since the COVID “pandemic” and associated QE deluge about the Fed and their money printing. Most people have some awareness that “the Fed prints money and that causes inflation.” There's some truth to that idea, but it also misses the real story. Most people don't understand that when someone says “money printing,” the correct response is “which kind of money?”

Banks operate by calling two different things “money,” and hoping everyone treats them the same. The average person might say “I have $100 in my wallet” or “I have $100 in my bank account” without realizing they aren't talking about the same thing at all. They might take the $100 in their wallet and “put it in the bank” without realizing that as soon as they do, that $100 becomes something else entirely.

The $100 bill in your wallet has the words “Federal Reserve Note” printed on it. This is one form of what's known as “base money.” Base money exists in two forms, cash and bank reserves. You can think of bank reserves as electronic cash that only banks can use.

Base money is created by the Federal Reserve. Creating base money is what the Fed does when they “print money.” They create bank reserves electronically by putting the numbers in the ledger at the Fed. The cash is printed by the Treasury, but that's just a technicality, it's printed at the request of the Fed.

The current circulating supply of cash is $2.3 trillion, and bank reserves are about $3.5 trillion. However, if you look at the total amount of US dollars, including money in people’s bank accounts, it’s currently $20.8 trillion dollars. So if base money is $5.8 trillion in total, what is the other $15 trillion? Well, it’s largely made up of bank deposits. So where do bank deposits come from? It can’t be cash people deposit into their accounts, like you might expect from the name, since cash only totals $2.3 trillion and bank deposits are over 6 times larger. The answer is that banks create them.

So as you can see, the largest category of dollars aren’t “printed” by the Fed, they’re created by the banks. And the way banks create dollars is so simple, it almost doesn’t seem real. Banks create money by making loans.

This seems completely counterintuitive to the way most people imagine banks work. That’s understandable, since the way banks work has almost no relation to the way individuals handle their own finances. You might make a loan to someone. Your friend asks to borrow $20 at the restaurant since he forgot his wallet at home. You pull yours out and hand him a $20 bill. In order to make that loan, you had to go to work, accomplish something, get paid, and save that $20 in your wallet. You couldn’t spend the $20, and you can’t spend it now until your friend pays back the loan. Obviously no new money was created to make that loan, work was done and money was saved and then given to the borrower so he can spend it instead of the lender.

Most people assume banks work the same way. They assume that when they deposit some money at the bank, the bank stores that money in a vault somewhere with their name on it. And they assume that when banks make loans, they take some money from a big pile of money stored in a vault somewhere and give it to the borrower. But that isn’t how it works at all.

When someone goes to the bank for a loan, the bank doesn’t draw on some pile of cash they have saved up somewhere. Instead, they use a simple accounting trick. They create a bank account for the borrower, and they type the amount of the loan into the borrower’s account balance. It’s really that simple. That balance becomes a “bank deposit.” Even though that money was never deposited in the bank, and in fact didn’t exist at all until the bank typed those numbers into the computer, it’s still called the same thing as the money you deposit into the bank when you get your paycheck.

So what is a bank deposit? It’s really a promise by the bank to give the account holder money. If you have $100 in your bank account, you expect to be able to go to the bank and withdraw that $100 in cash from your account and put it in your pocket. Remember, that $100 bill is base money, something completely different from the bank deposit in your savings or checking account. The implicit promise by banks is that any money in your bank account, any bank deposit, is as good as cash and can be exchanged for cash at any moment.

But of course that must be a lie, since there are $15 trillion of bank deposits and only $2.3 trillion dollars of cash. That means if everyone in the US went to the bank tomorrow and tried to withdraw their money in cash, the banks would run out of cash while still owing $12.7 trillion dollars to depositors. It’s actually much worse than that, since a lot of the cash is already in peoples’ pockets, much of it circulating in foreign countries outside the US. Banks only hold around $100 billion in their vaults on any given day. So if everyone tried to withdraw their money from their bank accounts, which banks have implicitly promised they can do, each person could get around $0.007 of every dollar on deposit. That’s less than one cent of every dollar. So the promise banks are built on, the promise to give you the money in your account, turns out to be at least 99% a lie.

So how can it continue like this? How do banks keep operating with so little cash and so many promises to give cash? Why does anyone put money in the bank when they keep less than a penny of every dollar you deposit available to withdraw when you need it? The answer is, banks don’t tell you that. And if nobody knows, people won’t all come asking for their money one day. If they did, all the banks would fail instantly. So they do anything in their power to keep that from happening.

How Do Bank Deposits Work?

The reason most people never question the function of their bank, is that banks do everything possible to make their dishonest “bank deposits” function the same as cash, and actually better than cash in a lot of ways. Instead of having to withdraw cash from your bank and give it to someone, you can just exchange bank deposits. You can do this in a lot of super convenient ways, like writing a check or using a debit card, or more recently even right from your smartphone with an app like Venmo or CashApp. This is very convenient for the customer, and even more convenient for the bank. When you pay someone else using your bank deposit, all they have to do is lower the number in your account and raise the number in the other person’s account by the amount of the transaction. Quick, easy and convenient for everyone involved.

And if you happen to be paying someone who doesn’t have an account at your bank, that’s no problem either. Your bank will just pay the other person’s bank, and they can then change the number in the other person’s account. Now of course banks want real money for their transactions, not the fake bank deposits the commoners use. Remember the bank reserves I mentioned earlier that are like cash for banks only? Well that’s how banks settle transactions between themselves. All banks have an account at the Fed, and the Fed settles up between banks by changing the number of bank reserves in their respective accounts at the Fed. In essence, the Fed is just a bank for banks, another entity that works just like your local bank, but only holds accounts with banks and governments and not with ordinary people.

This convenience discourages people from withdrawing cash from their bank, since it’s actually easier to use the bank deposits than the cash. Besides that, banks use a lot of arbitrary policies to make it difficult for people to withdraw cash, even if they want to. If you didn’t know that, you’ve probably never tried to take $5,000 in cash out of your bank account. If you do, you’ll probably be asked some irrelevant questions about what you plan to do with the money. That’s if they let you withdraw it at all. Ask for $20,000 and you’ll almost certainly have to schedule an appointment to withdraw it in a few days, after the next cash delivery comes in. Most community bank branches only keep around $75,000 in cash on hand at any given time, so you can see how few withdrawals it would take to completely drain their vault.

But increasingly now, the biggest threat to banks isn’t from people withdrawing cash, it’s from people withdrawing to a different bank. Remember, banks have to settle with each other at the end of the day. And since they won’t accept each other’s sketchy “bank deposits” in payment, they have to settle by transferring balances between their respective reserve balances at the Fed. As you can see, banks have loaned into existence $11.5 trillion more in bank deposits than they hold in bank reserves, so it doesn’t take much withdrawal from one bank to drain their reserve balance to zero and cause the bank to fail. Bank runs have been a recurring problem ever since the entire dishonest fractional reserve banking system began, and even in 2023 a few US banks suffered bank runs and collapsed in some of the biggest bank failures in history.

Why Banking is Legalized Theft

Now that we’ve explained on the most basic level how banks work, let’s briefly explore a few basic implications.

We’ve established that banks create money when they make a loan. How easy would your life be if you could create money at no cost and loan it to people? Is it any wonder that the financial industry is full of extremely wealthy individuals?

Let’s think through for a second why I would categorize what banks do as theft. First off, you need to understand what money is, and more importantly what it is not. I lay out some fundamental principles in this article.

Summarized in one sentence, money is a ledger of productive effort with deferred consumption. It represents work someone did for another person, instead of for their own benefit. In a sense, it’s an abstract representation of, or a claim on, the wealth in a society. Having money indicates that you provided value to someone else in the past, and therefore deserve to receive value from someone in the future if you choose to exercise that claim.

Anyone who has money can loan that money to someone. This is a transfer of your claim on wealth to that person. They can then use the money to buy something, and benefit from that loan. But with that type of loan, there is always a tradeoff. The tradeoff is what’s called opportunity cost. While you have the money, you have the option to exercise that claim at any time and buy something you want. If you loan the money to someone, you incur the cost of giving up that option for as long as it takes until the loan is repaid. You already put in the effort to create the wealth that money represents, now you’re sacrificing your opportunity to benefit from that effort by buying something you want.

Bank loans are different. There is no opportunity cost. The bank doesn’t have the money to begin with, because they haven’t put in any effort or created anything of value to deserve it. They just create the money out of thin air. There is no sacrifice on the part of the bank to make that loan possible. They don’t have to forego spending any money to make the loan because the money didn’t exist in the first place.

So when the bank creates money, they’re creating new claims on wealth. Since the bank hasn’t created any wealth, the claims must be claims on wealth that already exists. These new claims have no immediate effect on the people who hold that wealth. Nothing changes for them, the wealth they hold is still theirs as long as they don’t exchange it for money. As long as they don’t sell their wealth, the increase in claims on that wealth changes nothing.

The people who are negatively effected by this increase in money are those who already have money. Since money is a claim on wealth, the value of each unit of money equals [amount of wealth in existence] divided by [amount of money in existence]. Since the amount of wealth has not changed, but the amount of money has increased, the value of existing money falls. More money spread out over the same amount of wealth means each unit of money will buy less wealth. This is what everyone knows as inflation, and as everyone who has experienced it knows, the money they hold as savings or receive as income becomes less valuable the more inflation occurs.

Who benefits from this? Well, the borrower may benefit in some cases. They receive the newly created money and are able to spend it and acquire wealth they haven’t yet put in the effort to produce. So they get to enjoy unearned rewards now. Also, since it takes time for holders of wealth to realize how much inflation has occurred, they will often exchange their wealth for money at a price lower than the increase in money supply would indicate. So the price of a purchased item will often continue to increase after the borrower acquires it, and they benefit from the increase in prices by paying back their loan with money that is less valuable than it was when they borrowed it. Of course the interest charges negate some of the benefit, but often not all of it, so borrowing money can end up being very beneficial to a borrower in many situations.

The biggest beneficiary is the bank itself. They create the money from nothing, with no opportunity cost or sacrifice necessary. In effect, they are able to use the new money to transfer wealth from holders of wealth to borrowers, at the expense of holders of money. And of course as soon as that transfer is complete, the holders of wealth become new holders of money and begin to suffer the effects of inflation too. Meanwhile the bank requires the borrower to repay the loan, with interest attached.

When an individual makes a loan, the interest charged is payment for the opportunity cost of not being able to enjoy the benefits of spending that money now. However for banks, there is no opportunity cost in making a loan. So the bank receives interest as a reward from the borrower for transferring wealth to them at the expense of holders of money. A kind of sharing of the spoils of theft, if you will. Of course they would never describe it that way, but if you understand what’s actually happening it seems like the only accurate explanation.

So we see who gets rewarded by the banking system, and who gets punished. Those who get rewarded are bankers, who collect interest from loaning out money they didn’t actually have, and are able to enrich themselves by spending that collected interest to purchase real wealth. Sometimes borrowers are also rewarded, meaning the people who consume things they haven’t produced by borrowing the money to buy them get to enjoy immediate gratification, and then over a period of time pay back an amount of money that has lost so much value it would no longer be enough to buy the item they have already been enjoying.

And the people who get punished are those who save and hold money. Those people are the ones who produce value and defer consumption, the ones whose pro-social behavior and delayed gratification make capital formation and modern civilization possible.

The purpose and effect of banking, and creation of new money through bank loans, is to redistribute wealth. The incentive structure means access to wealth is stolen from those with the most socially desirable behavior, the most effective producers and most frugal savers who hold money they’ve earned for future use. The stolen wealth is given to those with the least socially desirable behavior, those who consume more than they produce and live beyond their means, being a net detriment to civilization, and to the parasitic banking class who collect interest as a reward for their theft.

The anti-civilizational outcomes of this perverse incentive structure, and the lie it’s built on (“money in the bank is the same as money in your wallet”) have only become more obvious and harder to ignore over the decades. Without a fundamental change to the basic design and function of the modern financial system, expect this trend to continue.

Forewarned is forearmed.