During the fourth stage of monetary development, banks began to take on the role of institutions of issue, or creators of money through fractional reserve banking. The process of fractional reserve banking arose largely out of the laws of averages and probabilities in addition to the trust of depositors. Depositors were issued receipts (deposit slips) each time they deposited their money at a bank. When depositors needed to make a purchase, they had two options: 1) travel to the bank and withdraw their funds, or 2) initial, sign or stamp their deposit receipt, give it to their trading partner and have him travel to the bank. The second option marked the first use of checking accounts, where no gold moves from box to box, but is kept track of in ledger books instead. Primitive bankers earned small sums of money as depositories; when they discovered that only a fraction of their depositors actually demanded their gold in exchange for a receipt, they were able to determine how many notes they could issue in excess of the gold that was actually on hand. For example, if only one in ten people (10%) actually demanded gold or silver upon the presentation of their receipts, bankers collectively soon discovered that they could issue up to ten times this amount in notes.20 What was initially a breach of depositor's trust became the historical basis for modern economics, finance and banking. Most primitive banknotes were issued as interest-bearing debts, such as short and long-term loans for consumption and investment. Banks no longer issued loans by transferring funds from one account to another; instead, they were able to literally 'create' funds by the willpower of a creditor and would-be debtor to make an agreement for repayment. The agreement was that, for the use of the funds, a debtor would reimburse the creditor for the loss of their next-best investment opportunity - their opportunity cost. The question to ask is if there really is an opportunity cost to money not yet created. The key to understanding debt is to know that when a loan is created, only the principal (say 100 dollars) is credited to the debtor's account, and the debtor is required to find the extra amount (5 dollars) which, is not created.21 This, according to Lietaer and Greco, induces artificial competition into the economy, as debtors compete with each other for the extra money that does not exist. Money is kept artificially scarce, and production no longer centres on making goods (increasing durability and use value), but on making money (increasing exchange value by decreasing durability). Capital, labour and resources are no longer arranged in order to maximize the usefulness and quality of goods, but to maximize the amount of money they can fetch in the market. Finally, fractional reserve debt-issuance gives a growth bias to modern economics. As Herman Daly, former World Bank economist has argued:
"As a result of fractional reserve banking over 90% of our money supply is loaned into existence by commercial banks and thus must grow by enough to at least pay the interest on the loan by which it was created. This gives a basic growth bias to the economy. Fractional reserve banking also transfers to private hands the state's traditional right to issue money, and does so in a way that increases the cyclical instability of the economy. The corrective call for 100% reserve requirements has been made periodically not only by so-called monetary cranks, but also by economists of impeccable reputation such as Frank Knight and Irving Fisher".22
Be Sure to Continue to Page 6 of "E Pluribus Unum: Dollar Hegemony and Money Creation in IPE".
