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.
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"
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.
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.
people imagine that checkbook money is really money and really
in the bank. Of course, this is far from true.
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.
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.
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.
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.
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.
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.
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.
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
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
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.
destruction of checkbook money was not something natural and inevitable;
it was due to a faulty system.
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.
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.
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.
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.
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.
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.
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.
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 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
especially issued through the Currency Commission.
Then all checkbook money would have actual money - pocketbook
money - behind it.
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.
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.
the new money would, in effect, be tied up by the 100%
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.
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
resulting advantages to the public would include the following:
There would be practically no more runs on commercial banks;
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."
There would be far fewer bank failures;
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.
The interest bearing Government debt would be substantially reduced;
a great part of the outstanding bonds of the Government would
be acquired from the banks by the Currency Commission (representing
Our Monetary System would be simplified;
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.
Banking would be simplified;
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."
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
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).
Great inflations and deflations would be eliminated;
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.
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).
Booms and depressions would be greatly mitigated;
these are largely due to inflation and deflation.
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.
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:
- 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
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.
- Would there be any valuable assets "behind" the
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.
- 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.
- 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
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.
- 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
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
- Would the plan be a nationalization of money and banking?
Of money, yes; of banking, no.
The 100% proposal is the opposite of radical. What it asks, in
principle, is a return from the present extraordinary and ruinous
system of lending the same money 8 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.
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
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.
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.
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.
- 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.
- See Chapter
- See Chapter
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