From Fractional Banking to Freedom

Posted By: Jason Powers ICOR Blog & News,

How the Infinite Banking Concept Counters Conventional Banking Flaws 

To understand the unique approach of the Infinite Banking Concept (IBC), it's essential to first
delve into the foundational practices of the modern US banking system - particularly, fractional
reserve banking. This system, where banks are required to keep only a fraction of their total
deposits in reserve and are free to lend out the remainder, is a cornerstone of contemporary
finance. While the theory is that it fosters economic growth through increased lending (and most
certainly enables banks to generate significant profits), it also introduces significant risks such as
bank runs, asset bubbles and destabilization of the financial system at large, as we’ve seen time
and time again.

Fractional reserve banking effectively creates money out of thin air. For every dollar deposited,
only a fraction is kept on hand, and the rest can be used for loans. Before 1992, banks were
required to keep 12% of deposited amounts on reserve. This meant they could loan out the
remaining 88%. In 1992, that reserve was lowered to 10%. This now meant that 90% could be
loaned out. In March of 2020, following the shock wave of COVID-19, the Federal Reserve
lowered that requirement to an unprecedented 0% (Zero Percent), where it has remained to date.

We all know what this means.

This can lead to a multiplicative effect in money supply creation, potentially leading to inflation
if not carefully managed. Through the lens of Austrian Economic Theory, we would argue that it
leads to unsustainable credit expansion that can cause economic bubbles and crashes. Austrian
economists advocate for a banking system based on sound money principles - where money
supply expansion is tightly controlled and closely tied to real assets like gold, thereby promoting
economic stability and reducing inflation risks.

Transitioning to Infinite Banking Concept
Against the backdrop of these potential instabilities inherent in fractional reserve banking, R.
Nelson Nash introduced the Infinite Banking Concept. Nash proposed that individuals could
become their own bankers, thus sidestepping some of the systemic risks posed by traditional
banking practices. By utilizing dividend-paying whole life insurance policies as financial tools,
individuals can build a personal banking system. This system allows policyholders to borrow
against the cash values of their policies rather than depending on commercial banks for loans.

Here’s how it works: a policyholder pays into a properly structured whole life insurance policy
designed specifically for the purposes of Infinite Banking, which over time accumulates a cash
value. This cash value grows at a guaranteed rate and also earns dividends. Policyholders can
then borrow against this cash value for personal (or business) financing needs - whether for
buying a car, investing in real estate, or funding a child’s education - without having to go
through a traditional bank. Now you, the policy holder, is in control of the banking function in
your life. Imagine a life without the bank.

The beauty of this system lies in its simplicity and control. Loans taken against a life insurance
policy come with no mandatory repayment schedule, and the interest rates are typically lower
than those of bank loans. Moreover, since the policyholder is borrowing against their own
savings, they are essentially paying themselves back, thus keeping the money within their
personal economy.

Infinite Banking as a Sound Money Solution
From an Austrian Economic perspective, the Infinite Banking Concept resonates strongly with
the theory’s core principles. Austrian Economics favors systems that minimize the risk of
inflation and promote fiscal conservatism. By encouraging individuals to save and build their
wealth within a life insurance policy - a historically stable and non-volatile asset - IBC promotes
financial self-reliance and stability.

Moreover, by reducing reliance on traditional banks and their loan products, individuals using
the Infinite Banking Concept mitigate the risk of being adversely affected by broader economic
downturns or banking crises. They create a buffer against economic uncertainty by leveraging
their life insurance policies to fund their borrowing needs.

In conclusion, while fractional reserve banking has facilitated economic expansion and
prosperity on a massive scale, it is not without significant risks - risks that are amplified by the
very nature of the banking practice as critiqued by Austrian Economics. The Infinite Banking
Concept offers a compelling alternative that not only aligns with Austrian principles of sound
money but also empowers individuals by making them their own financial managers. By building
wealth in a controlled, self-sustained banking system, individuals can achieve greater financial
security and independence, making the Infinite Banking Concept a prudent choice in an
uncertain economic landscape.