Fractional Reserve Banking

As wealth increased through trade, banker's vaults became filled with precious commodities such as gold, silver, and gems. Bankers soon realized that their customers had little use for the gold, silver, and gems themselves. Receipts were much more convenient for transacting business. Receipts were much lighter, safer, and easier to carry. To make more money, bankers transitioned from storing wealth to lending wealth. When a customer came in wanting to borrow money, the banker simply issued another receipt with interest. In other words bankers realized that they did not need their own money to make money. Bankers began effectively printing money.

The financial term in kind is derived from the German word kinder; which simply means child. This is where the word kindergarten comes from—literally, a garden of children. The financial term in kind was created when a borrower used cattle as collateral, security, to borrow money from the banker. If the borrower's cattle had calves while being held as collateral, the banker kept the calves as a part of loan agreement. This was the start of interest payments, or as bankers say, payments in kind.

Since bankers made money from interest payments, payments in kind, it was not long before bankers then began making more loans for more money than they had in their vault. This is where the magic show begins. This is where the bankers pull rabbits out of hats. For example, they might have had $1,000 in gold, silver, and gems in their vault, but they could have $2,000 in receipts in circulation that could lay claim to that $1,000 in valuables. In this example, they created a fractional reserve of 2 to 1—two dollars in receipts for every one dollar in gold, silver, and gems in their vault. The amount of money in the bank was only a fraction of the receipts in circulation. The bankers collected interest on money they technically did not have. If you and I did this, it would be considered fraud or counterfeiting—yet, it is perfectly legal for banks to do.

— Robert Kiyosaki; Rich Dad's Conspiracy of The Rich

Assuming a 12-to-l reserve limit (the ratio can change depending on economic conditions), when you deposit $100 in your bank, your local bank is allowed to lend up $1,200 in loans tied to that $100. When that happens, your money has been shaved and diluted, and inflation increases.

For example, let's say the bank pays you 5 percent interest per year on your $100, equating to $5 per year in interest payments to you. The bank can then extend $1,200 in loans at 10 percent interest, generating $120 in interest payments to them. The bank has robbed you of your wealth by debasing your money through fractional reserve, and it has made $120 in interest on your $100. You have made $5.

— Robert Kiyosaki; Rich Dad's Conspiracy of The Rich