Whenever we have an economy that begins slowing down, especially after the economy has been really on fire for a while, we then get into the arena where bank failures can become more possible, and sometimes, even more probable.

We’ve heard many times over the years about the dangers of Ponzi schemes, but when we look at how the banking industry is really run, how different is it in reality from being a Ponzi scheme?

Because under a Ponzi scheme, the people who are invested can continue generating money until new investors can no longer be found, and then the entire scheme collapses. But with banking, it can be similar in that everything can look fine as long as the economy is expanding, and the bank’s investments continue doing well, but once the economy shifts and both people and businesses aren’t doing so well anymore, everything can then begin to collapse.

With this in mind, do you understand how the banking system operates? Because most people who haven’t studied this become shocked once they discover the reality of what’s really been going on.

The banking industry here in the U.S. operates under a system known as “fractional reserve banking”, which on the surface can sound fairly reasonable. This means that for all of the money that the bank has on deposit, it can loan out a specific percentage of these deposits to people.

Many of us would think that loaning out 25% of the money on deposit could be prudent and reasonable, and that loaning out 50% of it may be riskier, but still acceptable. But then loaning out 75% of this money on deposit would be considered as being very risky by many people.

But what the banks are allowed to do here is absolutely stunning, and once we learn more about this, the idea of banks failing when the economy begins to turn south really begins to make much more sense.

Over a long period of time, requiring a 10% reserve ratio within the banks was considered to be a fairly accurate number, which means that if you deposited $1,000.00 in cash into a bank, the bank could then loan out $900.00 of that money to a borrower, keeping $100.00 of that original money on deposit (10%).

While many of us might think that loaning out 90% of a bank’s deposit money would be risky, trust me, it gets much worse…

Let’s say someone borrows that $900.00, spends it on a big-screen TV, and the $900.00 is then deposited into that store’s bank account. That bank can now lend out 90% of that $900.00 as a new loan to someone else, too.

Now note here what has just happened. You still have credit for your original $1,000.00 deposit within your own bank, but with the $900.00 loan that was just created from this money, we now have an additional $900.00 in new money that was just added into the economy. So from your $1,000.00 deposit, together with the $900.00 loan that was given to someone from that deposit, the banking system now has an additional $1,900.00 in total.

But where did this additional $900.00 in new money come from? It snapped into existence, and was digitally created as new money within the banking system, by the mere granting of the $900.00 loan!

Then when that big screen TV store’s bank exercises its ability gives someone else an $810.00 loan (90% of the $900.00 that was deposited into that bank), that additional $810.00 then becomes new, additional money within the banking system, too.

This then goes on and on, with money being borrowed and deposited into other banks, to the point where approximately $9,000.00 in new loans and new money can be created, from that initial $1,000.00 deposit!

Did I hear someone say “Ponzi scheme”? Because this is how our banking industry operates today.

So we begin to see the house of cards that the banking system is really built upon, and we can now better understand how, when the economy begins to slow down, this entire house of cards can begin to collapse.

In addition, in many circumstances when a bank collapses, the bankers then turn to the government to get bailed out, kind of acting as if they’ve been very cautious, conservative investors of everyone’s money.

Now think about this for a moment, too…the banks create this money digitally out of nothing, and then loan people this money to buy things like homes and commercial properties. Then if the people default and can’t make their loan payments, the bank can then take their property away from them.

So the bank can loan people money that’s created out of nothing, and then take the person’s property when they can’t repay the loan.

This is the ability that our banks are operating under today.

Now if this is all quite stunning to you, and you’d like to learn even more about how this entire banking system works, you can research and learn more about this online, but I really recommend that you read the book, The Creature from Jekyll Island, by G. Edward Griffin. This book is considered by many to be the ultimate authority on this subject, it goes into amazing detail, and I promise you, you will definitely be stunned!