Global Warming and the Existential Threat of Fractional Reserve Banking
Part 1: The Scourge of Fractional Reserve Banking
Part 1: The Scourge of Fractional Reserve Banking

Growth is an Under Appreciated Economic Killer
Yes, I know this statement is backwards to the common way of thinking!! However, too much of anything is no good. In fact, generally speaking, pleasures in excess are but punishments. Even for economic growth!
As this is a rather unusual point-of-view, I want to be clear what my position is in detail:
It is my first contention that economic growth on a finite planet is only possible up to a point, thereafter it is like the unchecked growth of a cancer: it will kill the host…that’s the planet earth and us!
It is my second contention is that fractional reserve banking is the root-cause of today’s unchecked economic growth (discussed shortly) and it must come to an end to overcome global warming and save life on earth. Yes, that is an earth-shaking “radical” position and an inconvenient truth, as we shall come to see.
It is my third contention that emerging clean energy technologies, carbon sequestration technologies, and geo-engineering technologies will never be able to solve global warming by themselves, i.e. within a growth-based economy. All hope for a long-term solution to global warming is in stopping unending growth.
It is my fourth contention that the missing piece of the puzzle to overcoming global warming is a new monetary system, which is designed to be simple, transparent, and in balance with nature from the beginning. A first draft is provided later in Part-2 of this article. It will not be perfect, but that’s okay, as it is meant to begin a long-overdue conversation.
It is my fifth contention that initially humanity will need curated and gentle economic contraction (negative growth) to bring energy use and pollution to a safe levels that are in-balance with nature. Thereafter, zero percent (0%) annual economic growth on Earth is required. Humanity needs to go on an energy diet and then “eat healthy” consistently!
Finally, for the sake of completeness for those with creative minds:
It is my sixth contention that, at least for now, unchecked off-world growth economics, e.g. on the Moon, and Mars, is not possible as Earth-based launches are too energy-intensive and polluting to Earth. That said, it is clear that this is the one area where growth-economics may still occur if its maladies are kept off of Earth. However, futuristic space technologies, such as space elevators and massive off-world manufacturing and mining, are nowhere near ready today. Today, it is a fantasy.
Unchecked Economic Growth is Mostly from “Loans”
There are three primary sources of money. First, governments typically print a small amount of bills and coins for circulation. Second, Central banks (like the Federal Reserve Bank) also create even more money, effectively out of thin air, writing “checks” against the good faith and credit of the host country by “fiat.” This money is deposited into smaller commercial banks. Third, MOST money is then created by commercial bank loans, via a technique called fractional reserve banking.
NOTE, there are other sources of money, such as: Treasure bonds and bills, foreign exchange reserves, digital currency mining, purchases of mortgage backed securities like derivatives during quantitive easing. However, these matters do nothing but confuse those that are trying to just understand the big picture.
So as a physicist, I will take the “physicists approach” and ignore second order effects to create a simplified description to retain the big-picture for the purpose of teaching.
How Fractional Reserve Banking Works
Fractional Reserve Banking was conceived as a “banking practice” by the likes of J. P. Morgan, William Rockefeller, and their associates. It was designed in such a way as to be without a single law to point to where the provisions of the law can be analyzed. With no specific governing law, it becomes hard to have a deep understanding of why it was created and the intentions of its creators behind the scenes. This obfuscation is by design.
Nonetheless, bits and pieces of laws do regulate Fractional Reserve Banking and are found in the Federal Reserve Act of 1913, Title 12 of the Code of federal regulations, especially Regulation D in Title 12, Part 204 of the Code of Federal Regulations (CFR), the Banking Act of 1933 (Glass-Steagall Act), Gramm-Leach-Bliley Act of 1999, and some of these laws have been revised hundreds of times making it all but impossible for the average person to understand what is going on.
In simple terms, Fractional Reserve Banking creates money out of pure-debt contracts (i.e. “thin air”) by creating a series of “loans” based on keeping 10% of bank deposits in reserve. Actually, it is more complex than 10%, but again let’s ignore complicating details for now.
For example, if a worker is paid $1,000, as deposited into his bank account, then a US bank has been empowered by the above laws and practices to create a “loan” for 90% of $1,000 or $900. Note, other central banks in other countries do effectively the same too.
This money is deposited into someone else's bank account as it is spent. By the rules of fractional reserve banking, each deposit may be further “loaned” again and again with 10% in reserve each time. Here is the simplified progression of an example fractional reserve “loan,” rounded to the nearest dollar for display convenience:
$900, $810, $729, $656, $590, $531, $478, $430, $387, … $1.
Each number is a result of multiplying the previous number by 0.90. The total is a simple mathematical progression and by a well-known math formula totals to $1,000/(1–0.9) = $10,000.
Wow! Did you see the bank’s “slight of hand” maneuver?
The bank only had $1,000 deposited to start, but has “loaned” out $10,000!! That means that the bank could NEVER LOAN any of its “own money” to anyone, as it does not have enough money to begin with!! In practice, not even the original $1,000 is loaned out. Moreover, there are many bank accounts so we actually need to talk about average values over many accounts and many banks, but its all the same basic idea.
Incredibly, each of these “loans” must be paid back to the bank as principle plus interest.
It is as if you go to your friend down the street and ask for a cash loan and he gives you a Post-It note instead, which says “$900” written in crayon.
Your “friend” never gave you any bills from his pocket. Nope! Just a Post-It note.
Then your “friend” demands you pay him back principle and interest with things of real value, like physical dollars or gold even — not a Post-It note!!!
I don’t know about you, but that pisses me off — big time!
The word “loan”was hijacked as Orwellian newspeak, when in fact there is nothing actually loaned by the banks ever! It is digital smoke and mirrors.
By the way, this means that mortgages and other bank loans never have the required monetary consideration needed to make them legal! That is the bank does not provide something that it owned before the loan contract is signed. This essentially illegal maneuver is “overlooked” because it is convenient for governments to do so. Otherwise, for example, the entire housing mortgage-market would collapse and governments would also subsequently collapse. However, that is the topic of another post. So I digress.
Moreover, $10,000 of principle and perhaps multiples thereof for interest don’t exist yet — not anywhere! Yet, tens of thousands of dollars in our example have to be paid back to the bank!! In cash!!! In the future.
If you thought that was bad, then take note, worse still all the complicating rules on reserves can effectively bring the required reserves down to 1% or less (not 10%) whereby the total of loans made from $1,000 is $100,000 or more. Wow! Wow! Wow!
The central bank creates out of thin-air $1,000, it is nothing more than a computer entry, and the commercial banks then create out of thin air $100,000 in loan principles and perhaps another $300,000 or more in interest payments! All starting with nothing!!
The repayment from the “loan” holders must come from money that does not yet exist anywhere in the economy or universe. Again whew!
Consequently, we must have (by design!) economic growth to create more and more money … or the loans will not get paid and people will go to prison at some point! It really appears to be some strange form of a Ponzi scheme.
You might say, “Who cares? It works! There is food on my table and a roof over my head!”
And, I would say to you:
It matters because it has created an evolving global warming catastrophe that is just now catching up to us!
Here is why:
The needed growth is obtained by expending massive amounts of energy to do productive economic work, which earns more money to service the loans! That energy must, by the laws of thermodynamics, produce waste such as the green house gas carbon dioxide (CO2) as we burn fossil fuels. This is killing our planet!
The Fractional Reserve Banking system is therefore a cancerous form of a Ponzi scheme that can keep growing with the availability of cheep energy and by ignoring the resulting pollution. If energy becomes expensive, or if the pollution is too consequential then the Ponzi scheme comes to an end…catastrophically.
Thus, fractional reserve banking requires unending economic growth, which requires unending energy growth, and thermodynamics then enforces unending pollution growth, beyond the ability of the earth to process. This causes global warming: an existential threat to life on earth!
By the way, the above statement is independent of using any fancy new clean energy technology. Even if we are not dumping CO2 into the atmosphere we will still be dumping a growing amount of heat into the atmosphere, by the second law of thermodynamics, as energy use increases!!
Even “clean” fusion energy from sea water will dump heat into the atmosphere, which can become heat energy pollution that is beyond the earth’s natural ability to absorb safely! This heat grows exponentially in a growth-based economy. This is pollution, just as much as CO2, and it is equally deadly to a planet supporting economics on an exponential growth curve. The time scales may be different, but the tragic end result is the same.
Summary
We thus conclude that to eliminate global warming we must:
Stop economic growth by eliminating fractional reserve banking.
End the fractional-reserve-based Central Banks (e.g. the Federal Reserve Bank in the USA).
Create clean and renewable energy technologies…of course!
Establish a monetary system, in balance with nature, as money circulates without economic and energy-use growth.
We must learn to be more than creative, we must learn to be wise.
Next …
In Part-2 of this article I will discuss item-4, how to actually build a monetary system that is in balance with nature, where there is zero growth, and no middleman (bank)….and NO taxes — done responsibly!
Hint, it was conceived of by the direct and indirect founders of the United States of America around the time of the US Constitution, as they hated taxes … the plot thickens!