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

Part II: How the 100% System Would Work



The Bank of Amsterdam and the Old 100% System

The two preceding chapters have briefly outlined the proposal for a 100% reserve against checking deposits - Chapter I for the layman in general, and Chapter II for the legislator in particular.

Many will want further explanations. Parts II and III are presented for that purpose. This chapter is devoted to the reserve problem in its relation to the principles and history of banking.

The very earliest banking system seems to have been a 100% system. It originated in the custom of depositing gold and other valuables for safekeeping with goldsmiths or with others having facilities for safety deposit. The gold and other valuables thus deposited were transferred through paper evidences called "bank money," which were, in effect, checks. As long as 100% of the gold was kept in vault, this old system was evidently a 100% system, much like that here proposed. It began to change when some of the gold was lent out. In England, this change occurred about the year 1645.

The Bank of Amsterdam (owned by the city of Amsterdam) began in the same way and made the same change of policy at about the same time. Of this bank the late Professor Charles F. Dunbar of Harvard University said:

"It is clear that the original theory of the bank as a bank of deposit did not contemplate lending as one of its functions. Established without capital, it was understood, both by the ordinance which created it and by the public, to have actually in its vaults the whole amount of specie for which bank money was at any time outstanding."1

The lending function developed gradually and surreptitiously. It was an abuse, made easy by the fact that no public reports were required of the bank. Professor Dunbar says:

"How completely the transactions and conditions of the bank were kept in secrete is shown by the general ignorance which prevailed as to the real extent of its business."2

"At intervals, for the last century of the existence of the bank, doubts were raised as to the actual presence of all the specie represented by the bank money, but these appear to have been easily satisfied, or dismissed as unimportant, although it is now uncertain that, in some cases at least, they were well founded."3

"It does not appear, however, that serious alarm was felt as to the safety of the bank before the disclosures of 1790 and 1791."4

The bank then failed "after a career of 182 years." It was found that it had lent money to the City of Amsterdam, replacing the case loaned with public obligations deposited by the City, and that this practice "had existed for not far from a century and a half" without the knowledge of the public.

"For generations the peculiar constitution of the bank had enabled the administration to hide this guilty secret and to stifle suspicion. A system of banking of great utility, under which, with a faithful management, failure was impossible, thus ended in discredit and ruin from a lack of any public knowledge of the real condition of affairs, and of any responsibility of the managers to public opinion."5

For our present purposes the only important difference between the abuse which ultimately wrecked the Bank of Amsterdam and the modern way of lending depositors' money (which was nearly wrecked capitalistic civilization) is that the modern system is not secret but is practiced openly, with the consent of all concerned, and is supposedly safeguarded by legal or other restrictions, especially as to the reserves.

Lending Reserves Ten Times Over

Under the present, or 10% system, the cash is lent not once but over and over again. The following is a simplified imaginary illustration of the process by which this is done, resulting in the modern intimate tie between deposits and loans - a tie far more intimate than that which wrecked the Bank of Amsterdam.

On, say, June 1 a bank is started - the only one, let us suppose, in the community - with one million dollars of capital consisting of actual money in the vault. This bank then proceeds to lend this money. The first customer borrows, say, $10,000, giving his promissory note. The $10,000 of actual money is, let us suppose, actually pushed through the teller's window to the customer; but the customer immediately pushes it back again, that is, "deposits" it. The same is done by other customers so that, by the end of the day, the whole million has been lent out and re-deposited.

Thus far the bank has lent only its own capital to its customers; and its customers, after receiving it (the million dollars), have re-deposited it. These customers now think of it as their money. And, at this stage, it practically, though not legally, is their money rather than the bank's; for they are secured by a 100% reserve against the million dollars of deposits recorded on the stubs of their check books.

Our imaginary bank, then, has one million of deposits (which are its liabilities due to the depositors) and it has assets of two millions - one million consisting of deposited cash, the other consisting of promissory notes.

If the cash can be called the property of the depositors, the promissory notes must be considered as the property of the bank. Both millions legally belong to the bank, but practically, as just indicated, the former - the million of cash in vault - belongs to the depositors. It may be thought of as, in effect, held in trust for them, by the bank.

The depositors can, by check, shuffle about, from person to person, their respective shares in this million dollars, in payment for groceries and everything else for which checks customarily circulate. So far, the situation is almost exactly like that of the old Bank of Amsterdam before the period of its secret manipulation.

On June 2, the same thing happens as on June 1. That is, the bank proceeds to loan out actual money from its vaults to the second day's borrowers - the very same million dollars, the million which practically belonged to yesterday's depositors, though legally to the bank; and then these borrowers of today, like those of yesterday, as fast as they get it, re-deposit that money - the same million dollars. At the end of the day there are bank liabilities of two millions (recorded as cash on the stubs of check books) and assets of three millions - namely, one million of cash and two millions of promissory notes representing the two days' loans.

Here the danger has begun. The deposits are now two millions but the assets, though they are three millions, include only one million of cash. The bank has done what the Bank of Amsterdam did surreptitiously, replaced cash with promissory notes. Half of the deposits are now backed by these promissory notes. Yet the two millions of deposits count for cash so far as the depositors are concerned. They have on the stubs of their check books a total of two million dollars, and call all of it their "cash in bank"; they circulate this entire two million by check, just as if it were real pocket-book money, turning it over, according to estimates, at about the rate of once a fortnight.

The bank is no longer in the position of a mere custodian. It has assumed a more serious responsibility - that of furnishing cash which it does not possess. It is in the position of a person who has sold a commodity short. It trusts to good management (and to good luck) to get that commodity, cash, when needed. As already noted, legally the million of cash, as well as all the other assets, belongs to the bank. The depositors' ownership of two millions of "cash in bank" has become fiction. It is not even there in trust. It is not there at all. The depositors do not own two millions of cash, although they think they do and their books say so. All they really own is the right to demand cash - two millions of it.

By allowing the second set of depositors to circulate by check what is not real money, the bank has, in effect, manufactured (by mere promises to furnish cash on demand) a million dollars of new circulating medium. Each dollar of the deposits is a mere promise to furnish a dollar on the demand of any depositor. These promises to pay its depositors instantly are made partly on the strength of the counter-promises of the borrowers to pay the bank sometime. These latter, the promissory notes of the depositors, are the basis for half their deposits, the other half being backed by the solitary million of cash.

On June 3 the bank lends out that solitary one million of cash for the third time and again receives it back as the borrowers re-deposit it.

In practice, of course, the cash seldom really passes through the teller's window and back again, but stays undisturbed in the vaults. All that usually happens is that the depositors are told to record the successive "deposits" - the proceeds of the loans - on the stubs of their check books, and each is assured that he may feel safe in drawing his checks against it up to the full amount of his particular deposit.

On June 4, the million is lent and deposited a fourth time; on June 5, a fifth time; and so on, until June 10, inclusive, when the deposits become $10,000,000 while the cash is still $1,000,000 (and the promissory notes are $10,000,000). Then (if the bank hasn't stopped earlier) the law steps in - the legal limit of 10 per cent reserve has been reached.6

The legal reserve requirement in the United States is not uniformly 10%, but, for convenience, the whole of our present system, that of short reserves, will hereafter be referred to as the "10% system", as already stated.

Which is not Cash

Most deposits are created in the curious way just described - by lending. Sometimes a little actual cash passes through the teller's window in one direction or the other - is borrowed and actually withdrawn, as for a payroll, or is deposited, as by a retail store which does a cash business. But typically and for the most part, checking deposits are manufactured out of loans, as in the imaginary example. In other words, some nine-tenths of the depositors' deposits can be made out of their own promises, with the help of the bank.

Besides loans (promissory notes) and cash, the assets of the bank usually include "investments" such as bonds. The above principles apply to these investments just as to the loans; that is, a bank may buy bonds, say from investment firms, by merely granting deposits, that is "extending credit" to those firms without the use of any cash at all, exactly as when it grants loans. The result is that the checking deposits are increased by increased investments, just as by increased loans - and so by increased loans and investments taken together. Also, of course, deposits are decreased by decreased investments, by decreased loans, and by decreased loans and investments taken together.

Loans (and investments) will be considered in Chapter V. Here what interests us chiefly is the checking deposits - the alleged "cash in bank," or what has been called check-book money - and the extent to which this "cash" is not really cash.

As already said, each depositor still calls his "deposit" his "cash in bank." But the only justification for this is that he feels sure he can get "his" cash when he wants it - and so he can, provided not too many others want to draw out "their" cash at the same time, or provided sufficient cash is deposited by others. As long as the bank can thus supply all the cash the depositors call for, the $10,000,000 of deposits can circulate by check as merrily as if there was really that much money behind them. Checks which pass from one depositor to another within the same bank simply transfer deposits - rights to demand cash - without any of the cash in vaults being touched; and, as between depositors in different banks, the checks largely cancel each other through the clearing house; so that, both as between depositors in the given bank and as between depositors in different banks, little cash is required - in fair weather.

Thus, being largely exempt (in fair weather) from large calls for cash, our illustrative bank has been able to perform a miracle. It has made $10,000,000 grow where $1,000,000 grew before. That is, it has inflated the circulating medium. It has manufactured $9,000,000 out of promissory notes or debts. This "money" is called by various names, all of which have practically the same meaning: "credit," "credit currency," "deposit currency," "cash in bank," "money that I have in the bank," "demand deposits," "deposits subject to check," "checking deposits." In Chapter I, it has been called "check-book money."

With a 10% reserve, only 10% of the check-book money can properly be called real deposits of money. The other 90% of check-book money is a synthetic substitute for pocket-book money, created by a sort of sleight of hand. The customer thinks he has obtained a loan of pre-existing money of the bank and then deposited that money. He does not see that the "money" he deposited was, in effect, created by the bank out of his loan itself - his own debt.

Destroying "Check-book Money"

Not only can the commercial banks create such synthetic money; they can also destroy it, simply by reversing the above process. Take the first customer who, on June 1, borrowed $10,000. By September 1, after using it in trade, that is expending it for labor, materials, equipment, he has earned thereby $10,000 together with a profit and deposited this intake (chiefly in the form of checks). He now pays his not of $10,000 by a check which he draws on the bank against his deposit in the bank. This payment destroys that much ($10,000) of the circulating medium of the United States; for it reduced by $10,000 the balance on the stub of his check book and does not increase anybody else's check-book balance. The deposits shrink by $10,000, as do the loans also.

That is to say, just as check-book money is manufactured by loans incurred, so check-book money is destroyed by loans paid.

This is the basis of the statement in Chapter I that banks are virtually private mints. However, Mr. Edmund Platt, former Vice-Governor of the Federal Reserve Board, reminds us7 that it takes two to make a loan. "The banks are powerless," he says, "if because of lack of confidence or for any other reason borrowers fail to come forward." This is perfectly true, but all the more unfortunate, for it shows our circulating medium to be at the mercy not merely of 14,500 private mints but also of millions of individual borrowers; and Mr. Platt quotes the English economist Keynes as saying that it is "most unfortunate that depositors should be able to take the initiative in changing the volume of the community's money."

But the important point is that it is the 10% banking system which gives these two parties, the bank and the borrower, the power to inflate and deflate the circulating medium - an unintended power which attaches unnatural consequences to an otherwise innocent transaction.

Banking on a Shoe String

If the two parties, instead of being a bank and an individual, were an individual and an individual, they could not inflate the circulating medium by a loan transaction, for the simple reason that the lender could not lend what he didn't have, as banks can and do. An individual cannot lend $10 from his pocket unless there is that much money in his pocket to lend. And if he lends it, it is no longer in his pocket. He cannot keep $10 in his pocket while lending it successively to ten different people, merely promising each person to furnish on demand the $10 which he lends to each person. But if he incorporates himself into a commercial bank (and is the only bank in the community) he can do this very thing - he can hold ten notes aggregating, say $100,000 and expect the borrowers to keep circulating the $100,000 ($90,000 of which is imaginary) by drawing checks against him, while he trusts to luck that they will never cash more than $10,000 of these checks at one time.

Only commercial banks and trust companies can lend money which they manufacture by lending it. The Savings Bank does not create its deposits. It lends the funds deposited in it. And by the same token, two individuals cannot deflate the circulating medium by liquidating; neither can a savings bank and an individual.

What about the danger to the banks themselves?

Just because the commercial banks and trust companies are always carrying a vast and varying volume of "credit" or check-book money on a small cash basis, they find themselves in a predicament like that of a teamster carrying an enormous load of hay on a very small and narrow wagon. On a smooth road all goes well; but not when the road is rough.

The Essential Defects of the 10% System

There is irony, unconscious or not, in the "conservative" banker advising his customers not to pyramid; not to do business on a shoe string; not to speculate with other peoples' money; not to sell short.

A banker of wide experience, which made him a believer in the 100% plan, said to me, "No real business man would think of running his business with such a balance sheet as that of an ordinary commercial bank, and if he tried it, no commercial bank would lend him any money. If you don't believe it, try it with any commercial bank. Take its own balance sheet disguised enough to apply to a business and ask the loan officer of that bank how much credit he would extend to a concern with demand liabilities ten times its cash, and its assets largely frozen even when nominally quick or liquid!"

Granted that such banks can escape shipwreck in fair weather or, in England and Canada, even in foul weather, they save themselves only by injuring the public; that is, by disturbing the circulating medium. So that not only would the banker refuse to sanction his business customers' doing business on so small a shoe string as that which he himself uses but he is even less justified than the customers in doing business on a shoe sting; or rather we are less justified in permitting the banker such dangerous practices. For a shaky bank reserve shakes the whole business structure.

Through inflation and deflation the 10% system hurts us all, including the innocent bystander.

As is well said in a memorandum written by some of the economists of the University of Chicago favoring the 100% system: "If some malevolent genius had sought to aggravate the affliction of business-and-employment cycles, he could hardly have done better than to establish a system of private deposit banks in the present form."

The smallness of the reserve and, growing out of that, the connection between checking deposits and loans, constitutes the great defects in our present banking system. These, and their fatal consequences, may be summarized in the following four propositions which will be discussed more fully in Chapter VII:

(1) The 10% system ties check-book money to bank loans (and
..... investments)

(2) This system and this tie-up result in runs and failures.

(3) They also result in the inflation and deflation of our chief
.... "money" ("check-book money") according as bank loans (and
..... investments) are inflated or deflated.

(4) Inflation and deflation of bank loans and so of "check-book
.... money" are largely responsible for great booms and
.... depressions.

Putting these four propositions together, we are justified in saying that the 10% system of banking is a major aggravating factor in such terrible calamities as we have recently experienced.

The Federal Reserve System as a Remedy

The Federal Reserve System was established in 1914 to remedy some (not all) of the faults in this 10% system in the United States.

In the Federal Reserve System there are 12 districts, each with one central bank (the Federal Reserve Bank of the district) and a group of so-called "members banks". The business public of a given district borrows of, and deposits in, the member banks; the member banks borrow of, and deposit in, the Federal Reserve Bank. Moreover, the deposits of the member banks kept in the Reserve Bank constitute the reserves of the member banks. That is, today the banks with which we deal need, themselves keep no cash reserves at all! They need only keep credit reserves, i.e. the promises of the Federal Reserve Bank to furnish cash on demand.

These reserves are required by law, according to the location of the member bank, to be equal to at least 7 per cent, 10 per cent, or 13 per cent of the deposits of the public in the member banks. The law also requires the Federal Reserve Bank to keep a 35 per cent reserve against the member bank deposits. Only this reserve - the reserve kept by the Reserve Bank - must be in case or bearer money. "Lawful money" is the statutory expression. Thus, in a small town, a bank with checking deposits of $100,000 must keep a reserve of 7% or $7,000, all of which is deposited in the Federal Reserve Bank. Behind this deposit, in turn, the latter bank must keep a 35% reserve, or $2,450, in actual cash. This is 245/100% cash behind the $100,000 deposits held by the public, or about 21/2%. In short, in small towns, the checking deposits need have a cash reserve of only 21/2% (i.e., 35% of 7%). Similarly a bank in a middle sized town with $100,000 of deposits in the Federal Reserve Bank which, in turn, keeps as reserve $3,500 cash or 31/2% of the $100,000. For the large towns, the cash requirement works out at 35% of 13%, or about 41/2%; that is, $4,500 cash behind $100,000 checking deposits.

Our American check deposit system, therefore, which we call in this book a "10%" system is much worse than a literal 10% system. Under our Federal Reserve Laws, it is really a 21/2%, 31/2%, and 41/2% system! Moreover, it is, in respect to reserves, worse than it was before the Federal Reserve System was established. The idea then was to make bank reserves safer by pooling them. But this added element of safety was afterward neutralized by weakening the reserve requirements. This weakening was objected to by some bankers, including Mr. Hemphill of the Federal Reserve Bank of Atlanta. He would have changed the reserve requirements in the opposite direction.

The 10% System's Inverted Pyramid

A member bank may create a part of its reserve by "rediscounting." That is, after a customer has his note discounted by a member bank, the member bank may have it rediscounted by the Federal Reserve Bank. Also, if the member bank sells securities to the Federal Reserve Bank, it may leave the purchase money on deposit in the Federal Reserve Bank and thus increase the member's bank reserves.

Moreover, the Federal Reserve Bank may initiate or influence these transactions and so cause the member banks to increase or decrease their reserves; that is, the Reserve Bank may

    1. raise or lower its rediscount rates;

    2. buy securities of, or sell securities to, the member banks. This second expedient (i.e. buying or selling) constitutes what is called "open market operations."

These two devices can theoretically be used, and have been used, to meet the dangers of the 10% system - the danger of runs and failures and the danger of inflation and deflation.

Yet, under the Federal Reserve System, we have had worse failures and also worse inflations and deflations than we had before that system was introduced! Until it happened, no one imagined possible such a sudden, sharp, and great deflation as that of 1920. And that which came a decade later was worse.

The recent attempt to reform, or "restore," the Federal Reserve System, merely by regulating the kinds of loans, miss the main point. It is of comparatively little consequence what kinds of loans are permitted. The important point is the inadequacy of the reserves.

The essential trouble is that American banking has been trying to do the business of the country on a shoe string of real money.

A Record of See-Saw in the Reserves

Thus, the whole history of banking seems to have been a see-saw in reserve requirements. There has been a cycle of abuse, remedy, evasion. The individual banker is tempted by the lure of profits to reduce his "idle" reserves; the law then applies, as remedy, higher reserves or consolidation of reserves; the banker responds by finding a way to evade these safeguards, which brings us back to the original abuses in some new form.

For instance, beginning several centuries ago with the full 100% reserves of the goldsmiths and the first deposit banks, bankers, to use the "idle" gold, "progressed" to the "free" or wild cat banking of a century ago, due largely in America to state bank notes being inadequately secured. This abuse was remedied in America, so far as our state bank not problem was concerned, by taxing state bank notes out of existence and substituting National Bank notes, better secured under Government auspice and safeguards. Later we added the Federal Reserve notes, which are ostensibly Government obligations (though the profits go to the banks!).

In England, the same sort of abuse (though less in degree) was better solved. In 1844, the Bank of England, through a great statesman, Sir Robert Peel - following earlier recommendations of the banker-economist, Ricardo8 - was required to revert, in part at least, to the 100% reserve system.

While the early abuses related to bank notes redeemable in gold, the later abuses related to, and still relate to, deposits redeemable in lawful money. But the trouble has almost always been the same - reserves inadequate to prevent inflation and deflation of our circulating medium.

Check-Book Money Has Escaped
the Reserve Restrictions on Notes

In England the inadequacy of reserves against notes had scarcely been remedied in 1844 when it reappeared in the form of inadequacy of reserves against deposits. When Sir Robert Peel applied essentially 100% principle to a part of the English note issue, checking deposits had not yet become a problem. They scarcely existed. But they speedily became a problem through the same abuse which had previously made bank notes a problem. True, the banks could not longer print and loan to their customers ill-secured bank notes, but they could furnish them with ill-secured bank deposits, or check-book money, a synthetic substitute for money, and this quasi-money could circulate by handwritten checks almost as freely as the older form of money circulated by printed notes.

Instinctively, checking deposits were resorted to by banks as a way of circumventing the restrictions on note issues. This modern deposit peril thus takes the place of the old bank note peril. From the standpoint of public policy, the modern form deserve, even more than the ancient form, the opprobrious epithet, "wild cat banking."

The growth of this peril has been particularly insidious because checking deposits were at first associated in men's minds with time "deposits" and savings "deposits" (which are not used as a circulating medium) rather than with bank notes to which checking deposits are more analogous. It is true that a check is not "lawful money" nor legal tender. It does not circulate from hand to hand except with the special consent of the person receiving it. It is, therefore, not - like a National Bank note - of equal use to any and every bearer.

But this very fact (that it is not bearer money) is a large part of the trouble; for it conceals the essentially monetary status of bank deposits subject to check. While the average depositor imagines he has "cash in the bank," bankers know that this "cash" is really only "credit," that is, a debt of the bank to the depositor. The result is that we mentally play fast and loose with "cash" as money and "cash" as credit. Now you see it and now you don't. This explains why so few today realize that the destruction of 8 billions of check-book money was a major cause of this depression.

Had it been realized more fully and more promptly that checking deposits are virtually money, they would long since have been treated as such. Yet, even when the Federal Reserve System was established, and established for the very purpose of making reserves more effective, the problem of regulating reserves against deposits was relatively neglected. Under the Federal Reserve Act notes must be backed by a 40% reserve (and all gold), while the demand deposits, as already indicated, need be backed by only 21/2%, 31/2%, and 41/2% - not all in gold, but merely in "lawful money."

The Present Reserve Problem

This quasi-money (checking deposits) has now come to constitute our principal circulating medium, while bank notes now furnish merely our small change, so to speak. The Annual Report of the Federal Reserve Bank of New York for the year ended December 31, 1933 (pp. 18-19), says:

"...the importance of currency in the money supply of the United States had been declining almost without interruption for more than fifty years prior to 1930, while the importance of bank deposits as a means of payment had been steadily rising. In 1873 and 1874 the amount of currency outstanding was approximately equal to the total deposits in all commercial banks. By 1880 the ratio of currency to deposits had dropped below 50 per cent, by 1910 to less than 25 per cent, and in 1930 to about 10 per cent. Subsequently the ratio has increased to around 18 per cent, due partly to an increase in currency outstanding as a result of hoarding, and partly to the rapid shrinkage in bank deposits between 1930 and 1933."9

Separate statistics for individual deposits subject to check without notice were not even available until, at my suggestion, the Aldrich Commission dug them out, at great expense, from the then unpublished records of the office of the Controller of the Currency. This was in 1910 when those statistics were wanted for filling out what I called the "equation of exchange.10 Since then (though with some ambiguities) such statistics have been published regularly. Yet, only a few years ago, a Governor of the Federal Reserve Board admitted that he did not even know of their existence, to say nothing of their significance. So careful have we been in regulating and watching "currency," or pocket-book money, and so careless in regulating and watching check-book money!

Deposits Need Reserves More Than Notes Do

Checkbook money really needs big reserves behind it much more than pocket-book money does, both because it is usually some six or seven times as large in volume and because check-book money is not bearer money. On their merits the contrast between the 21/2%, 31/2% and 41/2% reserves for deposits and the 40% reserve for Federal Reserve notes should be reversed, because there is less practical need of redeeming Federal Reserve notes than of redeeming deposits. The notes are real money and their redemption merely means substituting one form of money for another. But the deposits are not real money and every day someone needs to substitute real money for them, as in "cashing a check" for a payroll.

Consequently, if 21/2% or 41/2% is an adequate reserve for deposits, 1% or 2% ought to suffice for Federal Reserve notes. Or if 40% is necessary for the notes, much more than 40% ought to be required for deposits. The reason why the two reserve requirements are so inconsistent is doubtless to be found in history. Bank notes had been subject to long abuse - "wild cat banking" - the memory of which now deters the bankers from exploiting notes; but deposits have behind them no such history or memory. So deposits are exploited by the bankers of today as their forefathers exploited notes. The present depression is the logical result.

But the chief reason why for deposit currency a 100% reserve is needed in place of 10% (or rather 31/2%) is to prevent fluctuations in the quantity. This does not apply in the same way to reserves behind bank notes. Printed bank notes after redemption still exist and can be put back into circulation. But the pen-and-ink check-book money, when redeemed, no longer exists at all and so cannot be reissued until the bank can make a loan or investment. Under the 100% system, the dependence of our volume of circulating medium on loans would cease. This is the essential merit of the 100% system; and the quest for non-dependence of money on loans was what started the present writer on the 100% system. A congressman had asked him: "Can't you find a system such that to have the money of the Nation adequate does not require somebody going into debt at a bank?"

The foregoing, in brief, are the reasons why our modern reserve system as to bank deposits is so much more serious than was the ancient reserve problem as to bank notes.

Among the few efforts to meet this modern problem of reserves - of how to accomplish the interconvertibility of check-book money and pocket-book money - was the effort made by Canada under the Act of June 28, 1934. Under that act, any bank in Canada may, with certain restrictions, lodge with its branches surplus supplies of its own notes which are then held in safekeeping to be used for emergency redemption of deposits. This is not the 100% system, but it is a step in that direction. The same law also provides that notes of a Canadian bank, if issued beyond a certain point, must be backed 100% by government currency. This is analogous to the Bank of England 100% provision, and even more analogous to the proposals of this book.

We have seen an age-long see-saw between adequate and inadequate reserves. Inadequacy is now at its worst. The 100% principle, already partially invoked, would, if invoked fully, put an end to the seesaw altogether.

    1. The Theory and History of Banking, by Charles F. Dunbar, New York (Putnam), 1901, p. 103.

    2. Ibid., p. 110.

    3. Ibid., p. 112.

    4. Ibid., p. 113.

    5. Ibid., p. 116.

    6. Strictly speaking, the example given does not fully apply to an individual new bank in a community in which there are other deposit banks. The million, when lent and their transferred by check to others, would not all be redeposited in the same bank; and the other banks, as they receive their part, would draw out some of the million from the vaults of the new bank into their own vaults. This spilling over of the reserve from one bank's vault to another's hides the fact above stressed of relending the same money many times over - usually hides it even from the banker. The multiple lending is more evident when there is only one bank to consider. But, even where there are many banks, the same fact holds true for them all as a group. The spilling over from one bank to others merely shifts to these others part of the additional lending.

    7. New York Herald Tribune, January 2, 1935.

    8. Works, p. 499.

    9. It should be said, however, that the above figures, while correct as to trend, exaggerate somewhat the relative importance of deposit currency, as they include more kinds of deposits than those subject to check.

    10. The Purchasing Power of Money, New York (Macmillan), 1911.