The Need for 100% Reserves
[The American Economic Review (1936)]
Few suggestions for monetary reform have commanded such immediate and widespread interest as that which has attended the proposal to require 100 percent cash reserves against bank demand deposit liabilities. No small part of this interest can be traced to Professor Irving Fisher's genius for turning things, by schoolmen brewed, into human nature's daily food. Whether or not one sympathizes with his theses, one cannot but admire his expository skill. The initiators of the proposal that Fisher has developed, a group of economists at the University of Chicago, among whom Professor Henry C. Simons was prominent, may or may not subscribe to Fisher's version of their plan; but, however this may be, discussion will almost inevitably center upon his book.
The essence of the plan lies in a frank recognition of bank demand deposits as the principal element in our money supply and in the suggestion to make these deposits merely representative of, rather than additional to, less abstract forms of money (such as federal-reserve notes) in the same way that gold certificates merely represent gold actually withdrawn from circulation. The method by which this would be done would be to require banks to keep a 100 percent cash cover for their demand liabilities.
The difference between the existing and the required reserves would be bridged through the supply of new cash to the banks. Under the proposed rules this cash would be sterilized and thus could not generate inflation. The effect of the scheme would be to separate the lending function of the banks from the supply of currency. The latter would then be entirely in the hands of a governmental agency as is now the case with those forms of money somewhat more substantial than the demand deposit.
Discussion so far has almost exclusively turned on the potentialities of 100 percent money as a means of controlling business fluctuations. Professor Angell, indeed, in his critical estimate of the plan in the article already cited, refuses to discuss the general merit of divorcing the supply of circulating medium from the lending process, and of making it impossible for commercial banks to relend several times over the sums deposited with them, on the ground that measures to this end are so clearly desirable, if our monetary arrangements are ever to be put upon an intelligent and equitable basis, that it is superfluous to argue for them.
However tenable such a view may be, it is improbable that it will be widely accepted without a struggle. It seems worthwhile, therefore, to consider wherein the inequity and lack of intelligence in our present monetary and banking system lies and to look at the 100 percent reserve plan as a means for curing some of the major defects.
The 100 percent reserve plan raises two quite distinct general questions. The first turns on the location of the right to issue fiduciary circulating medium; the second on the principles that should govern such issue once the appropriate authority has been determined. These questions should be kept distinct not only because they are logically disparate but also because it will be relatively easy to decide the one and extraordinarily difficult to reach an assured conviction on the other. The fitting settlement of the easier question, moreover, is a prerequisite to the solution of the more difficult one, and, in itself, would constitute a great advance in monetary and banking practice.
It is to the question of the location of the right of issue that this article will be solely addressed. Attention will be directed to the deleterious results of the present misplacement of that right; but no suggestions as to its exercise, once it is in appropriate hands, will be made. Specifically, I shall not attempt a prophylaxis for economic instability, since it seems to me that our grasp of the intricacies of price relationships, including the reaction to monetary changes, is not yet firm enough to warrant the assurance that we could keep our economy on an even keel through monetary manipulation. Whatever the virtues or limitations of the 100 percent reserve plan as an instrument of control of our economic system, a well-nigh conclusive case can, I think, be made for it on the narrower and much less maze-like ground to which I shall confine myself.
Aside from a certain inconvenience of assay, full-value commodity money might properly be issued by private individuals; yet it is, I take it, all but self-evident that the issue of fiduciary money should be an exclusive prerogative of the sovereign. If it were necessary to justify this proposition one would argue:
that fiduciary money, unlike real wealth, cannot with social advantage be indefinitely increased in volume;
that to entrust the supply of fiduciary money to the workings of free competition would therefore not only result in no social advantage but would, on the contrary, bring chaos, including the killing of the goose that laid the golden eggs;
that a full or partial monopoly of the issue of fiduciary money is, in consequence, indispensable;
that such a monopoly permits of seigniorage profits in the nature of a tax on the community at large; and
that the power to tax cannot with equity be granted as a privilege to any group of private citizens.
These principles have long been recognized with respect to fractional metallic money, where the fiduciary element is partial only. But where the money is much more completely fiduciary, as in bank notes or demand deposits subject to check, we have drawn the inevitable inference slowly or not at all.
The fact is that, in the course of not more than two centuries, the world has passed through a monetary revolution in which it has almost ceased to use any form of tangible wealth as money in internal circulation and has gone over to the use of debt. It has scarcely been aware of what it was doing. The private debtors, therefore, whose obligations now circulate as money, have, without much ado, been permitted to take more than 90 percent seigniorage on their issues.
It is true that they have ordinarily been held to a redemption of their promises, but governments have likewise usually redeemed any fiduciary fractional currency presented to them for that purpose. In neither case have the seigniorage profits been much curtailed, since it is the reservoir of fiduciary currency always in circulation that is significant rather than the influx or efflux of individual atoms. The pursuit of profit by the banks has gradually brought it about that the great bulk of our money, instead of being a commodity asset, is an impalpable private liability with will-o'-the-wisp characteristics and of very dubious virtue.
Appreciation of the fact that it is wrong to put the provision of the supply of fiduciary circulating medium in the hands of private individuals, for exploitation to their own profit, is now much less keen than it was when the practice was in its incipient stage. No one will suspect John Adams of demagogy, but he was quick to denounce any issue of private bank notes as a fraud upon the public: "Every bank of discount," said Adams, "is downright corruption. It is taxing the public for the benefit and profit of individuals; it is worse than … continental currency, or any other paper money." It was clear to our second president, who had had abundant experience with public as well as private issues of currency, that if fiduciary currency in any form was to be issued it should be issued by the government so that the public should gain with the one hand what it lost with the other.
The era of wildcat bank-note issue, both in this country and abroad, brought support to Adams's views. The ensuing struggle to secure, as a sovereign prerogative, the monopoly of the issue of fiduciary money had an early sequel in the abolition, or governmental assumption of the right of issue, of practically all tangible forms of fiduciary currency. The celebrated Bank Charter Act of 1844 practically outlawed any new issue of tangible fiduciary money other than subsidiary coinage in England, but the procedure in other countries was rather toward the maintenance of the practice as a governmental or quasi-governmental monopoly. Hardly had these reforms been effected however, with private-note issue thus brought to an end, when the development of the checking system led to widespread evasion of the spirit of the legislation.
The differences between bank notes and demand deposits, under the checking system, are little more than formal but, as Professor Dunbar — with a not very perspicacious satisfaction — points out, the demand deposit, "incomparably the greatest, although the least considered part (of the circulating medium of this country) … eludes the regulations which legislatures so industriously enforce upon the other constituents of the currency" and "beyond the requirement of a minimum reserve … the subject is not touched by legislation, in this country or elsewhere."
In other words, the right to the private issue of money has been recaptured by the banks. The degree to which modern banks manufacture the money that they lend is in dispute, but there can scarcely be any question as to the fact. A modern discount operation consists of an exchange of promises between the borrower and the bank, each going in debt to the other. So far, however, as the totality of bank promises becomes, and remains, part of the currency, the promises are never called and the bank is in the delightful position of living on the interest of what it owes.
The privilege is in no way essential to the lending process. It should be clear that lending and borrowing ought not to change the supply of currency and that no money should be lent, by private individuals at least, which had not first been saved by someone. There is nothing to prevent commercial banks from lending, as all other financial institutions do, without manufacturing the money they put at the disposal of the borrower. The bulk of commercial bank lending at any time is, in fact, done without the (net) creation of new money. It is only the lending, which results in a net increment in demand deposits, that fails to meet this test, and to this increment discussion is relevant.
In the uttering of their uncalled non-interest-bearing promises the banks obtain permanent interest-bearing assets (loans and investments) at no direct cost to themselves and at the expense of the community at large. Promises can be indefinitely multiplied and, so long and so far as the public is willing to receive and use them as money, there would be no limit on the resources that the banks might acquire if it were not for the legal or prudential requirement of a minimum reserve.
The reserve requirement, which was once intended to give liquidity, has largely lost its original significance but has grown in importance as the only, if feeble, check on indefinite currency expansion. It has prevented commercial banks from rushing with our economy down a steep place into the sea, but it has been far from exorcising the evil spirit of inflation. As time has gone on, a steady reduction of reserves has proved feasible, without invoking immediate disaster, and the denial of a roving license to the banks has thus been compensated by the gift of privateers' letters of marque.
No responsible community, of course, would consciously grant to any citizen, or group of citizens, privateer privileges against its own commerce; and the advocates of the present system refuse to concede that this has been done. Professor Haney, for instance, who claims, "in all modesty," that he is both a trained and an unbiased economist and "admits" that he understands money, seems to think that he has justified the issue of currency by private banks when he asserts that bank deposit currency is not money. Since he puts government and other inconvertible paper currency in this same category, one is forced to the conclusion that Great Britain, for example, has no money at all. Such a distinction may be useful for certain dialectic purposes but it will, I submit, not go far in elucidating the real issues.
Professor Haney, moreover, appears to think that banks cannot even create "currency" since, as he says, banks cannot lend their deposits. This assertion, which is widely reflected in banking literature, rests on an ambiguity, perhaps consciously cultivated, in the word "deposits." New net deposits (the total for the system) can arise, of course, either from the delivery to the banks of cash derived from nonbanking sources or from the uttering of new promises, by the banks, in excess of those redeemed.
There is no question that the banks can, if they wish, lend most of the cash deposited with them; and there is, I suppose, as little question that, under existing circumstances, they can lend their promises to a sizable multiple of the cash they retain from such original deposits. It is true that they cannot lend their existing deposit liabilities but they can lend any cash assets involved in the assumption of some of those liabilities and they can, in addition, lend new liabilities created for, and in the act of, making a loan. They do not even have to wait on the initiative of borrowers since, in precisely the same fashion, they can buy securities on their own initiative whenever borrowers fail to offer them short-term notes adequate to their lending capacity.
The extent to which the liabilities so created will continue to be currency depends, it is true, upon the persistent readiness of the public to accept them as such. But in the play of use and wont this readiness has steadily grown and, following Gresham's law, the bank-debt money has more and more driven commodity money out of ordinary circulation. When it went out of circulation it went, in large part at least, into the banks and, as a reserve, has increased the power of the banks to issue more of their own debt as money. If nothing but cash were used as currency, the deposits (and assets) of the banks could grow in like measure (through recurring deposits of recurringly lent cash) only on the condition that deposits were left untouched.
It is clear that the community would not leave non-interest-bearing deposits indefinitely in the banking system if custom had not turned them into money that could be used without any net withdrawal. The growth of this custom permanently floated a large part of the banks' existing debt and made it possible for them, on their own initiative, to cast a much enhanced volume of debt upon the waters in the hope, on the whole justified, that it would not return. We have thus developed a new, and quite unique, species of mortmain.
The ultimate irony in the delivery to the banks of the government prerogative of money issue is now in process. The federal government is, at the moment, pursuing an inflationary fiscal policy in the form in which modern inflations typically occur. Except for a minor fraction of the total, the funds that it is borrowing have not been saved by anyone. Instead of that, interest-bearing securities are being sold to the banks, which are paying for them by the simple and practically costless process of writing up a deposit credit on their books. The banks have thus acquired nearly half of the national debt (nearly all of the recent increase), they retain a sizable volume of what are supposed to be their typical assets, and they still have reserves sufficient to permit the further absorption of commercial and other private indebtedness to an amount far greater than they ever possessed. No one would assert, I suppose, that all this new actual and potential investment could be made out of the recent earnings, or increases in the capital funds, of the banks, or that the present growth of bank liabilities and assets derives from the original initiative of private depositors.
If we are bent upon an inflationary fiscal policy, it would seem only common sense that the government should get the seigniorage on the new issues of money; but the administration is properly afraid of direct issues, since it is clear that, under the partial reserve system, this would give to the banks the power of creating many times as much money as the government would itself issue and would thus provoke monetary anarchy. Some means had to be adopted that would permit primary inflation but not the immensely greater secondary inflation. The government is thus put in the ridiculous position not only of divesting itself of its prerogative in favor of the banks, and of losing the seigniorage profits on the new supply of money, but of actually paying the banks, in interest-bearing securities, for issuing bank-debt money on its behalf. It cannot even spend the gold in its possession without increasing the potentiality of inflation in somewhat greater measure than would attend an outright issue of greenbacks to the same amount.
To defend the equity of the existing system of partial reserves would be, at best, a nice exercise in exegetics. The commercial banks have undoubtedly secured a large part of their earning assets (whether loans or investments) in exchange for fiduciary money manufactured by themselves. If there were no compensations the situation would be intolerable and the profits of the banks would long ago have been so great as to have led to early and vicious attack.
It is well known, however, that commercial banking has, on the whole, been by no means fabulously profitable; and it is a reasonable contention that the original inequity of the check-and-deposit system has been largely neutralized. Competition among the commercial banks has not reduced interest rates on commercial, relative to those on long-term, securities (the two sets of rates are, in the long run, inevitably tied together through substitution); but it has forced the banks to disgorge much of their gross returns in the provision to the community of free services such as bookkeeping, investment service, and the like.
In addition to this, the struggle of individual banks for cash to serve as reserves leads them to bid strongly for interest-bearing time deposits. Instead of deriving from cash originally in the hands of the public, it seems probable that the bulk of time deposits are now made by means of checks on demand deposits; and this merely shifts the liabilities of the banking system without any immediate change in assets. By their own action the banks thus unintentionally prepare the way for the conversion of some of their non-interest-bearing into interest-bearing debt and share with the depositing public a large part of the return on the assets purchased with newly created currency.
There seems to be scarcely any limit to which the public might not go in thus neutralizing the creation of money by the banks, since there is no limit on the extent to which the public may decide to use the commercial banks as investment agents by leaving time deposits with them instead of making investments direct. The practice does not prevent the ultimate expansion of bank assets and liabilities. On the contrary, it tends very much to accentuate it, since the reserve requirements against time are less than one-third of the average requirements against demand deposits. The banks, in this way, eventually acquire larger resources than they would otherwise have; but they must pay interest on some of their debts rather than float them as money, and their margin of profit is cut in comparison with what it would otherwise be.
Whether, and to what extent, new money created by the banks will continue as currency, or be turned into time deposits, seems to depend in large part on the degree, and circumstances, in which prices are passive and mobile. If prices were purely a resultant of the money supply, and responded readily to an injection of new bank money, they would tend to keep that money in being. But if prices are sticky, they may result in the destruction of the bank money, as money, by evoking its transfer from a demand to a time deposit. This interconvertibility of demand and time deposits means that the money supply changes at the caprice of individuals, as well as banks, and it is, therefore, a probably insuperable obstacle to control under the present system.
The relatively rapid growth of time deposits in the decade of the 1920s, when total bank debt was expanding fast but prices were not rising, may perhaps be explained as well in this as in any other way. Conversely, just as the sluggishness of prices may explain the growth of time deposits, the growth of time deposits may sometimes explain the sluggishness of prices in the face of expanding bank credit.
The net result of the whole process of bank debt formation, so far as equity is concerned, is difficult to assess, and I shall not pursue the matter further. Some lack of equity might be pardoned if our banking system responded well to the pragmatic test. We might concede special privileges to the banks if that would make them strong and otherwise effective. But it can, I think, be properly alleged that the use of demand deposits as money, on a fractional reserve basis, weakens the banks, renders them unfit for the unction they were designed to perform, frequently hoists them with their own petard, and brings general ruin in its wake.
The American public, though it has readily accepted the idea of bank debt as money, has for very good reasons never given full allegiance to it. In piping times it adheres to a dual concept, treating both bank deposits and tangible cash as money. The bank deposits are then complementary money. But, when a storm breaks, the public no longer regards bank deposits as complementary, but merely as alternative, money — and not a very good alternative at that.
The real money supply is thus subject to a catastrophic shrinkage through withdrawal of deposits and the subsequent calling of loans by the banks. It is unnecessary to elaborate this well-known phenomenon, which under the partial reserve system involves many unrealizable claims to the same cash, except to remark that the attempt of the banks to realize the inconsistent aims of lending cash, or merely multiplied claims to cash, and still to represent that the cash is available on demand, is even more preposterous than the investment of bank "reserves," which has often been tried but never with success; or, more simply, with eating one's cake and counting on it for future consumption.
This is perhaps why two troubled bankers, in an appendix to Professor Fisher's book, confess that they are living a lie. The alleged convertibility is a delusion, dependent upon the right's not being widely exercised; and we should not shrink from the inference that, if we are going to use debt money at all, we should be ready to use it at any and all times. Paradoxical as it may seem, debt of a given amount that is recognized as uncollectible (inconvertible government paper) makes better money than one that is ostensibly and even, in part, actually collectible. By assuming debt, the banks, literally as well as figuratively, make money, and by its repayment they destroy it. Once adjustment has been made to the new supply it is better that the debt not be repaid.
Where the acceptance of bank debt as money is much more complete than in the United States, as in Great Britain or Canada as a result of the branch system and the concentration of banking in the hands of a few reputedly invulnerable institutions, the volume of bank debt currency does not shrink greatly, or at all, during depressions. A transfer of assets from loans to investments tends to maintain the current earnings of the banks, and the real value of their more or less frozen loan assets is not tested. Whether or not the insurance of deposits will remedy the situation in the United States remains to be seen. If it does the banks will have acquired a perpetual annuity in the return on the assets acquired in the process of issue of deposit currency never redeemed.
The evil effects of a deflation of deposit currency, arising from distrust of this supplementary money, include not only the threat to the liquidity of the banks, and to their solvency through the consequent souring of their assets, but also to their profit position on current transactions. The cost of services developed in a period of expansion is so great that, when the total of demand deposits temporarily ceases to expand and the banking system can no longer secure new earning assets in this initially costless manner, it becomes impossible for many banks to pay their way. Competition still binds them to the rendering of these services, however, and the fate of commercial banks has thus come to be tied up with expansion in the volume of the circulating medium. The inevitable bias of the banks is therefore toward inflation.
A further consequence to the use of private debt as money is the shift that has occurred in the character of bank assets and the consequent perversion of the banks. Whenever reserves accumulate, following an increasing substitution of bank credit for cash or for any other reason, the potentialities of expansion of bank credit on a partial reserve basis far transcend the requirements of commercial borrowers at a price level conditioned, as under a gold standard, by that of the outside world. The banks then use their expansive powers to acquire long-term securities and, in process of time, have ceased to be primarily commercial credit institutions and become a peculiar type of "investment trust" creating their own purchasing power. Their liabilities remain demand liabilities, fixed in monetary terms, but a steadily growing proportion of their assets has shifted from a corresponding portfolio of short-term commercial bills or notes, similarly fixed in monetary value, to long-term securities which, however "sound," are dependent for their current value on movements in the prevailing rate of interest.
For good or ill this situation has now eventuated in at least a temporary paralysis of bank action. The demand for commercial loans from acceptable borrowers is negligible relative to the lending powers of the banks. The fear, however, that the rising interest rates that would attend the cessation of inflationary borrowing would so reduce the prices of long-term bonds as to drive their value far below the level of the liabilities incurred in their acquisition is preventing the banks from using anything like their full lending (investing) powers in the acquisition of these alternative assets.
Quite apart from this immediate situation, the original purpose of commercial banking has come to almost complete frustration; and liquidity, even of a theoretical sort, has in consequence largely gone by the board. If there is any principle of banking that we can assert with something like firm conviction it is that assets and liabilities should be of corresponding character as to time and fixity in money value. To attain the traditional ideal of a portfolio of self-liquidating commercial assets would under our present system, however, involve a large further inflation of commodity prices through the injection of the banks' full lending powers into the narrow commercial loan field.
Finally, the present system operates to the disadvantage of those banks that render the greatest service to the community in favor of those that exploit it. The secular expansion of bank debt, as money, gives exceptionally large profits to those banks in which (1) the average transaction is large and unit costs of administration therefore low and (2) demand deposits are great relative to time deposits. The banks for which this situation is typical perform but little service for the community, relative to the volume of transactions they carry on, and disburse to the public but little of the profits derived from issues of new bank debt as currency. The banks that render the greatest service, on the other hand, find it hard to make profits at all. The strongest, not the most serviceable, survive.
The tendency is accentuated by the fact that there is a premium on financial prestige rather than efficiency. The "best," that is the most profitable, business gravitates to those banks which make money and this enables them to make still more. They can afford to be supercilious about the size of their accounts, the size of individual transactions, and the reception of time deposits. In short, they can make the most of the privilege of issue. The growing tendency, which arises solely out of that privilege, to restrict competition in banking ministers to the power of the prestige-possessing banks to exploit the peculiar favors they enjoy; and it should, on this score at least, be regarded with suspicion.
How far would the instanced defects in our present money and banking system be cleared away by the adoption of a 100 percent reserve against demand deposits? The primary inequity of private issue of money would, of course, disappear, whether the supply of money were kept constant or alterations were concentrated in the hands of a governmental authority. Not only, however, would it be necessary to require 100 percent reserve against demand deposits but, to prevent a repetition of the fiasco of 1844, it would be essential to forestall the use of time deposits, or any other private financial instruments, as money. I think that this would not prove difficult.
To enforce the rule of notice of withdrawal might be sufficient for time deposits, and other possible forms of private debt money should not give much trouble. Substitutes for cash develop only when they are of superior convenience to both the parties immediately concerned. There need be nothing in the 100 percent reserve system to limit the present use of demand deposit accounts, and nothing else would be likely to prove nearly as convenient. However much potential issuers of private debt might like to circulate that debt as currency, it would hardly be possible to do so if its acceptance were subject to penalty. It does not seem likely therefore that the necessary mutual incentive to get round the law would be adequate to evoke widespread disregard of it.
The problem of restraint on the governmental abuse of the issue privilege would be neither greater nor less than it is at present. There is no good reason why the Federal Reserve authorities should not continue to function as the issuers of circulating medium, and be given sole powers to this end, with safeguards of similar character to those now operative. The existing anomaly of having the controlling body owned by the controllees should, of course, be removed.
The cost of handling checks and deposits, now largely defrayed by the banks out of the profits on expansion of the currency, could be met in any one of the several ways already suggested by proponents of the 100 percent reserve plan. On whatever terms the transition to the 100 percent system were effected it would, however, seem appropriate that the future cost of handling be borne by the central issuing authority in a manner similar to that now employed for the clearing and collection of out-of-town checks.
Equity as between the banks themselves would likewise be greatly furthered by the 100 percent system where profits would depend upon efficiency rather than upon the ability to take advantage of the privilege of issue. While difficulties of liquidity would be much reduced, since demand deposits and cash would always be alternative rather than complementary forms of currency, they would not be completely solved. A general passion for liquidity cannot be realized, without disaster, under any monetary system. The major source of trouble here, however, is the contract to deliver on demand large fixed sums of money out of nonmonetary assets. This applies to time as well as to the present demand deposits. The idea of having money generally available as such, and of earning on it as well, should be relegated to the realm of exploded magic. There is urgent need for a general reduction of short-term claims to fixed amounts of money against long-term investments in physical property.
Demand deposits, which are not an investment, should be held in trust (fully backed by cash), but time deposits should be recognized as an investment, should certainly not be insured, and should be subject to restrictions on use. Not only should notice of withdrawal always be required but different rates of interest should be offered according to the time for which such deposits are left intact. The time deposit contract, moreover, might be required to give to the bank the right to redeem all time deposits in special low-interest government bonds. These bonds should be made available to the banks by purchase with, or loan on, their own acceptable long-term assets. The Treasury should always stand ready to redeem as well as issue such bonds at par. This would enable any time depositor, who wanted his money, to have it, but would check the urge for liquidation of deposits by those who were merely in search of security.
In combination with the 100 percent reserve plan this practice would change the whole picture so far as liquidity of bank assets is concerned. Demand liabilities would be matched dollar for dollar with cash. To the extent that the banks' investments were in the traditional short-term business paper, assets would be quicker than other liabilities; and, for the rest, called liabilities could be met without sacrifice of the investment portfolio. The problems of equity, liquidity, and a proper correspondence of assets and liabilities would then all be on the way to solution.
The 100 percent reserve plan is reactionary in the sense that it involves a return to earlier and, in my judgment, sounder methods of banking. The partial reserve system was evolved out of contracts immediately satisfactory to the parties concerned but in complete disregard of the social interest. All of our past banking legislation has been weakly defensive against the evils of this system which, like Topsy, just "growed." With typical temporizing we have made those evils tolerable rather than rooted them out. The social implications of the private issue of money have thus grown more obscure, though not less vital, as we have become inured to the present practice, and they furnish by no means innocuous ammunition to rabid reformers who look through a glass rather darkly.
It will not do, however, not to look at all. If the power arbitrarily to create and destroy the circulating medium of the country were taken out of private hands, the demand for socialization of banking would collapse of its own weight. Since demand deposits would be 100 percent backed by cash, there would be no need for the deposit insurance that so many competent authorities regard as an invitation to reckless banking all too likely to be accepted; and nearly all of the present regulation of banking could be abandoned with the ideal of free banking then safely realized.
What we need is not control of banking but a government monopoly of the supply of money, with commercial banks left to lend on short-term precisely as other financial institutions now take care of intermediate and long-term credit, viz., out of capital funds, debenture borrowings, and real time deposits. Such a system, moreover, is a probably indispensable prerequisite to the regulation of the money supply on which all attempts to bring greater stability into our economic system, through monetary means, must inevitably be based. We are certainly not likely to get stability so long as the supply of money remains even partially in the hands of those who have no responsibility for the total issue and no motive to do other than increase it as far as law, and a merely selfish prudence, will permit.
 Cf. 100% Money, Irving Fisher, New York, Adelphi, 1935.
 The proposal was first circulated, in mimeographed form, among a somewhat restricted group but was later presented in Professor Simons's Positive Program for Laissez Faire, University of Chicago Press, Chicago, 1934. Synchronously with the original mimeographed version, Dr. Lauchlin Currie had developed a similar idea in his Supply and Control of Money in the United States, Harvard University Press, Cambridge, 1934. Competent discussions are to be found in A. G. Hart's article "Chicago Plan of Banking Reform," Review of Economic Studies, vol. ii, no. 2, which mentions earlier proponents; in James W. Angell's article "The 100 Percent Reserve Plan," Quarterly Journal of Economics, vol. 1, pp. 1-35; and in Fritz Lehmann's article "100% Money," Social Research, vol. iii, no. 1, pp. 37-56, together with Irving Fisher's comment and Lehmann's rejoinder in the succeeding number of the same journal, pp. 236-244. Professor Frederick Soddy of Cambridge must be mentioned as a pioneer of the idea.
 On the assumption that average reserves are something less than 10 percent.
 Life and Works of John Adams, C. F. Adams, Boston, Little Brown, 1854, vol. ix, p. 638.
 The limited issue of private bank notes was maintained in the United States, however, until 1935.
 Theory and History of Banking, Charles F. Dunbar, 4th ed., New York, Putnam's, 1922, p. 51.
 How to Understand Money, Lewis H. Haney, New York, Farrar and Rinehart, 1935, introduction.
 The contention that bank deposits are not currency, since the credit of the offerer of a check is in question, seems to me to be wholly casuistical. No one refuses a valid claim on a deposit in a good bank, and deposits are transferred in final payment of debt without an equivalent movement of cash. The scrutiny directed at a check is of precisely the same character as that which seeks to distinguish between good and counterfeit commodity money.
 The government has obligingly provided the banks with far more than adequate reserves through: (1) the devaluation of the dollar, which has tended to bring gold into the country; (2) the silver purchase policy, which has furnished potential reserves; (3) pressure on the reserve banks to provide reserve credit by the purchase of securities.
 And yet Mr. James P. Warburg, who fears inflation as the outcome of the present government policies, continues to assert that banks do not create money and, generally speaking, do not even create deposits by making loans (America's Town Meeting of the Air, no. 14, American Book Company, New York, 1936, p. 32). It is difficult to see how government borrowing from the banks can be inflationary if the banks do not create money. The fact that no bank, managed with ordinary prudence, makes any individual loan in excess of available reserves apparently prevents recognition that the reserves stay in the banking system only because bank deposits are used as money.
 The importance of out-payments of interest in total bank costs is striking.
 It is here assumed that the essential distinction between money and non-money turns on the absence or presence of interest.
 There may, however, be a shift of demand into time deposits.
 The situation is still worse, of course, when bank debt contracts and the banks, in consequence, are forced to divest themselves of earning assets.
 It might be necessary for administrative reasons to extend this procedure to cover other types of bonds.