From Fractional Banking to Freedom: How the Infinite Banking Concept Counters Conventional Banking Flaws
by Jason K. Powers
To understand the unique approach of the Infinite Banking Concept (IBC), it’s essential to first delve into the foundational practices of the modern U.S. 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 shockwave 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.
Jason K Powers is a Multi-Business Owner, Real Estate Investor and an Authorized IBC Practitioner. In an exclusive partnership with the National Real Estate Investor Association, Jason is the go-to expert for all aspects of Infinite Banking and Life Insurance. Connect with Jason today to explore how life insurance can empower you to reach your financial goals. Visit www.1024wealth.com/NREIA for more information.
