"Fractional banking, along with the erosion of the Glass-Steagall act by Congress, are two of the primary catalysts in our monetary system which devalues money, investments, assets, and creates the ever growing invisible tax known as inflation. Money is simply an idea backed by confidence, and when President Nixon removed our currency from the gold standard, sound money was replaced by the de facto confidence in the entities who print it over the hard asset of gold which formerly backed it."

Ron Paul: Our current banking system is about counterfeiting money

By: Kenneth Schortgen Jr

On July 9, Congressman Ron Paul compiled testimony of a recent hearing in the House on fractional banking, and the Federal Reserve's control of monetary policy. From that testimony, Congressman Paul emphasized that the primary moral hazard in our economy is that America's current banking system's use of fractional banking was the equivalent of making money appear out of thin air, or in fundamental terms, legal counterfeiting.

As Murray Rothbard put it, "Fractional reserve banks ... create money out of thin air. Essentially they do it in the same way as counterfeiters. Counterfeiters, too, create money out of thin air by printing something masquerading as money or as a warehouse receipt for money. In this way, they fraudulently extract resources from the public, from the people who have genuinely earned their money. In the same way, fractional reserve banks counterfeit warehouse receipts for money, which then circulate as equivalent to money among the public. There is one exception to the equivalence: The law fails to treat the receipts as counterfeit." - Paul.house.gov

Fractional banking, along with the erosion of the Glass-Steagall act by Congress, are two of the primary catalysts in our monetary system which devalues money, investments, assets, and creates the ever growing invisible tax known as inflation. Money is simply an idea backed by confidence, and when President Nixon removed our currency from the gold standard, sound money was replaced by the de facto confidence in the entities who print it over the hard asset of gold which formerly backed it.

In 1965, the average cost of an automobile was $2650, while the average cost of a home was $13600. A middle class household required only one member to work full time, and their average annual income was $6450.

After 1971 however, increases in the leverages of fractional banking drove prices higher much faster than an equivalent rise in wages. Less than 50 years later, the average price for an automobile is now over $30000, while median home prices equate to $232,000. Inflation, created by the devaluation of money through increases in the fractional banking system, have spiraled prices for each of these items by 1130% and 1705% respectively. However, income levels have not risen in relation to the cost of goods, as the median household income during the same time increased only 617%, and is now achieved with two or more household members in the work force.

It has been the mandate of the Federal Reserve to regulate the banking and monetary systems in the U.S., and to formulate policies to protect against inflation, while at the same time, keeping their member banks in check. As Congressman Paul has so aptly pointed out, the real problem and moral hazard of fractional banking has been its inability to insure that their increased leverages, or money multiplier policies, are contained on a scale where wages and prices rise at equivalent levels to limit inflation and monetary devaluation. In this, the current system of fractional banking is an absolute failure, and has simply been a means of legal counterfeiting that benefits no one but the entities who run the scheme.

Link:
http://www.examiner.com/article/ron-paul-our-current-banking-system-is-about-counterfeiting-money