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Date: November 27, 2008
Subject: Fractional Reserve Banking -aka- Counterfeiting

This is
G&G Associates
Tax & Financial Consulting Services

Dear G&G Readers,

Your bank is a counterfeiter, as facilitated by the Federal Reserve System and permitted by the government that allegedly represents you.

The lie of fractional reserve banking is at the heart of our ‘banking' system. And its acceptance as fact or necessity by the world's populace is the basis on which most other economic lies and myths gain so much credibility.

To understand why we're in so much trouble right now, and why the privately owned Federal Reserve Banks are to blame, one must understand fractional reserve banking, and why it amounts to little more than counterfeiting.

King Edward II, Goldsmiths and"Legal" Counterfeiting

For all of history through the 1800s, goldsmiths were the world's primary bankers. It made sense in those hard money days to keep your gold with the fellow who molded it into coins and acted as the community's central cash register.

So here we have the goldsmiths...guardians of bullion and protectors of everyone's wealth. I've personally always seen this as the primary function of a bank.

But just guarding money and issuing certificates for it...I suppose it just didn't pay as well as it could. That and you always end up with a huge pile of cash (gold) that's just sitting around and not really doing anything other than backing promissory notes. So the goldsmiths got crafty, and at this point they became the bankers we know today.

They started issuing more certificates than they could back in gold, allowing them to collect interest on the physical gold collecting dust in their that already belonged to someone else. But weren't there already certificates attached to that gold? Of course. But the bankers believed those certificates wouldn't all be cashed in at the exact same time, so they could get by and no one would ever be the wiser.

This is the critical point in the story, and at few points in history has the difference between right and wrong been so very clear.

The value of goldsmith's notes was in the gold behind them. So when they issue a new note backed by...well backed by nothing other than the supposition that they'd have enough inventory to pay it off if it fell through...they were engaging in wishful thinking, at best. Folks, I give you irrational exuberance. At the very core of our banking system.

But how could the goldsmiths get away with such blatant counterfeiting? Didn't anyone realize that they were pulling wealth from thin air, that they were trading worthless notes for valuable goods? Well, the governments knew. Why didn't they do anything to stop the goldsmiths?

Put clearly; it wasn't in the interest of the world's ruling monarchs to stop them. King Charles II of England had his own con game going with the where they traded him physical gold for sticks of wood (I'm not kidding at all...I'll be covering government debt next week.)

So, by complying with the government's con games and "ponzi" schemes, the goldsmiths earned themselves a back-scratching from the world's monarchs, received in the form of Fractional Reserve Banking.

The Whole World Falling for the Same Tricks...500 years later. And, so we arrive at the modern-day Federal Reserve. The Dollar is the world's reserve currency, making us in some sense the world's "goldsmith." And we have a Federal Reserve System - composed of privately owned member banks (The IMF/Vatican/8 Wealthiest Families in the world) - that represents how cloudy and convoluted the relationship between governments and banks has become in the last half-millennium.

But somehow, the world economy keeps falling for the same "scam" fo some reason.

You see, the Federal Reserve controls not only the interest rate at which banks are allowed to lend, but the fractional reserve ratios they're required to keep (as a percentage of their reserves).

Let's backpedal for a second here...let me make it even simpler. An institution composed of banks and their representatives is in control of not only our money supply, but the amount of new money (in the form of loans issued) that banks are allowed to ‘counterfeit' and the interest they're required to charge on those conjured-from-nowhere dollars.

Interest rates - when the decision is left to the borrower and the lender - represent the time preferences and assumed risk of borrower and lender. Like the price of any other good, the interest rate of a loan ideally represents a compromise for both parties in terms of time and risk.

But when the government intervenes with a mandated interest rate (like Greenspan's sub-zero "liquidity experiment") those decisions to lend and borrow are often made with little or no consideration to time and risk. Since the money is cheap, free, or the government might even be paying you to take it, incentives are changed across the board.

And then fractional reserve banking comes in. Since the banks only have to keep a percentage of their reserves - a ratio set by an institution they own...making them essentially self-governing - these ridiculously low interest rates spur the banks into a lending frenzy.

Lending to and from each other, commercial interests and private parties, the banks go hog-wild. Without the restraint of reasonable lending costs, they lend as much credit against your money as humanly possible, flooding the economy with fresh dollars that never existed before.

Euphoria takes over. Of course housing prices will continue to go up when the pool of dollars chasing those houses is growing so rapidly...that's just common sense. But many of us bought into it, in some way or another. And that's what makes the coming correction so painful.

Because of the one-two punch of mandated interest rates and fractional reserve banking, an epic amount of bad business decisions are inevitably made. That's a simple truth of matter who tries to ignore it.

But what can you do? Well, it's pretty easy actually. Just don't believe all the hype, take everything with a grain of salt, and make your own decisions. Don't be a fool and fall for the suckers game of borrowing and spending because you wanted something now until of waiting to pay cash for it later.

Also, start buying real money..."Gold and Silver"...I truly hope I don't have to tell you I told you so when I have been giving you months upon months of recommendations of why you need to start purchasing theses precious metals.

Better yet you should be asking these questions.

When the government gives a US$25 Billion bailout to Citigroup, and then the company's market capitalization is listed at around US$20 Billion shortly before the company is taken should certainly be asking questions.

When Detroit's CEOs fly to Washington in separate luxury jets, and they beg for US$75 Billion in bailout money for companies with a combined market capitalization of less than US$10 should be asking questions.

There's a heist going on out there...and plans are afoot. Through the careful control of information sources, those in power can control the actions of the masses. But you don't have to be a part of the masses.

Quote: "When they asked him...Why did you buy a bank? He said...the best way to rob a
bank was to own it."
Al Capone

Who do you think owns Citigroup, GM, the Federal Reserve...the "Banks."

It's no wonder gold is starting to look so attractive right now, even amid deflation. Investors forget their history when alluding to gold as only an inflation hedge; true, gold is primarily an inflation hedge as prices rise, but it is also emerging as a surrogate currency as the dollar, still the reserve currency of the world, heads into the abyss drowned by bailout after bailout and a seemingly never ending expansion of credit and money supply.

Gold was not freely traded post-1934 when FDR confiscated the metal. It's therefore impossible to predict how gold will perform now in the first credit deflation since the 1930s. But I've got a feeling its moment has yet to arrive ahead of the next dollar sell off.

I'll sure,y bet on Gold.

Gary Gray
Tax & Financial Consultant, RFC
G&G Associates
877-817-6031 toll-free
866-361-3872 toll free fax

"We are not bound by chains and shackles but by our own thoughts and perception."
S. Barrett

LEGAL NOTICE: This work is based on SEC filings, current events, interviews, corporate press releases and what I've learned as a financial consultant. Nothing herein should be considered personalized investment advice. It may contain errors and you shouldn't make any investment decision based solely on what you read here. It's your money and your responsibility. Also, please note that due to our commercial relationship with Publc Gold, G&G Associates may receive compensation from a membership purchased at


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