II: How the 100% System Would Work
Bank of Amsterdam and the Old 100% System
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.
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.
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
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
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
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:
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
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
does not appear, however, that serious alarm was felt as to
the safety of the bank before the disclosures of 1790 and 1791."4
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.
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
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
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.
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.
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.
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.
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
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.
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.
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.
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.
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.
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
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.
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
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.
"Cash" Which is not Cash
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.
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
(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.
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.
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."
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
Destroying "Check-book Money"
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.
is to say, just as check-book money is manufactured by loans
incurred, so check-book money is destroyed by loans paid.
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
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."
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
Banking on a Shoe String
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.
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.
about the danger to the banks themselves?
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
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.
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
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.
inflation and deflation the 10% system hurts us all, including
the innocent bystander.
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
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
The 10% system ties check-book money to bank loans (and
This system and this tie-up result in runs and failures.
They also result in the inflation and deflation of our chief
.... "money" ("check-book
money") according as bank loans (and
..... investments) are inflated
Inflation and deflation of bank loans and so of "check-book
.... money" are largely responsible
for great booms and
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
Federal Reserve System was established in 1914 to remedy some
(not all) of the faults in this 10% system in the United States.
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.
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.
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
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
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
or lower its rediscount rates;
securities of, or sell securities to, the member banks.
This second expedient (i.e. buying or selling) constitutes
what is called "open market operations."
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.
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.
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.
essential trouble is that American banking has been trying to
do the business of the country on a shoe string of real money.
Record of See-Saw in the Reserves
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.
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!).
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
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.
Money Has Escaped
the Reserve Restrictions on Notes
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.
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."
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.
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.
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
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:
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
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
Need Reserves More Than Notes Do
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.
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.
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?"
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.
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.
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.
Theory and History of Banking, by Charles F. Dunbar, New
York (Putnam), 1901, p. 103.
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.
York Herald Tribune, January 2, 1935.
- 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.
- The Purchasing Power of Money,
New York (Macmillan), 1911.
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