100% Money

thetrader's picture


By www.thetrader.se

While Ben Hur is trying to flood the system with even more Debt, there are alternative ways of running the Economy. As with all systems, there are pros and cons, but maybe something in the middle would work. Irving Fisher’s 100% Money, A Summary;

In 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.

When 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 I propose to call “check¬book money” as distinct from actual cash or ”pocket-book money.” Pocket-book money is the more basic of the two. It is visible and tangible; check-book 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” a check.

But the chief practical difference between check-book money and pocket-book money is that the latter is bearer money, good in anybody’s hands, whereas check-book money requires the special per¬mission of the payee in order to pass.

In 1926, a representative year before the great depression, the total check-book money of the peo¬ple of the United States, according to one estimate, was 22 billion dollars, whereas, outside of the banks and the United States Treasury, the pocket-book 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. Both together 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.

Many people imagine that check-book money is really money and really in the bank. Of course, this is far from true.

 

What, then, is this mysterious check-book money which we mistakenly call our “money in 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 only some 3 billions in actual money. The re¬maining 19 billions were assets other than money—assets such as the promissory notes of borrowers and assets such as Government bonds and corporation bonds.

In ordinary times, 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 gotten together a certain amount of cash by selling their other assets, could not have gotten 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.

Between 1926 and 1929, the total circulating medium increased slightly—from about 26 to about 27 billions, 23 billions being check-book money and 4 billions, pocket-book money.

On the other hand, between 1929 and 1933, check-book money shrank to 15 billions which, with 5 billions of actual money in pockets and tills, made, in all, 20 billions of circulating medium, in¬stead of 27, as in 1929. The increase from 26 to 27 billions was inflation; and the decrease from 27 to 2 0 billions was deflation.

The 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.

These 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.

If we assume that the quantities of circulating medium for 1929 and 1933 were respectively 27 and 20 billions and that its turnover for those years was respectively 30 and 20, the total circulation mold be, for 1929, 27 x 30 = over 800 billion collars and, for 1933, 20 x 20 = 400 billion dollars.

The changes in quantity were chiefly in the de¬posits. The three figures for the check-book money were, as stated, 22, 23, 15; those for the pocket-book money were 4, 4, 5. An essential part of this depression has been the shrinkage from the 23 to the 15 billion in check-book 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 for business.

The shrinkage of 8 billions in the nation’s check¬-book money reflects the increase of 1 billion (i.e. from 4 to 5) in pocket-book money. The public withdrew this billion of cash from the banks and the banks, to provide it, had to destroy the 8 billions of credit.

This loss, or destruction, of 8 billions of check¬-book money has been realized by few and seldom mentioned. There would have been big newspaper headlines if 8 thousand miles out of every 23 thou¬sand 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 trage¬dies, unemployment and bankruptcies.

The public was forced to sacrifice 8 billion dol¬lars out of 23 billions of the main circulating me¬dium 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.

This destruction of check-book money was not something natural and inevitable; it was due to a faulty system.

Under our present system, the banks create and destroy check-book 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.

As 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 circu¬lating medium is destroyed on the stub of my check book and on the books of the bank. That is, it dis-appears altogether.

Thus 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.

What 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 “credits,” that is, check¬book money, the volume of which can be inflated and deflated.

It 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 bystanders,” the general public. In particular, when deflation results, the public is de¬prived of part of its essential circulating medium through which goods change hands.

There is little practical difference between per¬mitting banks to issue these 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 un¬sound practice.

Deposits are the modern equivalent of bank notes. But deposits may be created and destroyed invisibly, whereas bank notes have to be printed and cremated. If eight billion bank notes had been cremated between 1929 and 1933, the fact could scarcely have been overlooked.
As the system of checking accounts, or check¬book money, based chiefly on loans, spreads from the few countries now using it to the whole world, all its 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.

The dangers and other defects of the present sys¬tem will be discussed at length in later chapters. But only a few sentences are needed to outline the proposed remedy, which is this:

The Proposal

Let the Government, through an especially cre¬ated “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, through the Currency Commission, issue this money, and, with it, buy some of the bonds, notes, or other assets of the bank or lend it to the banks on those assets as security.1 Then all check-book money would have actual money— pocket-book money—behind it.

This 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 circu¬lating medium of the country. A bank which pre-viously 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.

After this substitution of actual money for se¬curities 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.

Thus, the new money would, in effect, be tied up by the 100% reserve requirement.

The checking deposit department of the bank would become a mere storage warehouse for bearer money belonging to its depositors and would be given a separate corporate existence as a Check 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 only if its cash also rose to $125,000,000, i. e. by depositors depositing $25,000,000 more cash, that is, taking that much out of their pockets or tills and putting it into the bank. And if deposits shrank it would mean that depositors withdrew some of their stored-up money, that is, taking it out of the bank and putting it into their pockets or tills. In neither case would there be any change in the total.

So 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 service charge made to its depositors—or otherwise (as detailed in Chapter IX).

Advantages

The resulting advantages to the public would in¬clude the following:

1. There would be practically no more runs on commercial banks;
because 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.”

2. There would be far fewer bank failures;
because the important creditors of a com¬mercial bank who would be most likely to make it fail are its depositors, and these depositors would be 100% provided for.

3. The interest-bearing Government debt would be substantially reduced;
because a great part of the outstanding bonds of the Government would be taken over from the banks by the Currency Commission (representing the Govern¬ment).

4. Our Monetary System would be simplified;
because there would be no longer any es¬sential difference between pocket-book money and check-book money. All of our circulating medium, one hundred per cent of it, would be actual money.

5. Banking would be simplified;
at present, there is a confusion of owner¬ship. When money is deposited in a check¬ing account, the depositor still thinks of that money as his, though legally it is the bank’s. The depositor owns no money in the bank; he is merely a creditor of the bank as 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.”
In the future there would be a sharp distinction between checking deposits and savings deposits. Money put into a check¬ing 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 would give the right to repayment with interest, but no checking privilege. The savings depositor has simply bought an investment like an interest-bearing bond, and this investment would not re¬quire 100% cash behind it, any more than any other investment such as a bond or share of stock.

The reserve requirements for savings deposits need not necessarily be affected by the new system for checking deposits (al¬though a strengthening of these require¬ments is desirable).
6. Great inflations and deflations would be elim¬inated; because banks would be deprived of their present power virtually to mint check¬book money and to destroy it; that is, making loans would not inflate our circu¬lating medium and calling loans would not deflate it. 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 be¬ing lent from one person to another.

Even 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. It 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).

7. Booms and depressions would be greatly mitigated; because these are largely due to inflation and deflation.

8. Banker-management of industry would almost cease; because only in depressions can industries in general fall into the hands of bankers.

Of these eight advantages, the first two would apply chiefly to America, the land of bank runs and bank failures. The other six would apply to all countries having check-deposit banking. Advan¬tages “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.

Objections

Naturally, 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.

The questions which seem most likely to be asked by those who will have doubts about the 100% system are:

1. 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 check-book money and pocket-book money completely interconvertible; char.es existing circulating deposits of imaginary money into circulating deposits of real money.

After the transition (and after the pre¬scribed degree of reflation 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.

2. Would there be any valuable assets “behind” the new money?
The day after the adoption of the 100% system there would be behind the new money transferable by check the very same assets— mostly government bonds—which had been behind the check-book money the day before, although these bonds would now be in the possession of 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 infla¬tion. 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 pocket-book money, the bank can (theoretically) sell the securi¬ties 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 Gov¬ernment. Finally, there would be no panicky depositor, fearful lest he could not convert his deposits into cash.

3. 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 de¬sired, 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.

4. 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 probably be much more money lent; for there would be more savings created and so available for lending. But such an expansion of loans—a normal expansion generated by savings— would not necessarily involve any increase of money in circulation.

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 no longer overlendingby manufacturing money out of thin air so as to cause inflation and a boom.

Besides the above three sources of loan funds (bank capital, savings, and repayments) , 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 a suitable index number.

5. Would not the bankers be injured?
On the contrary,
(a) they would share in the general benefits to the country resulting from a sounder mon¬etary 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 almost entirely freed from risk of future bank runs and failures.

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 a 100% liquidity would be assured at all times and for each bank separately and independ¬ently of other banks.

6. Would the plan be a nationalization of money and banking?
Of money, yes; of banking, no.

In Conclusion

The 100% proposal is the opposite of radical. What it asks, in principle, is a return from the present extraordinary a nd ruinous system of lending the same money 8 or 10 times over, to the conservative safety-deposit system of the old gold-mints, before they began lending out improperly that was entrusted to them for safekeeping. It vas this abuse of trust which, after being accepted is standard practice, evolved into modern deposit banking. From the standpoint of public policy it is still an abuse, no longer an abuse of trust but an abuse of the loan and deposit functions.

England 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 he-yond a certain minimum (as well as for the notes of all other note-issuing banks then existing).

Professor Frank D. Graham of Princeton, in a statement favoring the 100% money plan, says of President Adams that he “denounced the issuance of private bank notes as a fraud upon the public. He was supported in this view by all conservative opinion of his time.”

Finally, why continue virtually to farm out to the banks for nothing a prerogative of Govern¬ment? That prerogative is denned as follows in the Constitution of the United States (Article I, Sec¬tion 8): “The Congress shall have power … to coin money [and] regulate the value thereof.” Virtually, if not literally, every checking bank corns money; and these banks, as a whole, regulate, control, or influence the value of all money.

Apologists for the present monetary system can¬not justly claim that, under, the mob rule of thou¬sands 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 check¬book money.

If our bankers wish to retain the strictly bank¬ing 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 oppo¬sition.

1 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 Com¬mission stood ready to supply it on request.

Courtesy Faibi.

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dida's picture

This would be a good thing if it happens and I hoe that the situation will be ok in a short while. Asigurari de viata

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matte1975's picture

You can find a similar proposal at Chapter 9 of Money, Bank Credit and Economic Cycles of Huerta De Soto

http://mises.org/books/desoto.pdf

Fishhawk's picture

Rocky has come the closest to recognizing that this proposal is just rearranging the mysticism.  When his (Fisher's) proposal is all done, we still have debt being used as money.  ThirdCoastSurfer states two errors in bold face, and nobody caught them: 1) 100% money would preclude capital formation...  Capital is formed from saving some of current revenues for future use (ie, not spending all you make), and thus capital formation would proceed under 100% money as it always has.  True, interest rates would be much higher, ie, capital would not be free, as it purports to be under Bernanke's printing press.  People would have to be compensated for the time value of their saved money.   2) ... that money itself is worthless.  Money is the most widely accepted commodity; it is not worthless.  Further, one of the main requirements of money is that it be a store of value, since the purpose of capital is to invest in the future, ie, defer spending today.  TCS is clearly confusing today's currency, which is clearly recognized as (soon-to-be) worthless, with money.  Gold is money; debt cannot be money, because, as you see, bankers can contract debt endlessly, and thus create 'money' out of promises.  Fisher would take this further, centralizing the power to create 'money' out of nothing and entrust that power (to make endless promises) to politicians.  Rocky is right:  phuck this.  What we need is free gold, which we almost have now (you can still turn in FRN's for gold, but we have to get the taxes removed so gold can actually circulate as money).  The bankers will resist this use of real money, since it thwarts all their plans to loot the productive capacity of the worlds industry by creating massive unpayable debts and then creaming off the interest forever.  

indio007's picture

"cash" is just the piece of paper from a different issuer. The fact hat some will trade John Doe's promise to pay for the Federal Reserve's is just more of the same paper chase. The article is fundamentally flawed insomuch as it's understanding of the nature of paper money versus hard money, executory contract versus and executed one, and a debt in personam and a debt in rem.

Adding another layer of paper does nothing.

GoldSilverDoc's picture

Exactly correct, indio.

The truly sinister result of this system would be to completely centralize all fractional reserve banking in one institution, which has already proven its incompetence dozens of times over.  Banks would issue more loans, then sell those to the Fed at par for cash, to maintain their "100% reserve". 

Nothing at all would change.

This is another attempt to con the public that "the experts"  (at the Fed, of course) can do it "right", if only they are given the power to do so.

Irving Fisher was, charitably, poorly schooled in the history of money and central banking. More directly, he was a fool and a moron.

If you must have a paper "currency", a 100% money-backed currency (backed by the best money the market has found over 10,000 years or so, probably gold), is the ONLY thing that will keep the banksters at bay.  Remember that fractional reserve banking used to be punishable by death, then by penury; only since the decisions of the English "courts" in the early 1800's (by judges bought and paid for by bankers) have this group of parasites been able to propagate this con successfully, this long.

 

AR15AU's picture

"issue this money, and, with it, buy some of the bonds, notes, or other assets of the bank or lend it to the banks on those assets as security."

So basically monetize every garbage loan in existance at par value?  I fail to see how that would be a wise idea..

essence's picture

Interesting proposal. Certainly we need these sort of ideas being floated and debated today. Alas, that isn't happening becasue the intent by the Powers That Be is to preserve the status quo, not rectifiy it.

Dispensing with fractional reserve banking (only in part according to this proposal) and bringing about a more robust and transparent banking system are laudable intentions. Don't know about that government "Currency commission" though, I cringe at the thought of how that would be gamed in todays corrupt world.

All in all, I'm more inclined to go with proposals such as Ron Pauls and get the government out of this area and let a free market have a crack at it. Government should grant no monoplies, ensure only seek to ensure a relatively fair playing field. Let the market vie for providing society "money" & credit. Gold,Silver, Bank notes, bills of credit, let private institutions offer a bevy of choices and in time standards will form organically.

Although it might sould like anarchy, I counter that the history of Government/private Central Banks controlling the money & credit supply has proven to be an abysmal failure. A corruption filled failure.

 

 

 

Shineola's picture

When the Fed dies, let's not resuscitate!

ThirdCoastSurfer's picture

The existence of debt is a very complex subject to explain. It is as necessary an evil as poverty because we live in a world that has finite resources. A world that operated strictly on a cash only basis would preclude capital investment. A banking system required to maintain a 100% reserve  fails to account for the fact that money itself is worthless, it is only a easier means of exchange for goods & services than bartering -a system the absence of debt would produce. 

We need to accept and embrace the fact that in good times debt is to be exploited to the benefit of humanity in such a way that two steps forward does not lead to 3 or more steps back when the bust of boom-bust arrives and this, like most other things, means extending the life-cycle for as long as possible and not like a candle burning at both ends. 

 

ElTerco's picture

I had no idea that Irving Fisher took credit for being the inventor of the economic system known as the Banana Republic.

Mr. Magniloquent's picture

Spoken concisely, Fractional Reserve Banking (FRB) is not only a form of fraud, but responsible for The Business Cycle. For every reason a 100% reserve system should be adopted, a commodity backed system satisfies and more. This is why Gold is money.

While I dream of a world without FRB, it remains at the heart of why Gold is so desperately reviled by The Elite.

As a point of interest, I did not read any mention of the effect on interest rates this would incur. Naturally, they would be far higher than now. Before equillibrium would be met, massive deflation would occur. Keynesians cannot co-exist with such a reality, and would invoke the central bank to print. Therefore, a 100% reserve status is muted without a commodity backed currency, or a total aboliton of a country's central bank.

tomeuchre's picture

WAAAYYYY too cimplistic.  You might as well say "Let's have congress (and IMF, et al) declare that all banks are non-profit entities. See how that will work?

 

Right. It won't.

 

Bring on the revolution.

PulauHantu29's picture

Bankers prefer to borrow from the Fed at Zero Rate and rake in 3.5% interest on reserves held at the Fed....Free, Riskless and Fat!

Then, every quarter hand the Bank CEO $30 Million Bonus!

Sun Tsu's picture

-the "Extraction" Bankers free to retire their private urban or south sea islands.

cranky-old-geezer's picture

 

 

This article is completely worthless. 

Why?  Because no way in hell would it ever happen.

 

Double down's picture

Netting, one hell of a drug!

Species8472's picture

Seems to me a little deflation now and then would be good. I am tired of getting screwed, how about enough deflation to undo the inflation of the last 10 years. See, I'm not greedy, if I was I would ask to undo the inflation of the last 40 yrs.

 

tictawk's picture

Now that we are engulfed in DEBT which is nothing but money borrowed from the FUTURE, we start seeing ideas like this to MONETIZE the debt.  This will have the effect of making the dollar confettii (of course its with good intent, like all liberal ideas). It is crystal clear that we will be unable to pay off this debt and what remains on the horizon is default.  It is still a DEFAULT WHEN YOU STOP PAYMENT OR WHEN YOU DESTROY THE CURRENCY BY MONETIZING THE DEBT.  

This is another scheme that should be thrown into the dustbin of crappy ideas.

disabledvet's picture

you have to factor in "the information age." that's why cash is king and the checkbook is dead. debit and credit cards are the banks' "golden geese." more important than that of course is the media itself which insinuates itself into our daily lives and makes even more money. "the all knowing/all seeing eye" as it were. in that sense "the money is worthless" because the information gleaned from the use of said money is so valuable as to render the "saved money" pretty much de-minimus. There is a question arising i think now about the true profitability of said "wholesale invasion of the very idea of privacy" however. even "programming people" has its limitations of course but "seeing what they see" as seen as some type of advantage...once seen by many is no longer such. Indeed at some point it can be seen for exactly as it is...a sign of a sick society on it's last legs and never really capabable of original or creative thought to begin with but nothing more than "plagiarism incorporated" since the information advantage is lost due to the open-ness of it all. to me the key is decentralizing media--basically breaking up the entire complex--and to a large extent the market is already doing it via pricing out "annihilation risk" of a financial system without privacy (which equals no financial system.) trust me when i tell you: "this does not lead to the end of wars." Indeed it appears to be a starting point for them. I know i wouldn't want to be held responsible for blowing up the US financial system.

Hannibal's picture

Too man twists and turns. Keep it SIMPLE wiseguy!

RockyRacoon's picture

Amazing isn't it?   What lengths must be gone to in order to reset the system to what it originally was.  This is pie-in-the-sky stuff here folks.   The system is going to have to burn to the ground in order to revert to the original concepts.   Backing out all the rules and regulations would be a statistical nightmare.  You can't make wheat from spaghetti.   Just scrap it and start over.   The re-birth of banking would look a lot like the old banking.   Ripe for the rape as well.   What's the use?   Burn it.

Shineola's picture

It is Amazing!   And it also reminds me that I may as well hold a much higher percentage of my bank balance in green physical cash.  My bank pays me no more interest than my gun safe does. 

Catullus's picture

The Proposal that Fisher is giving is to basically monetize all the debt created by banks in the fractional reserve banking process.  It is akin to what has already gone on in the US.  The Treasury was supposed to have purchased "troubled" assets under TARP, but rather took equity positions in the banks until the run subsided (a complete lie to the American public in late September 2008 to which apologists are still justifying).  The Fed has been purchasing bonds or "assets" off the books of the banks and in doing so is converting what was M3 into M1 or M0.  This is of course has massively inflationary potential since there banks are not but compelled to take excess reserves and eventually loan them out. 

It would be interesting to see what year Fisher wrote this since the Federal Reserve in the mid-1930s began to raise the reserve ratio in an attempt to add greater stability to the banks.  The reserve ratio increase was well within what banks had already held in excess reserves in the aftermath of 1933.  Friedman and Schwartz blamed the Depression of 1937-38 on the increase in this reserve requirements by the Fed, but this was in contrast to the increase in commercial loan activity leading up to 1937 with knowledge by the banks that the Fed was increasing the reserve requirement.  The decrease in the money supply during the 1937 depression was the result of a new wave of loans defaulting in the commerical lending space rather than a forced liquidation or deleveraging from the Fed.

The 100% reserve requirement for on-demand depository accounts is very interesting.  If that were the case, we should be able to get rid of FDIC and immidiately declare bankruptcy for banks that can not meet a withdrawl from these accounts. Everyone other account at the bank can be said to be on its own and is subject to investment loss.  The way banks can entice money out of the checking accounts and into investment savings accounts would be to pay higher interest rates on savings, CDs, limited withdrawl accounts.  Back those checking accounts with an amount of gold, and we have the return of the gold standard. 

aaronb17's picture

Really don't understand how this author concludes we can let the banks lend out "savings" account funds willy-nilly and just lock down checking account funds.  The whole idea of "interest" being paid on "savings" is what screws everything up, causing heightened risk-taking, inflation, etc.  What's really going on there is that the banks are borrowing our money and then lending it out -- this is the same thing with "savings" as with "checking" accounts.  It shouldn't be called "savings" but rather the purchase of a bond from the bank, because that's all you're getting -- the bank's word that they'll pay you back.  A bond.

It's a huge fraud that the bank is holding tight to your money and your money is somehow magically earning "interest."  Bull-pucky.  You're giving your money to the bank, and the bank is playing with it at the casino of life.  Eventually, things will go bad, and you won't get your money back -- either that, or there's going to be inflation to vaporize your "gains" by making the money worth less than it was when you deposited it. 

There's no such thing as "savings" or "deposits" that earn interest.  Anyone who tells you different wants to scam you into turning over your money for their mere promise of re-payment.  They are not holding your money, they are gambling with it. 

Catullus's picture

The first condition of the proposal was for 100% reserves on the checking accounts.  Though it no longer means anything, there used to be a significant difference between savings and checking accounts.  Checking accounts never used to be free, but they had a definite cost associated with storing money for someone.  People would understand that if their savings account is paying them interest, then the bank is loaning the money out in order to profitable pay interest to the customer.  Savings account techinically could pay out withdrawls until the end of the month.  Checking accounts are on-demand accounts.  CDs charge big penalties for calling money before the term.

Savings can absolutely earn interest.  But if you tell someone from the outset that they have a chance of losing the principle, might the customer make a different decision or require a higher interest rate for allowing someone to "gamble" with their savings as you say?

The creation of the money market fund (which has become what most people actually refer to their savings account now) is one of the newest developments over the past 20 years in banking. The run in late 2008 was actually a run on these money market funds.

MichaelG's picture

 

The savings depositor has simply bought an investment like an interest-bearing bond, and this investment would not re¬quire 100% cash behind it, any more than any other investment such as a bond or share of stock.

A Lunatic's picture

It would definitely make armed robbery more profitable. There's nothing worse than investing a shitload of time and planning only to end up with a small bag of IOU's.

infiniti's picture

You could have saved everybody a lot of time by just saying that we should increase the reserve ratio on checkable deposits to 100%.

AmCockerSpaniel's picture

"The Proposal

Let the Government, through an especially cre¬ated “Currency Commission,” turn into cash enough of the assets of every commercial bank". Commercial bank/ TBTF! Were going to buy/ print more money to buy ALL the Toxic debt/ junk loans they got as part of there CDO's???  Just how many times are you people going to say YES to them picking our pockets?

Downtoolong's picture

I'm pissed that I had to read this entire post just to come to the same conclusion.

11b40's picture

A newly installed (and enforced) Glass-Stegall act would be a good start.

disabledvet's picture

exactly. interestingly for all the "safety and soundness" talk no one really talks about why the government doesn't just do that. of course when it comes to gold and silver it's PAY UP PHUCKER! The irony of "PAY UP PHUCKER" not working should be noted as well. I find it hard to believe a government run bank would be any better (say if BofA is nationalized.) Without failure--we're just a planet of unpayable debts.

Steroid's picture

You can bet your ass that there would be a difference if, after nationalization, the previous management, say top 10, were publicly executed.

I wouldn't say it would be more efficient though just the looting would stop (for a while).

disabledvet's picture

Would that include the bond holders. I hate them too...

Moe Howard's picture

A bankster's nightmare.

MichaelG's picture

Did Irving Fisher have a fatal heart-attack in his bathtub shortly after writing this?

zorba THE GREEK's picture

To make the money system full proof, why not have said currency commission

back the currency issued to banks by gold. That way currency would not be

created out of thin air and would keep the commission on the up and up.