100% Money
Irving Fisher
Go to Chapter: Introduction 1. 2, 3, 4, 5, 6, 7, 8, 9, 10, 11




In the United States, as in a few other countries, most of our bills are paid by check - not by money passing from hand to hand.

When a person draws a check, he draws it against what he calls "the money I have in the bank" as shown by his deposit balance on the stub of his check book. The sum of all such balances, on all such stubs in the whole country, i.e. all checking deposits, or what we ordinarily think of as the "money" lying on deposit in banks and subject to check, constitutes the chief circulating medium of the United States. This we may call "check-book money" as distinct from actual cash or "pocket-book money." Pocketbook money is the more basic of the two. It is visible and tangible; checkbook money is not. Its claim to be money and to pass as if it were real money is derived from the belief that it "represents" real money and can be converted into real money on demand by "cashing" a check.

But the chief practical difference between checkbook money and pocketbook money is that the latter is bearer money, good in anybody's hands, whereas checkbook money requires the special permission of the payee in order to pass.

In 1926, a representative year before the great depression, the total checkbook money of the people of the United States, according to one estimate, was 22 billion dollars, whereas, outside of the banks and the United States Treasury, the pocketbook money - that is, the actual physical bearer money in the people's pockets and in the tills of merchants - amounted, all told, to less than 4 billion dollars. This made the total circulating medium of the country, in the hands of the public, 26 billion dollars, 4 billions circulating by hand and 22 by check.

Many people imagine that checkbook money is really money and really in the bank. Of course, this is far from true.

What, then, is this mysterious checkbook money which we mistakenly call our "money the bank"? It is simply the bank's promise to furnish money to its depositors when asked. Behind the 22 billions of checking deposits in 1926, the banks held, besides some 3 billions of actual money at their command, 19 billions of assets other than money - assets such as the promissory notes of borrowers and assets such as Government bonds and corporation bonds.

In ordinary tunes, as for instance in 1926, the 3 billions of money were enough to enable the banks to furnish any depositor all the money or "cash" he asked for. But if all the depositors had demanded cash at one and the same time, the banks, though they could have got together a certain amount of cash by selling their other assets, could not have got enough; for there was not enough cash in the entire country to make up the 22 billions. And if all the depositors had demanded gold at the same time, there would not have been enough gold in the whole world.

Between 1926 and 1929, the total circulating medium increased slightly - from about 26 to about 27 billions, 23 billions being checkbook money and 4 billions, pocketbook money.

On the other hand, between 1929 and 1933, checkbook money shrank to 15 billions which, with 5 billions of actual money in pockets and tills, made, in all, 20 billions of circulating medium, instead of 27, as in 1929. The increase from 26 to 27 billions was inflation; and the decrease from 27 to 20 billions was deflation.

The boom and depression since 1926 are largely epitomized by these three figures (in billions of dollars) - 26, 27, 20 - for the three years 1926, 1929, 1933.

These changes in the quantity of money were somewhat aggravated by like changes in velocity. In 1932 and 1933, for instance, not only was the circulating medium small, but its circulation was slow - even to the extent of widespread hoarding.

Granting that the quantities of circulating medium for 1929 and 1933 were respectively 27 and 20 billions and assuming that its turnover for those years was respectively 30 and 20, the total circulation would be for 1929, 27 X 30 - over 800 billion dollars and, for 1933, 20 X 20 = 400 billion dollars.

The changes in quantity were chiefly in the deposits. The three figures for the checkbook money were, as stated, 22, 23, 15; those for the pocketbook money were 4, 4, 5. An essential part of this depression has been the shrinkage from the 23 to the 15 billions in checkbook money, that is, the wiping out of 8 billions of dollars of the nation's chief circulating medium which we all need as a common highway for business.

This loss, or destruction, of 8 billions of checkbook money has been realized by few and seldom mentioned. There would have been big newspaper headlines if 8 thousand miles out of 23 thousand miles of railway had been destroyed. Yet such a disaster would have been a small one compared with the destruction of 8 billions out of 23 billions of our main monetary highway. That destruction of 8 billion dollars of what the public counted on as their money was the chief sinister fact in the depression from which followed the two chief tragedies, unemployment and bankruptcies.

The public was forced to sacrifice 8 billion dollars out of 23 billions of the main circulating medium which would not have been sacrificed had the 100% system been in use. And, in that case, as we shall see in Chapter VII, there would have been no great depression.

This destruction of checkbook money was not something natural and inevitable; it was due to a faulty system.

Under our present system, the banks create and destroy checkbook money by granting, or calling, loans. When a bank grants me a $1,000 loan, and so adds $1,000 to my checking deposit, that $1,000 of "money I have in the bank" is new. It was freshly manufactured by the bank out of my loan and written by pen and ink on the stub of my check book and on the books of the bank.

As already noted, except for these pen and ink records, this "money has no real physical existence. When later I repay the bank that $1,000, I take it out of my checking deposit, and that much circulating medium is destroyed on the stub of my check book and on the books of the bank. That is, it disappears altogether.

Thus our national circulating medium is now at the mercy of loan transactions of banks; and our thousands of checking banks are, in effect, so many irresponsible private mints.

What makes the trouble is the fact that the bank lends not money but merely a promise to furnish money on demand - money it does not possess. The banks can build upon their meager cash reserves an inverted pyramid of such "credit," that is, checkbook money, the volume of which can be inflated and deflated.

It is obvious that such a top-heavy system is dangerous - dangerous to depositors, dangerous to the banks, and above all dangerous to the millions of "innocent by-standers," the general public. In particular, when deflation results, the public is deprived of part of its essential circulating medium.

There is little practical difference between permitting banks to issue book credits which perform monetary service, and permitting them to issue paper currency as they did during the "wild cat bank note" period. It is essentially the same unsound practice.

As this system of checking accounts, of checkbook money, based chiefly on loans, spreads from the few countries now using it to the whole world, all these dangers will grow greater. As a consequence, future booms and depressions threaten to be worse than those of the past, unless the system is changed.

The dangers and other defects of the present system will be discussed at length in later chapters. But only a few sentences are needed to outline the proposed remedy, which is this:

The Proposal

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 buy (or lend money on) some of the bonds, notes, or other assets of the bank with money,1 especially issued through the Currency Commission. Then all checkbook money would have actual money - pocketbook 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 and would be given a separate corporate existence as a Checking 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 at hand). The bank's deposits could rise to $125,000,000, i.e., by depositors depositing $25,000,000 more cash. And if deposits shrank it would mean that depositors withdrew some of their stored-up money.

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 serve charged 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 acquired 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 pocketbook money and checkbook 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 deposit; he is merely a creditor of 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 "a 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 gives the right to repayment with interest. 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 checkbook money and to destroy it; that is, to inflate our circulating medium by making loans and to deflate it by calling loans. Under the 100% system, when bank loans increased or decreased, 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. This money 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.

Of these seven advantages, the first two would apply chiefly to America, the land of bank runs and bank failures. The other five would apply to all countries having 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. A proposal to end the present period of wild cat credit issue by banks brings up the same inquiries presented when we ended the wild cat note issue of private banks more than half a century ago. 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 checkbook money and pocketbook money completely inter-convertible; 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 which had been behind the checkbook money the day before, namely the Government bonds, in particular, taken over by 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 pocketbook 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 1933 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 to operate.

    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 be probably much more money lent; for their would be more savings created and so available for lending.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 not 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, 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 an efficient 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 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 the amount of checkbook money would not then be governed, as it is now, by the amount of bank loans.

    6. Would the plan be a nationalization of money and banking?

      Of money, yes; of banking, no.


In Conclusion

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 to 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 coming to be accepted as standard practice, evolved into modern deposit banking. From the standpoint of public policy it is still an abuse, not 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).

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 1, 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 the 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 checkbook money.

If our bankers wish to keep 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 Commission stood ready to supply it on request.

    2. See Chapter VI.

    3. See Chapter V.