100% Money (continued)

Designed to keep checking banks 100% liquid; to prevent inflation and deflation; largely to cure or prevent depressions; and to wipe out much of the National Debt

by Irving Fisher, LL.D

Professor Emeritus of Economics, Yale University

This is from Professor Fisher's book entitled 100% Money, revised edition published by The Adelphi Company (1936)


Chapter II. Outlines for a Statute

Those who wish to study a proposed statute, drawn up in legal form, are referred to Appendix IV. There they will find a reprint of the bill suggested by Mr Robert H Hemphill, as an amendment to the Bank Act of 1935. Also Chapters IX and XI contain further discussions of this subject. The present Chapter is designed primarily for the general reader and is less technical.

There are various possible ways of enacting into law the principle of 100% money. All of them would require a Currency Commission, or some equivalent, such as the recently constituted Open Market Committee of the Federal Reserve Board (with some suitable changes). This Currency Commission (or equivalent) should be empowered to issue the money of the nation and, under some of the plans, to regulate it in accordance with a legal criterion of stabilization. The stabilization would be accomplished by open market operations, that is, buying and selling United States bonds and any other items made eligible, as well as gold and foreign exchange - also by changing the price of gold, silver and foreign exchange.

Fixed Total Supply

The first outline of a statute embodies the simplest possible 100% reserve plan.

It is followed by a brief description of compromise plans, not quite so simple, but designed partly to occasion less disturbance in the status quo.

1. Authorize and direct the Currency Commission to issue new currency and to use this new money:

(a) to purchase of the twelve Federal Reserve Banks sufficient United States bonds (or other eligible items) to provide each of these banks with a 100% reserve in actual physical money against all their demand liabilities;

(b) to purchase from all other existing banks carrying checking accounts sufficient United States bonds to provide each bank with a similar 100% reserve in actual money against such accounts;

(c) to purchase from the general public Government bonds sufficient to bring the total circulating medium of the nation (all in actual money) up to a specified figure (such as thirty billion dollars),


2. Thereafter, leave this total money supply unchanged.


The above two provisions - for reflation and for subsequent fixity of amount - cover the essentials of the 100% money plan in its simplest form - and a form more automatic, even, than the old-fashioned gold standard. For, after issuing and allocating the new money, the Currency Commission would have nothing further to do, so far as concerns the creation and destruction of money. Neither they nor the banks (at present the great disturbers of the money supply) nor any other agency would have the power to alter the nation's supply.

This plan should be implemented with two other requirements:


3. Prohibit all substitutes for check-book money and all other evasions of this law (such as checks against savings deposits).

4. Under suitable regulations, permit banks carrying checking accounts to make warehouse and service charges, thus reimbursing them for any loss of earnings incurred by surrendering earning assets.

It should go without saying - although it might be legally advisable to make it a specific declaration - that all banks carrying deposits subject to check would be required to treat these deposits as trust funds of money held for the depositors. The reserves, instead of belonging to the bank, as they do now, would automatically become, on reaching 100%, identical with the deposits. This simplest Version of the 100% plan may appeal to those who fear the discretionary feature of a "managed currency".

But, in my opinion, the amount or supply of circulating medium should not be fixed so simply - once and for all time. With a growing population and growing business, it might lead to a harmful and progressive deflation.

In order to provide needed elasticity some continuous management of the money supply would be necessary, though this management need not require any more discretion than the discretion of a chauffeur who is ordered to drive a definite, prescribed course.

Fixed Per Capita Supply

For instance, if we wish, not a fixed total amount of circulation, but a fixed per capita amount, the Currency Commission would be authorized and directed continually to buy and sell (usually buy) bonds and other eligibles in order to keep the money supply in pace with population.

In order to obtain and maintain such a fixed per capita amount of money the only change needed in the four provisions above formulated would be to replace the second ("thereafter, leave this total money supply unchanged") by:

2. Thereafter, purchase securities (from banks or public) whenever the per capita supply of money falls below a stipulated figure (such as $250) until that figure is again reached and, reversely, sell whenever the per capita supply rises above that figure.

Fixing Purchasing Power

If we wish, as our criterion, neither a fixed total supply nor a fixed per capita supply of money but a fixed purchasing power of the dollar - that is, a fixed price level as measured by some official index number - exactly the same procedure would apply as in the last case. The Currency Commission would be required :

2. to buy securities when the index is below the official par and to sell when above.

This last is, of course, precisely what Sweden has been doing through her Riksbank ever since September 1931 in connection with suitable adjustments in the price of gold and foreign exchange. Her success in keeping almost constant her official index number (an index of the internal cost of living), thereby also keeping almost constant its reciprocal, the purchasing power of the krona, is the most convincing answer to those who fear currency management, especially as Sweden has been foremost in recovering from depression.

Other Criteria

There are, of course, numerous other criteria which are possible (see Chapter VI). To all of them the same technique of management applies. That is the Currency Commission would increase or decrease the supply of money in order to meet whatever type of stabilization requirement should be prescribed in the law.

I have often expressed the opinion that theoretically one of the best criteria for the dollar, whenever statistics shall be adequate for the purpose, would be a fixed fraction of the per capita income of the country - such as the one-thousandth part.

There is a growing opinion among specialists in this field that the per capita money income is approximately equal to three times the per capita money in circulation. Should this opinion be confirmed - that money and money income maintain an approximately constant ratio or even that this would be true in the absence of great booms and depressions - we would reach the rather startling conclusion that to maintain the dollar as a fixed fraction of per capita income would amount to the same thing as fixing the per capita supply of money and that the only statistics needed by the Currency Commission would be those of population. We cannot, as yet, be sure that the two criteria - a fixed per capita quantity of money and a dollar as a fixed fraction of the per capita income - are so nearly the same; but we can at least be sure that the per capita quantity plan would not be a bad solution of the money problem.

Naturally the Currency Commission should study all available criteria or indexes and report its recommendations to Congress. But at present and all things considered, my own preference would be to do what Sweden has done: fix the monetary unit in terms of the cost of living.

To be most efficient, the Currency Commission should have no other function than the regulation of the value of the dollar.

Nevertheless, as the reader will note and as is emphasized elsewhere in this book, the question of what criterion to use in managing the nation's money is really separate from the question of whether or not to have a 100% reserve. The criterion of stability does not directly concern us in this book.

It would greatly simplify the problem of money in the mind of the general public to separate it entirely from that of loan banking, exactly as the Issue Department of the Bank of England was separated in 1844 from the Banking Department. Each commercial bank should be thus split into two, a Check Bank and a Loan Bank.

Compromise Forms

So much for the simpler plans, but the simplest way to accomplish a purpose is not always the best nor politically the most practical. For instance, the retirement of existing money which, from the standpoint of simplicity would be desirable, would in practice be fiercely resisted. This would be true of our silver certificates and of the useless silver now "behind" them, as well as of the Treasury notes, the greenbacks, and the Federal Reserve notes.

Fortunately, there is no urgent practical need of abolishing any part of our thirteen {1} sorts of circulating media, however awkward and superfluous many of them are. The only important requirement is to regulate the demand deposits.

Even if, in our 100% plan, we used only paper money, we would not need so much of it as above provided for. The reserves behind the deposits of the public in member banks could consist not wholly of this actual paper money but chiefly of "credit" or demand deposits held by those member banks in Federal Reserve Banks, so long as the total were kept equal to 100% of the public's checking deposits. It would be (to trace backward) as if the member banks originally had possessed the actual money in their own vaults and had then, for safety, redeposited most of it in the Federal Reserve vaults. Nor would it even be necessary to have all this money in the Federal Reserve vaults so long as it was available somewhere. In fact, it would not even be necessary to have all of it printed and extant - certainly not actually signed - so long as the Bureau of Engraving stood ready to supply it promptly on request. Canadian banks are allowed to have unsigned bank notes on hand ready to be converted, when authorized, into actual money by a stroke of the pen.

Under such a regime, the reserves of member banks could remain in the form of credit as now and not become actual money.

Like the Bank of England

Furthermore, we would not have to keep all the 100% reserve in the form of either money or credit. To lessen the opposition of bankers, we could allow part of the reserve - in fact the bulk of it - to remain in the form of Government bonds (or other eligibles) in the vaults of the banks, provided, however, these bonds or other eligibles were made convertible into money or Federal Reserve credit on demand of a member bank; and also provided that the total reserve, that is, the total of the bonds and the money, should not exceed in value the total check-book money required under the criterion adopted.

As a result, demand deposits would merely become a trust fund, invested partly in "cash" and partly in Government bonds, exactly as was required by President Roosevelt in 1933 in the case of the new deposits in reopened and "restricted" banks. In principle, this mixed reserve system would also be like the English provision for Bank of England notes. These are backed 100%, partly by "cash" (Government paper money) and partly by (a fixed amount of) Government securities. In fact, the 100% plan for Bank of England notes adopted in 1844 seems to have been arrived at as a compromise, an effort to avoid the opposition of bankers by disturbing the 1844 status quo as little as possible.

With these provisions it would be found that the inauguration of the 100% system would scarcely cause any disturbance in the status quo today, since most banks already have substantially 100% behind their demand deposits, if Government bonds be counted in. There would only be a slight change in the status of these bonds - namely, they would be made convertible into cash and their total amount would be limited.

But, for simplicity of exposition, the following chapters ignore any such practical compromises and assume a literal 100% reserve in actual money, the bonds having been bought outright by the Currency Commission.{2}

Notes:

{1} Namely: (1) gold; (2) gold certificates; (3) silver dollars; (4) silver certificates; (5) U.S. notes or greenbacks; (6) currency (greenback) certificates; (7) Treasury notes; (8) National Bank notes; (9) Federal Reserve notes; (10) Federal Reserve Bank notes; (11) subsidiary silver; (12) minor coins; (13) deposits subject to check. Of these, items (5), (6), (7), (8), (11), (12) could be let alone entirely. If we retain the gold standard (items [1] and [2]), the President or other authority would have to make occasional changes in the price of gold. Some similar regulations would be:required as to (3) and (4), concerning silver. The best way to treat (10) would seem to be to stereotype the amount now outstanding just as, sixty years ago, we stereotyped (5). This leaves (9) (Federal Reserve notes) to serve as the "Commission Currency" above mentioned and to be varied in amount as required to maintain the right total of the circulating medium. The reserve behind (13) could consist of any lawful money whatever, from among the twelve sorts of pocket-book money.

{2} Since the above was written, Professor James W Angell has proposed a version of the 100% plan (see Appendix V).


Bill Totten http://www.ashisuto.co.jp/english/index.html