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The Soon Coming Judgment Of God Upon America and How To Escape It 310
assume each borrower deposits his loan in the same bank from which he got his loan. In the real
word this does not always happen but the effects on the money supply are the same no matter
what bank it is deposited into as long as it is a domestic bank.
For this example we'll use a $100,000 deposit. The bank would record this deposit with
two ledger entries. A $100,000 credit entry would show the deposit as a liability and a $100,000
debit entry would show the deposit as reserves. Under FRB reserve limits, the bank would be
able to lend out $90,000 leaving $10,000 (10%) in reserves. The $90,000 loan would be debited
as an asset and reserves would be credited an equal amount.
When the $90,000 loan was deposited the bank would make another credit entry showing
the deposit as a liability and a debit entry showing it as reserves. The bank would then be free to
loan out $81,000 (90% of the deposit) keeping ten percent in reserves. The bank could do this
over and over until it has made $1 million in loans from the original $100,000 deposit and
increased the money supply by $1 million. These loans could include car loans, lines of credit,
credit card purchases etc.
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And the bank would earn interest on the $1,000,000 that it created,
it may also have interest payments to make to the depositors.
The Fed can increase the money supply in a similar manner by buying Treasury bills. The
Fed buys the securities with a check that it creates from nothing. When the check is deposited in
the bank either by a securities dealer or the government, the bank can then generate ten times
original deposit in loans. If the Fed purchased $100 million in securities, the bank could generate
$1 billion in loans.
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Does The Ability To Create Money Sound Illegal?
Under federal and state law, banks can only engage in those activities which have been
authorized under law. In California Bank v. Kennedy, 1897, the court ruled: “It is settled that the
United States statutes relative to national banks constitute the measure of the authority of such
corporations, and that they cannot rightfully exercise any powers except those expressly granted,
or which are incidental to carrying on the business for which they are established.” (California
Bank v. Kennedy, 167 U.S. 362; 17 S. Ct. 831; 42 L. Ed. 198; 1897 U.S. LEXIS 2104) Similarly,
in 1942 in Community Federal S&L v. Fields, the US Appeals Court ruled that: “The doctrine of
ultra vires, by which a contract made by a corporation beyond the scope of its corporate powers
is unlawful and void, and will not support an action, rests, as this court has often recognized and
affirmed, upon... above all, the interest of the public, that the corporation shall not transcend the
powers conferred upon it by law.” (Community Federal S&L v. Fields, 128 F.2d 705; 1942 U.S.
App. LEXIS 4741)
The Federal and State laws under which banks are chartered allow banks to charge
interest on money they lend but the courts have ruled that debt is not money. In 1903 an Oregon
court ruled that “checks, drafts, money orders, and bank notes are not lawful money of the
United States.” (State v. Neilon, 43 Ore. 168; 73 P. 321; 1903 Ore. LEXIS 44) Similarly, in 1939
a Kentucky court ruled: “The word 'money' in its usual and ordinary acceptation means gold,
silver, or paper money used as a circulating medium of exchange, and does not embrace notes,
bonds, evidences of debt, or other personal or real estate.” (Lane v. Railey, 280 Ky. 319; 133
S.W.2d 74; 1939 Ky. LEXIS 120)
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