[A-List] How Credit Unions Survived The Crash

Anne Williamson annewilliamson at msn.com
Thu Mar 5 08:23:20 MST 2009

Yesterday, I misquoted the legal case that determined bank deposits are loans to the bank.  (My library is in storage and I was going by memory -- apologies.)  

The correct case name is Foley v. Hill and Others, decided by the House of Lords in 1848.

Here is a quote from Lord Cottenham that explains the thinking behind the decision:

"The money placed in the custody of a banker is, to all intents and purposes, the money of the banker, to do with as he pleases; he is guilty of no breach of trust in employing it; he is not answerable to the principal if he puts it into jeopardy, if he engages in a hazardous speculation; he is not bound to keep it or deal with it as the property of his principal; but he is, of course, answerable for the amount, because he has contracted."

(And then the bank collapses, and the lenders - depositors - are left with no recourse, despite the banker being answerable for "the amount")

The case and its implications are discussed in The Case Against the Fed, pg.s 40-45 in the section entitled "Problems for the Fractional-Reserve Banker: The Criminal Law."

The case and its import to banking practice is discussed in greater detail in:

Murray N. Rothbard, The Mystery of Banking
Milnes Holden, The Law and Practice of Banking, vol. 1, Banker and Customer

Again, apologies for any confusions my poor memory may have engendered.

The FDIC can not guarantee all bank accounts, it is arithmetically impossible as I fear we might all learn through practical experience...nonetheless, an article in yesterday's WSJ reports on FDIC head Shelia Blair's increase in banking fees to fund the service (along with lots and lots of taxpayer dough via congress), which will claim the entire profits of last year from small, well-run regional banks, which are not seeking bailouts - the very banks which should be encouraged to prosper, not penalized for the imprudent and bad actions of NYC's money center banks....just another example of an unintended consequence of government intervention/scam/politicization. 
From: annewilliamson at msn.com
To: a-list at lists.econ.utah.edu
Date: Thu, 5 Mar 2009 08:33:50 -0500
Subject: Re: [A-List] How Credit Unions Survived The Crash

Yes, the regulations have recently changed in order to flood the system with more and more liquidity when the problem is one of insolvency - that is the controversy. Now, the credit unions will become part of the problem.  -A.

Date: Wed, 4 Mar 2009 15:09:46 -0800
To: a-list at lists.econ.utah.edu
From: tboyle at rosehill.net
Subject: Re: [A-List] How Credit Unions Survived The Crash

Credit Unions are allowed to loan out 90% of their demand
deposits, identically to commercial banks.  Are they not? 

See the Federal Reserve page,

  Which indicates the reserve requirement since Jan. 2009 has been
10%.  Here is their explanation: 

"Note. Required reserves must be held in the form of vault cash
and, if vault cash is insufficient, also in the form of a deposit
maintained with a Federal Reserve Bank. An institution that is a member
of the Federal Reserve System must hold that deposit directly with a
Reserve Bank; an institution that is not a member of the System can
maintain that deposit directly with a Reserve Bank or with another
institution in a pass-through relationship. Reserve requirements are
imposed on commercial banks, savings banks, savings and loan
associations, credit unions, U.S. branches and agencies of foreign banks,
Edge corporations, and agreement corporations. "
The effect of this practice (lending depositors' money instead of
holding it in the bank) is that those loans are redeposited into a bank
somewhere, by the borrower or his suppliers, very quickly. 
Resulting in total deposits 190% instead of the original 100.  
So, some banks quickly deposit 9, and loan 81.  Then it comes back
again, so they reserve 8 and loan 72, etc until the money in circulation
has been multiplied, I think 10 times the original deposit. 

See the video "Money As Debt" it's online in multiple different
places.  30 minutes well spent. 


At 05:18 PM 3/3/2009, Anne Williamson wrote:


Fractional Reserve Banking is what got us into this mess - it's a system
whereby credit creation is exploded by the banks....imagine an inverted
pyramid, only the point having any value, and layers and layers of fiat
money credit are piled on top.  The footnote from Contagion
below explains the system in its essence - when you get to the bottom of
the example, realize that the 70,000 will be lent and deposited into
other bank accounts, whose banks can then explode the fiat money (and
then lend it!) in the same way as the original 10,000 cheque, ad
nauseum.  Very quickly a mountain of debt is built on a single
Fed transaction:

 Here’s how an ordinary transaction involving a citizen, the Fed and
a commercial bank works:  the central bank buys most usually old
existing government bonds, though in principle it can buy any public
asset, through what are known as the Fed’s “Open Market
Operations.”  When the Fed  makes a purchase, the Fed writes a
check on the Federal Reserve system out of thin air.  The
recipient - let’s say in this case a private citizen who sold a warehouse
business to the Fed - goes to his commercial bank and deposits the
central bank’s check.  The commercial bank of the depositor then
takes the check to the central bank, says, ‘Put it into my reserve
account,’ thereby increasing the bank’s required reserves with the
central bank, which then allows it to pile a multiple of checkable money
created out of thin air on top of the actual note value of the
original check created out of thin air from the central
bank.  Neat, huh?  Out of a $10,000 deposit in a bank, $1,000
goes to the vaults, $2,000 to the bank’s reserve account with the central
bank, and the remainder is exploded into $70,000 of checkable money the
bank can lend.

Hope this helps,


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