Jeffrey Epstein outlined his view of how the modern banking system operates, focusing on what he described as fractionalized banking and the disconnect between public understanding and financial practice.

In a statement explaining the mechanics of the system, Epstein said fractionalized banking allows institutions to lend out significantly more money than they physically hold in deposits.

He argued that the concept is commonly understood by finance professionals but remains counterintuitive to the general public.

“The fundamental part of money, which is called fractionalized banking. And fractionalized banking is something that finance people understand, and the people on the street. And when I say people on the street, that's where I was when I started on Wall Street, would find it impossible to believe impossible, why?” Epstein said.

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He illustrated the point using a simplified example of a single-dollar deposit and how banks are able to extend credit beyond that amount.

“Bannon Bank I give you $1 just one single dollar in our system of banking, I would say, okay, Steve, I gave you $1, how much could you lend out to your friends? Your natural reaction would be probably something less than $1 because I want to keep something in my pocket,” Epstein said.

According to Epstein, the reality of the banking system runs counter to that instinct.

“The way our system works is, if I you as a bank, are holding my dollar, you can lend out an additional eight or $9 No, it's impossible. I only have $1 Jeffrey, we have something called fractionalized reserves. If you have one, you can lend out nine. That's the way our system works,” he said.

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Epstein argued that this structure is poorly understood not only by the general public but also by political leaders and individuals without financial backgrounds.

He referenced his own family to highlight the gap in understanding.

“And so not only do world leaders not understand banking, but the man on the street, my father, worked in the park department, it would be beyond his imagination that people could lend out more money than they actually had in their pocket,” Epstein said.

He said this lack of understanding has consequences during periods of financial stress, particularly when public confidence in banks weakens.

Epstein pointed to historical examples where depositors attempted to withdraw funds en masse, exposing the underlying structure of the banking system.

“If the public understood that the bank really doesn't have their money at any one time, there's one of the things during the pressing there were runs on the bank,” he said.

Epstein explained that banks operate on the assumption that not all customers will seek to withdraw their funds simultaneously, which allows institutions to maintain relatively low levels of physical cash on hand.

“The reason the banks don't keep much money in the actual bank is they assume that not everyone's going to want their money on the same day,” he said.

He argued that this assumption shifts the primary risk faced by banks away from inflation and toward the possibility of a sudden loss of confidence.

“So that's not really the fear of inflation. The fear is a run on the bank,” Epstein said.

Epstein concluded by emphasizing that in such scenarios, depositors may demand funds that, in practical terms, are not fully available at any given moment under the fractional reserve model.

“Everybody wants to take out something that doesn't really exist,” he said.

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