by Allan McGregor

Created on: October 19, 2008   Last Updated: November 23, 2008

In the 1968 film 'The Producers', the eponymous partners are played by the late comedic genius Zero Mostel as failed Broadway producer Max Bialystock, and Gene Wilder as unsuccessful accountant Leo Bloom, who cook up an ostensibly foolproof money-spinner involving producing a guaranteed' theatrical turkey. But how can a flop make money?

Bloom realises if they can persuade more backers than they need to finance a show and then go out of business they can pocket the excess funds. Thus he and Bialystock create a potential liability they cannot possibly honour, by selling a vastly oversubscribed share issue in a venture whose certain failure is assured.

In the fictional farce, our hapless producers' best efforts to guarantee failure backfire spectacularly when their abysmal musical, 'pringtime for Hitler', becomes an unwitting hit, landing both men in prison.

Their mistake was in choosing the theatre rather than banking in which to perpetrate their fraud, because much the same scam has been standard practice in the industry for years. Uncannily similarity to Bialystock's and Bloom's scheme, the 'Partial Reserve' system works like this.

I establish a bank in which you deposit $10,000, on which I agree to pay 4% interest per annum. By lending your money to my debtors at 6% annual interest I notionally gain 2%-a-year. In round figures, your $10,000 costs me $400-a-year, but makes me $600 a $200 business profit.

It's how most people imagine banking works when, under the Partial Reserve system, your $10,000 deposit actually authorises me to lend $100,000. Like Bialystock and Bloom I am reliant on my deceit remaining undetected, which requires that my borrowers continue to service their debts.

Where does the extra $90,000 come from? Nowhere; hence the Partial Reserve system is also known as 'PFA' or, 'Plucked From Air'. A no-brainer con, whereby I lend and charge interest on money that doesn't exist. You even repay the principal sum, that I made up in the first place.

Standard practice for years; so long as relatively few debtors defaulted, it went largely unnoticed until now, with too many subprime loans falling apart and everyone wanting back money that had never actually existed. In America, about $40-trillion of debt rides on only $8-trillion of cash - a $38-trillion bubble of non-existent money. Multiplied globally, now governments worldwide are acutely interested. Are even they big enough to fill so sizeable a gap?

Hardly! $9-trillion of America's $38-trillion is government

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