Healthy Money Healthy Planet - library.uniteddiversity.coop

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banking, a term used to dignify what some call ‘the world’s biggest confidence trick’.
Not all banks throughout history have, however, operated like this. In contrast to
fractional reserve banking, the banks of Amsterdam and Hamburg in the 17th century
acted as warehouses, fully backing all of their receipts by the assets deposited – gold
and silver. Such banking is called ‘100 per cent reserve’ banking. In this system, it was a
requirement that banks held 100 per cent of the money in reserve for the customer in
case he or she should need it. Monetary reformers have always favoured 100 per cent
reserve banking, and are supported by the writings of economists such as Irving
Fisher, author of 100% Money. 2
The System Today
Fractional reserve banking continues today with the approval of governments, but it is
now dignified by euphemisms such as ‘managing risk’. Banks are essentially printers
of warehouse receipts that circulate as if they were genuine, fully backed notes. When
most people go to the bank to get a mortgage, for example, they think the bank is
taking the money out of its deposits in order to lend it to them. This is not true. The
bank simply creates the extra money and starts charging the borrower interest. Once the
borrower has paid back the loan, the bank effectively cancels that money – it ceases to
exist. And, of course, the interest payments stop at that point.
Up until 1984 New Zealand had a fractional reserve banking system whereby the
commercial banks were required to keep a certain fraction of their money as ‘reserves’,
in case people wanted to make withdrawals. Let’s take a closer look at how this
worked.
Suppose, say, that Elizabeth borrows a mortgage $100,000 from Bank and the
fractional reserve has been set at 10 per cent. This means that the bank can only create
$90,000 of new money: 10 per cent of the deposit, or $10,000, must be put into reserves.
Elizabeth then buys a house from Craig for $100,000. Craig puts the $100,000 into