The Secret of Money

Say you have $5,000 in your checking account. Being a prudent person you would not spend more than $5,000, correct? Now, what would happen if a check took 7 days to clear? Let’s also assume that you get paid $1,000 on a weekly basis. This means that on Monday you could spend up to $6,000 dollars and still be relatively safe since you have $5,000 on the bank and you have a certain degree of certainty that you will get another $1,000 within a week, correct?

It gets better. Experience has taught you that the $1,500 rent check will not be cashed by your landlord up until the end of the month, the $1,000 check you sent to your friend in New York, by regular mail, will probably take more than 2 weeks to get cashed and most checks will be over a week, except the groceries one that will clear exactly by day 7.

This means that you could inflate your original $5,000 by at least double to a total of $10,000 and still be relatively safe. After 1 month, at $1,000/week plus your original $5,000 that’s a total of $9,000 and you know that many checks linger in limbo for many weeks before they are cashed. If you were strapped for cash or really needed to spend more, you could inflate your money supply to over $10,000 and maybe you could call a few of your creditors and ask them to cash their checks later.

If I were to follow the above formula you would probably call me irresponsible, unworthy of a checking account, an economic liability, someone who is living beyond his means and in some countries this would be illegal. In fact society would condemn this conduct and my record will most likely than not show quite a few bounced checks. Many of my creditors and friends would be weary of accepting my checks –rightly so.

What if you could do this legally? What if the law protected you when you did this? Moreover, what if in the event that all your creditors showed up at the bank the same day to cash all their checks at once and there was no money on your checking account to pay them all, you were protected by a government insurance which would produce the money to pay your creditors and in the event they run out there was a law that compelled everyone to chip in so you could pay your bills?

Wait, there is more. This is so sweet, what if you needed to do a major purchase and of course you didn’t have any money to do it. However, you wrote a check or several checks to finance this purchase and knew that you will be safe since payment is guaranteed by the law that forces everyone to chip in?

It is reasonable to assume that if you did this for a few years you would find yourself in such dire straights, with such a huge amount of debt, owing so much to so many people, that if you didn’t pay them, many of them would go bankrupt and this would cause a lot of harm to other people?

Not to worry. Since you are now a big fish and your debts are so large that you are able to single-handedly wreck your State all by yourself, you can now go to Congress and make a case to “save the American People” from certain disaster if your debts don’t get paid.
Of course Congress wants to “protect the people” of this terrible calamity, if they don’t do it, they are the “bad” guys, not you.

That is, if you are a big enough fish. If you did well and applied yourself over the years, you will be a big fish, the others, who were cautious and tried to do the right thing by curbing their desire to inflate their money supply will not be rescued and this would cause several small collapses all over the State since now a lot of people will not get paid.

Do this a few too many times over a couple of decades and you have booms and busts in the economy.

This is called “Fractional Banking” the basis of how Central Banks, such as the “Federal Reserve System” which is not Federal and has no Reserves (it is a System though) operates.

Fractional Banking is not new, its earliest uses date back to the Roman Empire and it was responsible for the collapse of the richest and most powerful empire the World had ever seen.

This is why the Founding Founders and most of the delegates to the Constitutional Convention in charge of writing the Constitution forbade, in the most strongest terms, Fractional Banking. When you read the transcripts of the Constitutional Convention you will notice the heated and violent debates in opposition to fractional banking.

Back to our hypothetical story. Now that you find yourself in this mess, how do you get out? Do you sit back, reflect on your behavior, realize that a lot of people got burned and through a feeling of responsible self-ethics decide to amend your conduct? Oh no! The “solution” is to do it all over again even more massively! That’s how you are going to pay everyone! Through the “stimulus package”. This package is being promoted, managed and voted by the same people that got us in this mess in the first place!

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