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Watch this extremely entertaining history of banking, and how we got into the fractional reserve mess in the first place. Whether or not you agree with its proposed solutions, the explanation is pretty sound.
See Wikipedia for a more detailed description of:
Fractional reserve banking, and
Compound interest
Here's a (very) simple overview:
Banks are allowed to loan out money they don't have. If the fractional reserve rate is 10%, the bank only has to have 10% of all its transactions in deposits as 'real' money. The other 90% can be loaned out, even though it doesn't really exist, except on paper.
Then, bank customers can buy things with those loans, and that money gets deposited in other banks. Those banks then consider this 'real' money (even though it's actually a loan from another bank), and can loan out 9 times that amount. The upshot is that virtually all money circulating in the economy is debt. Banks create money from thin air, by typing numbers into computers. I'll say that again. Banks create money from thin air, by typing numbers into computers.
The fractional reserve system, and the interest payable on those debts forces the global economy to balloon like bacteria in a petri dish (1920s, 50s and 80s), then burst (30s, 70s and now). But meanwhile, those superficial economic cycles are causing the ecology we need to survive to degrade towards collapse. And because economists don't tend to know anything about ecology, they don't know how dangerous this is. Economic crashes are ugly enough, but a global ecological crash could well be terminal.
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