Fractional Reserve Banking

Currently, banks are indebted on an unprecedented scale. If people want to pay out only 10 per cent of their deposits, the banking system risks collapsing. The fractional reserve is very partial.

That is why the bank has only 10% of our cash that we have deposited.

Knowledge of the sub-preserve is generally available. There is a lot of information in Wikipedia, in Investopedia and on other web portals. Are you able to plan your financial future well with this knowledge? Always reading countless articles about economics on the Internet, I have such a disturbing thought at the back of my head: how to translate it into real money. I have already completed this stage of education and I already know how to do it. Unfortunately, I also found out that the generally available knowledge on economic issues is practically of little use. There are several reasons. First of all, it is boredom. Economic portals still provide data on base rates, CPI inflation levels, the achievement of the inflation target, the level of unemployment. Does this information mean anything to you? Can you save for your retirement better thanks to this information? I don’t think so.

Secondly, the level of complexity of these articles is quite high and without knowledge of concepts in the field of economics and finance you are not able to draw from these articles useful for you practical information thanks to which your pension will be rich.

Thirdly, what you read is often official, academic economic knowledge, which is not very suitable for the economy of everyday life. What do I mean? The answer lies in the simple question of what I can buy in 10 years’ time for the $1000 that has now been put aside. You won’t find out from these articles. Coming back to the main topic of this part of our history of enrichment, another question comes to my mind. Will I be able to withdraw my $1000 from a bank when this bank goes bankrupt? The answer is terrifying. Well, not. If you want to learn more read on in the section for subscribers, which is free of charge until further notice.

A little bit of history

The starting point is that the partial reserve system is a relatively young invention. It was created so that central banks and commercial banks could create new money out of nothing. The history of the partial reserve is about 200 years old. In the history of banking, the traditional task of the bank was to store gold and silver coins and other valuables, which rich landowners, townspeople and other privileged layers of society gathered. The bank charged a small fee for storage and kept all the valuables all the time. The second form of storing assets in the bank was to lend its valuables to the bank in return for a profit (interest) determined on an annual basis between us and the bank. Something reminds you ? Of course. That’s how deposits work. Thanks to this, the bank was able to grant loans in the olden times. At that time, it acted according to the principle that it could not grant credit that exceeded its deposits. So if he had 1000 zlotys of coins, he also had such a creditworthiness.

Such a system seems simple, honest and logical. And it worked well. The world was different. The poor did not take credit because they were too poor. A serf worked for food, and when he needed money, he borrowed from his Lord (knight, landowner, bishop) in exchange for even harder work.

But the world is changing. The population is growing. The degree of organization of business, education, states and civilization in general is becoming more and more complex. People are getting rich. As a result, banks are getting rich and taking care of more and more capital. At some point bankers notice that more and more capital is left in the bank, which lies unused and brings them a small annual profit of a few percent. As a result, the bankers start to trade in this excess cash. Based on the right assumption that money makes money. In this way, the banks move smoothly from a total reserve system to a partial reserve. Banks begin to grant credits for an amount greater than they have in deposits. Initially, the bank’s reserves amount to 60-70 percent. Over time, this percentage decreases to reach 20 % at the beginning of the 20th century. Do you know what sub-preparation your bank has, in which you keep your life savings?

Many factors contributed to the fact that the banks introduced a partial reserve

The development of civilisation and the increase in the complexity of the world, which I have already mentioned, has complicated and strengthened relations between banks, businesses and countries. It is important to mention and remember that the state as such is a huge company that has profits and losses. Large empires such as England, Portugal, France and Spain grew rich by colonising new regions of the world. The valuables and profits from the colonies invested in their home countries. It is important to know, however, that in order to achieve wealth, they first had to conquer the region. For this they needed money. They were financed from the royal treasury (central bank) or from commercial banks. In addition, companies that carried out invasions were set up. Sometimes they did it on their own, sometimes hand in hand with the royal army. The flow of money was high. Finally, building a fleet of ships that was supposed to circumnavigate the globe in search of new goods, slaves and transport routes is not cheap. The scale of money flow was growing.

The profits from colonization were enormous. Unfortunately, the golden time is over. Colonies gradually became independent, a resistance movement was formed, countries waged constant wars to maintain control over their colonies. Unfortunately, this resulted in ever-increasing costs for the state. The trade balance began to look worse and worse, and the countries became more and more indebted.

War is a very expensive business

Wars are very expensive because the material and human resources that the state has to allocate for this purpose are very large. Possible loss of war is already a financial nightmare. The reason is the war repairs. The loser pays the winner. Very long and very much. After all, it is the winner who sets the rules of the game. Why do countries then wage wars? The answer is as simple as it is brutal. About money. Of course, we ignore any local conflicts related to revenge. On a larger scale, a war that one country declares to another country usually has an economic subtext. Most often it is about taking over material resources and natural resources such as fertile land, gold, oil, diamonds and human resources. That is right. Human resources. Citizens of another state are very valuable acquisitions. After all, someone has to work.

Usually central banks do not go bankrupt

In a situation of increasing spending related to war or other costly situation for the state, there is increasing pressure from the state on the central banks to freely increase debt. The problem, however, is that the bank acts like a bank. It must not go bankrupt. Even in a partial reserve system it must have some sensible cash reserve.

Technically speaking, it can go bankrupt, but it must do everything it can to make sure that this is not the case. Of course, the bankruptcy of the central bank happens. What happens then can be seen in youtube watching movies from Venezuela ad.2018. There are more examples. It is the task of the central bank to prevent such a situation. And the indebted state needs more and more money during or after the war. Of course, in such a situation it increases taxes. This is not enough, because people do not like to pay taxes, and above a certain level of taxation, tax revenues decrease. How will you ask this? This is due to the simple fact that people crushed by high tax rates are starting to think about how not to pay them. The result is that many people find a solution like not paying taxes at all. The state’s influence is diminishing. That is why each country creates its own currency and theoretically gives control over that currency to a central bank. And everything works well when the economic environment is good.

When there is not enough money, the summit war between central bankers and the ruling states begins. Follow the conflict between President Trump and FED or President Erdogan and the Central Bank of Turkey.

Source of money

At this point, we need to get to grips with the method of generating money in the state. The state prints money. Yes. It prints. In a regulated way, but still. And how it prints it can pay off debts, finance investments, wage wars and, above all, pursue a socialist and populist policy of distribution.

In this way, we have come to this most important issue, which involves a partial reserve. A modern state is governed by democratically elected politicians. Which politicians do we elect? Those who promise us the most. That is how it works almost all over the world. Exceptions like Switzerland can be omitted. One day I will write for you an article about Switzerland and you will understand why it is different there and why you cannot do Switzerland somewhere else.

After the elections, politicians keep their election promises so that voters want to elect them for the next term. After all, a politician, like every employee, tries to secure a job for the next 4-5 years. Therefore, he promises and realizes. If he fails to fulfil at least some of his promises, then in the next elections he will be won by a politician from another party. One that promises more. And promises are expensive. Free nurseries, free and universal health care, higher pensions, more jobs, unemployment benefits, subsidy programmes for young people, subsidised loans for the purchase of a house. Do you know this?
Of course, yes. It is the same in every country. And does a politician have money for this? No.

The natural cycle of spending our money by politicians

How is it? It just doesn’t matter to him. After the elections, something will be found out. Then the Ministry of Finance raises taxes, imposes new ones, issues bonds, prints money, lends abroad from various financial institutions. And somehow it turns. And the debt is growing.
So you can all print. The European Central Bank, the Fed, the Central Bank of England, Japan and even Switzerland. The system of central banks cooperating with each other results in the fact that if one country prints money, it fulfils its election promises with this money, but in addition it does something more important: it buys the debt of another country. What for? It does this in order to keep the debt system under control. After a period of printing in one country, another country starts printing and in exchange for earlier help buys our debt. And that’s how it’s going. In this way, the partial reserve allows the state to get into debt on an unimaginable scale. If the state lent money on such a scale in the past as it currently does, the money would surely soon run out. And the creditors would quickly recover the borrowed money. Most often by sword, bow, fire and cavalry


You will not find out about the existence of a partial reserve system from television or Internet portals. You will hear that the base rate is, the base rate of that, that agreement has been reached, that the economy is in good shape. I would like to make it clear that the media are very dependent on private capital and capital is dependent on the states. Therefore, they are not talking about inconvenient matters. Why is the partial reserve system inconvenient for those in power. For a simple reason. This system allows countries to become over-indebted.


For us, this fact is important because the partial reserve system also applies to commercial banks. Now I have a homework for you. Try to find out what cover in the capital has the bank in which you hold the most money. You can call there, ask in the bank, and the best way is to search on the Internet. This is not secret data. Banks have to report very precisely what is happening to their finances. There are two reasons for this. First of all, as listed companies they are obliged to do so. Secondly, there is the special banking law, which imposes very strict rules on financial institutions to provide information about the details of financial operations and the state of the company.

The banks with which I have accounts have 9 % and 13 % respectively of the reserve in live cash. In the opinion of supervisors, banks get excellent marks because they are very well recapitalised. Hmmm. Somehow it does not convince me. Now let’s imagine what happens when the crisis starts in the country, because the level of sovereign debt was already so high that nobody wanted to lend it.

Purchasing power of money

In such a situation, the State issues bonds. Unfortunately, nobody wants to buy them, because the state is bankrupt. Professional investors (I know that I am leaving the subject. I have to brighten up the dark dependencies between these phenomena) such bonds bypass with a wide arc. The state starts to print its currency like a crazy one to cover the costs of the state and pay off huge foreign debts. In order for someone to buy the bonds, they have to have very high interest rates. They will have to be redeemed afterwards. Prices are rising, inflation is rising. People in this situation usually want to withdraw money from the bank. Most people know that in a money crisis day by day, it is worth less and less. Its purchasing power drops very quickly. They want to withdraw money to buy for it things that store value. Suddenly queues are queuing up in front of banks and ATMs. Bankers realize that they are not able to withdraw such money because they do not have it. At this point, a phenomenon described as bank panic begins. Banks based on a partial reserve have only 4, 5 or 7 percent of the cash that we have deposited there. With a rapid increase in withdrawals, banks introduce restrictions on cash withdrawals. Such a move results in an even greater desire to withdraw money. Rioting begins, fights in front of ATMs. There are huge queues in front of the banks, stones are flying, the pressure is increasing.

The banking crisis begins in full view

Banks’ websites have a temporary indisposition. It turns out that you had money, and suddenly you don’t have it. Now answer the question of what reserves of money you have for the crisis. Many of you will proudly answer that it is well secured. You have x money in one bank account for a black hour. Consider now what you will do if your bank only allows you to withdraw $100 a week from this account and your online account will be temporarily suspended for an indefinite period of time. Here I must also explain why I am writing about dollars. For a simple reason. The US dollar, by default, is currently the most recognizable currency in the world. The phenomena I describe are universal and concern every currency and every country. If you are a lucky account holder in Austria, Denmark or Norway, it may also meet you.

If you have experienced it, you know what I am talking about. If not, it would be better for you to take an interest in this subject. Watch reports from Greece where daily payout limits of 100 eu have been introduced. An extreme example is Venezuela. It is a country with some of the largest oil deposits in the world. So why did it go bankrupt. For a simple reason. Because of irresponsible and socialist policy. All election promises were sponsored by oil money. At one point, oil prices fell sharply, the cost of fulfilling election promises rose and there was not enough money. What is happening there is a tragedy. In other countries this is also the case, and this may be the case with us. We must protect ourselves.

What can happen to our money in a bank in a crisis situation?

They will be there. Only what if we are not able to withdraw them because the banks will introduce limits on withdrawals. In addition, the bank guarantee fund, which operates in most countries of the world, guarantees a return of up to EUR 100,000 or USD. The law is structured in such a way that banks can circumvent it. In case of bankruptcy of a small bank, the Bank Guarantee Fund or even the state will help and repay the bank’s debts in order to avoid riots in the streets. What happens if a large bank or a group of affiliated banks fail? Bail in. This is a completely new invention, which is a consequence of the partial reserve system. In case of lack of solvency, a bank can apply two defensive mechanisms. One is expensive for us in the long run and is called Bail out. In this situation, the state saves the bank from taxpayers’ money. The worse option is Bail in. Then the bank takes the deposits of its customers and saves itself from these deposits. Did you know that most EU countries agree to such a procedure?


– Money on a bank account is at risk

– The bank does not act on your behalf. It protects only its own interests

– Bail-in – in case of financial problems of the bank your money will save the bank. A good example is bail in banks in Cyprus

– Moving from real to virtual money forces you to keep your savings in the bank. This process is deliberately carried out so that we have no way out and have to keep the money in the bank


– Do not keep the cash register in one bank

– Select banks from different capital groups

– Keep money in banks in different countries

– Avoid banks with a low level of equity capital

– Do an online market research on the bank you intend to entrust with your savings

– Do not keep all your money in bank accounts. I believe that 20 percent of your savings are safe. If you lose it you still have 80 percent in other assets

– The most important principle: apply the principle of limited trust

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Marcin Jagodzinski

Marcin Jagodzinski

Author and originator of the Wealthy Pensioner website, medical practitioner, author of articles on economic issues, enthusiast of modern technologies, fan of Brazilian culture and a man fascinated by blockchain technology.

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