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Understanding the UK Banking system

Fractional Reserve Banking in the UK

A series of short, 5 to 10 minute videos have just been released which describe in clear, non technical terms, exactly how fractional reserve banking works in the UK. Every voter in the country should view them. They are an essential watch for those who want to really understand how the UK system works, and why it is in crisis.

How Money is created by banks

The Positive Money Group, who have produced the videos, are campaigning for the introduction of full reserve banking, and are asking for public support here

In a historic speech last month, the Governor of the Bank of England, Mervyn King .

“Of all the ways of organising banking, the worst is the one we have today. ...eliminating fractional reserve banking explicitly recognizes that the pretence that risk-free deposits can be supported by risky assets is alchemy. To work, financial alchemy requires the implicit support of the tax payer...For a society to base its financial system on alchemy is a poor advertisement for its rationality.”

Fractional reserve banking is one of the root causes of the financial crisis but not the only one. Some of the other reasons are

Financial illiteracy of the general public
The payment of debt interest requires economic growth………
Growth requires energy which is increasingly expensive because of peak oil. Rising fuel prices will suppress economic growth
The credit expansion has been driven by investors (e.g. pension funds) who want high yields to pay benefits to a burgeoning baby boomer population
Powerful Vested interests wanting to maintain the status quo

The seeds of the current crisis have been sown over several decades. The crisis is still in progress and has some way to go. Changing to a full reserve banking system will not affect the progress of the current crisis but may help prevent a future one. But this is closing the stable door after the horse has bolted.

How can the current crisis be halted? Here are a few miracles which might happen.

• A new form of sustainable energy is discovered which replaces oil

• Investors, including baby boomers accept big drops in pension and investment income.

• New huge oilfields are discovered, and climate change is proved not to be manmade

• The Masters of the Universe with powerful vested interests eat humble pie, admit they have been wrong