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This quote is criticizing the practice of fractional reserve banking. In fractional reserve banking, banks only keep a fraction of deposits on reserve while lending out the rest. Orrin Woodward is suggesting this allows banks to essentially create money through lending, likening it to “fool’s gold” since it’s not backed by real assets.
The quote means that through this system, the banks that create new money via lending have control over those who take on debt from them (“the fool”), since the banks profit from interest on loans while those borrowing the money created from nothing are left “holding the bag” if the banking system fails.