Below are extracts from 100% Money by the American economist, Irving Fisher, first published in 1935; revised in 1936 (NY - Adelphi Co.)
His proposal is for a "100% reserve" system for the banks, and the book deals at length with the advantages and objections. After the 'Foreword by a Banker", below, I reproduce part of his first chapter, the "Summary in Advance", outlining his proposals "designed to keep checking banks 100% liquid; to prevent inflation and deflation; largely to cure or prevent depressions; and to wipe out much of the National Debt", as his subtitle claims.
Fisher was not the only one, nor the first, to advocate this reform. That it has still not been implemented, despite its clear advantages not only for society hut also for the hanks themselves, strongly supports the contention of the existence of a conspiracy of top bankers and politicians to dominate the world; why else should they oppose it, in face of the havoc and destruction caused by the existing system'?
His proposal is only part of the programme of reforms needed to achieve an equitable, sustainable distribution of the World's resources and product"; but it is one of overriding importance.
Since Fisher's time, the international role of the banks has expanded enormously, and the globalisation of trade is fast destroying society as well as its resource-base, hut his reform would return to national government control of the nation's currency, which is vital to combat this development.
Other vital reforms are the elimination of usury (i.e. all forms of "making money out of money", by which the already-rich effortlessly extract further wealth from the poor – money should be no more than a means of exchange; and the reform of land ownership, by the introduction of Community Ground Rent/Land Value Taxation or otherwise, to distribute equitably the community’s “added value” of land holdings.
– Brian Leslie
[Note his Note1; he is not proposing that all money need be in physical form – notes or coin. The above was written for the first issue of this leaflet, in April 1996. Since then, of course, we have had the ‘credit crunch’ of 2008 and its continuing problems and revelations of debt-levels, growing unemployment and massive bank-bailouts along with outrageous CEO bonus-payouts, etc. – resulting in growing public awareness of the need for fundamental reform of the system of money creation. Please view my ‘vidcast’, MoneyMyths.org.uk – BL, February 2010]
To the "man in the street," or to one whose wages, salary or income is paid in currency or coin, banking appears to be a remote subject, in which he can have little direct interest. To such a man it may be a great surprise to read that the amount of his wages, salary or income depends on the total of loans outstanding by the commercial banks of the nation. And yet such is the case.
Certainly this is the most vital question of the moment. You who read this are not buying the things you normally purchase for the very simple reason that you haven't the money. Your friends and acquaintances seem to be in the same boat. What does· all this add up to?
If your personal difficulty and that of all the people you know or know of, is lack of money, is it not obvious that the central national difficulty is but the aggregate of the difficulties of all its citizens, that the scarcity of money is our paramount national problem?
We have ample producing and distributing facilities to supply everyone with an abundance of the essentials for a high standard of living, and we are desperately anxious to produce, but we haven't sufficient money to effect the exchange of our goods and services.
It is only in very recent years that we have collected sufficiently accurate data to calculate the amount of money which must be in circulation to make possible a given national income. We find that this ratio is about one to three, and persists at that figure with remarkable constancy, under widely varying conditions.
To bring the significance of this important fact home to you – there must be one dollar in money or some usable substitute in circulation for each three dollars of your annual wages, salary or income, and there must be an additional dollar in circulation for each three dollars of the annual income of every other individual in the nation.
According to my estimates, which are in substantial agreement with those of other students. we had in circulation in 1929 twenty-seven billions of dollars in cash and demand bank deposits, exclusive of an estimated amount employed in stock speculations. Our national income for 1929 was eighty-one billions of dollars. This eighty-one billions was but the total of your wages, salary or income and that of all other individuals in this nation.
In 1932 the volume of currency, coin and bank deposits in circulation had shrunk to approximately sixteen billions of dollars, and our national income had shrunk in precisely the same proportion. to approximately forty-eight billions of dollars, and of course this means that the average personal income had shrunk proportionately.
Currency and coin, issued by the government, playa minor part in the transaction of our business. The vast majority of our transactions are paid by checks drawn against the demand deposits, or checking accounts, in commercial banks. These deposits are created by the commercial banks and the people who borrow from them. The borrower gives the bank his note and the banker credits the face value of this note as a "deposit" on the books of the bank. Checks drawn against this deposit are charged against the borrower's account and credited to the account .of the persons who receive them. This person again “spends” this “deposit” and it continues to circulate. through an average of the accounts of twenty-five or more persons or firms per annum. In this way. these book credits operate as a synthetic substitute for money, performing every monetary function.
The total business of the nation is simply the aggregate of the transactions we effect by means of these borrowed credits and of the trifling amount of cold cash that circulates.
Neither the banker nor the borrower ordinarily realize that a loan justcompleted, is putting into circulation that much new money, or, as our reactionary friends would say, "inflating the currency," bythe amount of the loan. Neither the banker nor the borrower ordinarily realizes that he is starting an endless chain of successive transactions which will continue as long as this credit substitute for money remains in circulation.
When a bank loan is paid, someone draws on one of these deposits to pay it, and of course so much of that deposit goes out of existence, and a train of successive transactions which would otherwise have been made with that portion of that deposit ceases.
If all bank loans were paid, no one would have a bank deposit, and there would not be a dollar of currency or coin in circulation.
This is a staggering thought. We are completely dependent on the commercial banks. Someone has to borrow every dollar we have in circulation, cash or credit. If the banks create ample synthetic money we are prosperous; if not, we starve. We are absolutely without a permanent monetary system.
When one gets a complete grasp upon this picture, the tragic absurdity of our helpless position is almost incredible-but there it is.
If all the 14,500 banks of the nation begin calling their loans simultaneously, the aggregate destruction of this synthetic money is enormous. Almost immediately, practically no one seems to have the normal amount of money to spend. The business of the nation decreases sorapidly that merchants and manufacturers are suddenly compelled to decrease their forces and lower the wages of the remainder. This isa "depression." Its severity depends on how many of these loans are called and paid – how much of our principal money is destroyed by the payment of these loans.
It is a baffling and mysterious disappearance of money – mysterious because, of course, the general public is unaware that the 14,500 banks of the nation are all busily destroying our principal substitute for money – bank deposits.
As the depression deepens, prices and values decline and the banks are forced into further and more drastic efforts to preserve their solvency. Ruthless foreclosure becomes the only doctrine consistent with their self-preservation.
Our statesmen have consistently declined to study the question and provide a sound monetary system, an adequate permanent currency, scientifically calculated to expand consistently with our increasing population and our increasing ability to produce.
Somehow, the intelligent public of this nation must learn the fundamentals of this question. We can no longer depend upon our banking system to furnish all the money we have to do business with. The principal reason this depression continues is that the banks are not lending, and as a result, the money with which to expand business does not exist. It is so simple that business men largely overlook this fundamental situation and continue to search for some economic "fourth dimension" to explain our distressing situation, but there is no mysterious force defeating our efforts to exchange goods and services. We haven't the money nor any substitute in circulation, and that is the essence of the story.
In Professor Fisher's book, he presents in lucid detail the operation of this erratic banking-monetary system, and the obvious remedy. It isthe most important subject intelligent persons can investigate and reflect upon. It is so important that our present civilization may collapse unless it is widely understood and the defects remedied very soon.
It is your problem and mine.
…….. But only a few sentences are needed to outline the proposed remedy, which is this:
Let the Government, through an especially created "Currency Commission," turn into cash enough of the assets· of every commercial bank to increase the cash reserve of each bank up to 100% of its checking deposits. In other words, let the Government, through the Currency Commission, issue this money, and, with it, buy some of the bonds, notes, or other assets of the bank or lend it to the banks on those assets as security1. Then all check-book money would have actual money – pocket-book money – behind it.
This new money (Commission Currency, or United States notes), would merely give an all-cash backing for the checking deposits and would, of itself, neither increase nor decrease the total circulating medium of the country. A bank which previously had $100,000,000 of deposits subject to check with only $10,000,000 of cash behind them (along with $90,000,000 in securities) would send these $90,000,000 of securities to the Currency Commission in return for $90,000,000 more cash, thus bringing its total cash reserve up to $100,000,000, or 100% of the deposits.
After this substitution of actual money for securities had been completed, the bank would be required to maintain permanently a cash reserve of 100% against its demand deposits. In other words, the demand deposits would literally be deposits, consisting of cash held in trust for the depositor.
Thus, the new money would, in effect, be tied up by the 100% reserve requirement.
The checking deposit department of the bank would become a mere storage warehouse for bearer money belonging to its depositors and would be given a separate corporate existence as a Check Bank. There would then be no practical distinction between the checking deposits and the reserve. The "money I have in the bank," as recorded on the stub of my check book, would literally be money and, literally be in the.bank (or near athand). The bank's deposits could rise to $125,000,000 only if its cash also rose to $125,000,000, i.e. by depositors depositing $25,000,000 more cash, that is, taking that much out of their pockets or tills and putting it into the bank. And if deposits shrank it would mean that depositors withdrew some of their stored-up money, that is, taking it out of the bank and putting it into their pockets or tills. In neither case would there be any change in the total.
So far as this change to the 100% system would deprive the bank of earning assets and require it to substitute an increased amount of non-earning cash, the bank would be reimbursed through a service charge made to its depositors-or otherwise (as detailed in Chapter IX).
The resulting advantages to the public would include the following:
1. There would be practically no more runs on commercial banks;
because 100% of the depositors' money would always be in the bank (or available) awaiting their orders. In practice, less money would be withdrawn than now; we all know of the frightened depositor who shouted to the bank teller, "If you haven't got my money, I want it; if you have, I don't."
2. There would be far fewer bank failures; because the important creditors of a commercial bank who would be most likely to make it fail are its depositors, and these depositors would be 100% provided for.
3. The interest-bearing Government debt would be substantially reduced;
because a great part of the outstanding bonds of the Government would be taken over from the banks by the Currency Commission (representing the Government).
4. Our Monetary System would be simplified;
because there would be no longer any essential difference between pocket-book money and check-book money. All of our circulating medium, one hundred per cent of it, would be actual money.
5. Banking would be simplified;
at present, there is a confusion of ownership. When money is deposited in a checking account, the depositor still thinks of that money as his, though legally it is the bank's. The depositor owns no money in the bank; he is merely a creditor of the bank as a private corporation. Most of the “mystery" of banking would disappear as soon as a bank was no longer allowed to lend out money deposited by its customers, while, at the same time, these depositors were using that money as their money by drawing checks against it. "Mr. Dooley," the Will Rogers of his day, brought out the absurdity of this double use of money on demand deposit when he called a banker the man who takes care of your money by lending it out to his friends."
In the future there would be a sharp distinction between checking deposits and savings deposits. Money put into a checking account would belong to the depositor, like any other safety deposit and would bear no interest. Money put into a savings account would have the same status as it has now. It would belong unequivocally to the bank. In exchange for this money the bank would give the right to repayment with interest, but no checking privilege. The savings depositor has simply bought an investment like an interest-bearing bond, and this investment would not require 100% cash behind it, any more than any other investment such as a bond or share of stock.
The reserve requirements for savings deposits need not necessarily be affected by the new system for checking deposits (although a strengthening of these requirements is desirable).
6. Great inflations and deflations would be eliminated;
because banks would be deprived of their present power virtually to mint check-book money and to destroy it; that is, making loans would not inflate our circulating medium and calling loans would not deflate it. The volume of the checking deposits would not be affected any more than when any other sort of loans increased or decreased. These deposits would be part of the total actual money of the nation, and this total could not be affected by being lent from one person to another.
Even if depositors should withdraw all deposits at once, or should pay all their loans at once, or should default on all of them at once, the nation's volume of money would not be affected thereby. It would merely, be redistributed. Its total would be controlled by its sole issuer – the Currency Commission (which could also be given powers to deal with hoarding and velocity, if desired).
7. Booms and depressions would be greatly mitigated;
because these are largely due to inflation and deflation.
8. Banker-management of industry would almost cease; because only in depressions can industries in general fall into the hands of bankers.
Of these eight advantages, the first two would apply chiefly to America, the land of bank runs and bank failures. The other six would apply to all countries having check-deposit banking. Advantages “6” and “7” are by far the most important, i.e. the cessation of inflation and deflation of our circulating medium and so the mitigation of booms and depressions in general and the elimination of great booms and depressions in particular.
Naturally, a new idea, or one which seems new, like this of a 100% system of money and banking, must and should run the gauntlet of criticism.
The questions which seem most likely to be asked by those who will have doubts about the 100% system are:
1. Would not the transition to the 100% system – the buying up of the assets with new money – immediately increase the circulating medium of the country and increase it greatly?
Not by a single dollar. It would merely make check-book money and pocket-book money completely interconvertible; change existing circulating deposits of imaginary money into circulating deposits of real money.
After the transition (and after the prescribed degree of reflation2 had been reached), the Currency Commission could increase the quantity of money by buying bonds, and could decrease it by selling, being restricted in each case by the obligation to maintain the prescribed price level or value of the dollar with reasonable accuracy.
But it is worth noting that the maintenance of 100% reserve and the maintenance of a stable price level are distinct; either could, conceivably, exist without the other.
2. Would there be any valuable assets "behind" the new money?
The day after the adoption of the 100% system there would be behind the new money transferable by check the very same assets – mostly government bonds – which had been behind the check-book money the day before, although these bonds would now be in the possession of the Currency Commission.
The idea is traditional that all money and deposits must have a "backing" in securities to serve as a safeguard against reckless inflation. Under the present system (which, for contrast, we are to call the "10% system"), whenever the depositor fears that his deposit cannot be paid in actual pocket-book money, the bank can (theoretically) sell the securities for money and use the money to pay the panicky depositor. Very well; under the 100% system there would be precisely the same backing in securities and the same possibility of selling the securities; but in addition there would be the credit of the United States Government. Finally, there would be no panicky depositor, fearful lest he could not convert his deposits into cash.
3. Would not the gold standard be lost?
No more than it is lost already! And no less. The position of gold could be exactly what it is now, its price to be fixed by the" Government and its use to be confined chiefly to settling international balances.
Furthermore, a return to the kind of gold standard we had prior to 193·3 could, if desired, be just as easily accomplished under the 100% system as now; in fact, under the 100% system, there would be a much better chance that .the old-style gold standard, if restored, would operate as it was intended.
4. How would the banks get any money to lend?
Just as they usually do now, namely: (1) from their own money (their capital); (2) from the money received from customers and put into savings accounts (not.-subject to check); and (3) from the money repaid on maturing loans.
In the long run, there would probably be much more money lent; for there would be more savings created arid so available for lending. But such an expansion of loans – a normal expansion generated by savings – would not necessarily involve any increase of money in circulation.3
The only new limitation on bank loans would be a wholesome one; namely, that no money could be lent unless there was money to lend; that is, the banks could no longer overlend by manufacturing money out of thin air so as to cause inflation and a boom.
Besides the above three sources of loan funds (bank capital, savings, and repayments) , it would be possible for the Currency Commission to create new money and. pass it on to the banks by buying more bonds. But .this additional money would be limited by the fundamental requirement of preventing a rise of prices above the prescribed level, as measured by a suitable index number.
5. Would not the bankers be injured?
On the contrary,
(a) they would share in the general benefits to the country resulting from a sounder monetary system and a returned prosperity; in particular they would receive larger savings deposits;
(b) they would be reimbursed (by service charges or otherwise) for any loss of profits through tying up large reserves;
(c) they would be almost entirely freed from risk of future bank runs and failures.
The bankers will not soon forget what they suffered from their mob race for liquidity in 1931-33 – each for himself and the devil take the hindmost. Such a mob movement would be impossible under the 100% system; for a 100% liquidity would be assured at all times and for each bank separately and independently of other banks.
6. Would the plan be a nationalization of money and banking?
Of money, yes; of banking, no.
The 100% proposal is the opposite of radical.
What it asks, in principle, is a return from the present extraordinary and ruinous system of lending the same money 8 or 10 times over, to the conservative safety-deposit system of the old goldsmiths, before they began lending out improperly what was entrusted to them for safekeeping. It was this abuse of trust which, after being accepted as standard practice, evolved into modern deposit banking. From the standpoint of public policy it is still an abuse, no longer an abuse of trust but an abuse of the loan and deposit functions.
England effected a reform and a partial return to the goldsmiths' system when, nearly a century ago, the Bank Act was passed, requiring a 100 % reserve for all Bank of England notes issued beyond a certain minimum (as well as for the notes of all other note-issuing banks then existing).
Professor Frank D. Graham of Princeton, in a statement favoring the 100% money plan, says of President Adams that he "denounced the issuance of private bank notes as a fraud upon the public. He was supported in this view by all conservative opinion of his time."
Finally. why continue virtually to farm out to the banks for nothing a prerogative of Government? That prerogative is defined as follows in the Constitution of the United States (Article I, Section 8): “The Congress shall have power . . . to coin money [and] regulate the value thereof.” Virtually, if not literally, every checking bank coins money; and these banks, as a whole, regulate, control, or influence the value of all money.
Apologists for the present monetary system cannot justly claim that, under the mob rule of thousands of little private mints, the system has worked well. If it had worked well, we would not recently have lost 8 billions out of 23 billions of our check-book money.
If our bankers wish to retain the strictly banking function – loaning – which they can perform better than the Government, they should be ready to give back the strictly monetary function which they cannot perform as well as the Government. If they will see this and, for once, say “yes” instead of “no” to what may seem to them a new proposal, there will probably be no other important opposition.
[1] In practice, this could be mostly "credit" on the books of the Commission, as very little tangible money would be called for – less even than at present, so long as the Currency Comission stood ready to supply it on request.
[2] See Chapter VI. [3] See Chapter V.