100% Banking and Its Advocates: A Brief History


The 100% reserve plan is often considered a radical proposal for monetary reform. This article discusses the history of 100% banking and its advocates. The article shows that many of the most important figures in the history of money and banking have advocated 100% reserves. Contrary to the modern consensus in economics, the 100% plan is conservative, not radical.

The Early History of Banking

The deposit business is older than recorded history. Deposit banking first emerged in the ancient Mesopotamian temples. Initially, the temples took deposits in grain. But eventually, the temples stored other crops, livestock, farming equipment, and the precious metals. Accountants in ancient Mesopotamia invented writing around 3300 BC to record the ownership of property, including property held on deposit.

Around 1775 BC, rules of banking were enshrined in the Code of Hammurabi. Laws 100-191 deal with trade, and these laws distinguish between the deposit contract and loan contract. Laws 120-125 deal with deposits, and law 120 affirms that the owner of deposited goods is the depositor, not the depository. Moreover, this law prohibits the depository from using goods left on deposit. Law 120 of the Code of Hammurabi constitutes a 100% reserve requirement for depositories:

If a man stores his grain in grain-storage in a man’s house and a diminution occurs in the grain-store or the house owner opens the storage place and takes grain or he wholly denies that grain was stored at his house, the grain owner shall affirm his grain before the god and the house owner who took the grain shall pay twofold to the grain owner.1

Archeologists have found hundreds of thousands of clay deposit receipts and transfer orders written in the ancient cuneiform. All these clay tablets indicate that deposit banking was extremely widespread in ancient Mesopotamia. Moreover, these clay blocks show that bank notes and checks existed more than a thousand years before coinage developed in ancient Greece around 650 BC.

As in Mesopotamia, the temples in ancient Greece functioned as depositories. The temples of Apollo, Artemis, and Hera maintained 100% reserves. Private banks emerged in ancient Greece, and, like the temples, private bankers were expected to hold 100% reserves. For instance, the epitaph of the Greek banker Caecus records that he maintained a 100% reserve ratio. Private bankers did violate the 100% principle, however. In a speech called Trapezitica (393 BC), Isocrates accuses the Greek banker Passio of holding fractional reserves. In short, 100% banking was the tradition passed down from ancient Greece to Rome.

It is nearly impossible to overstate the importance of Aristotle in the history of economic thought. Aristotle (384-22 BC) distinguished between a loan and a deposit, and he maintained that a depository’s purpose is to safeguard property: “a deposit is handed over to be guarded and returned, whereas the lender lends for his own advantage as well [that is, for interest].”2 Fractional reserve banks put depositors’ property at risk and thereby breach their promise to safeguard property.

The Digest of Justinian (530-533) is the great compilation of Roman law, and it is the most important legal work in the history of Western civilization. The Digest distinguishes between the deposit contract and the loan contract: “it is one thing to have made a loan, quite another to have made a deposit.”3 The Digest contains the following definition of a deposit:

A deposit is what has been given to another for safekeeping. It is so named from the word ponere, to place. The preposition de makes up the term depositum to show that everything which pertains to the safekeeping of the property had been committed to the good faith of the depositee. 4

The Digest holds that the depositor retains ownership of property stored in depositories. Depositories are prohibited from using depositors’ property for gain. In fact, any depository that uses depositors’ property is guilty of theft. The 100% reserve requirement for depositories was enshrined in the Digest.

if a person takes possession of the thing deposited with a view to appropriating it, he does commit theft. It is irrelevant whether he wears the ring on his finger or has it in a jewelbox, if, when he holds it as a deposit, he decides to hold it as his own.5

In the West, the banking business went into steep decline after the collapse of the Roman Empire around the year 476. Significant banking activity reemerged after the Templar order was founded in 1119. The Templars developed an advanced banking system. Importantly, however, the Templars did not engage in fractional reserve banking. It must be stressed that the Templar’s 100% reserve system did not fail. Rather, in 1307, the tyrant Philip IV of France destroyed the Templars in a failed attempt to steal the order’s vast precious metals reserves.

No doubt, isolated violations of the 100% principle have occurred in the deposit business since the very beginning. But when did fractional reserve banking become institutionalized? Systematic fractional reserve banking emerged in Italy and Spain during the thirteenth and fourteenth centuries. Available records show that, from 1300-1600, banks in major European trading centers typically held reserve ratios of about 30 percent.

Banking panics are inevitable in any economy with a fractional reserve banking system. As economic science dictates, the emergence of institutionalized fractional reserve banking in Europe led to systemic banking panics. For example, there were banking panics in Florence (1343-46; 1425; 1485, 1494; 1574-89), Venice (1340-42; 1374-75; 1429; 1445; 1499; 1509), Barcelona (1400; 1468), and Seville (1553-57; 1575-79). In short, banking panics have been a regular feature of economies in the western world since the institutionalization of fractional reserve banking in the thirteenth and fourteenth centuries.

100% Banking from 1200-1800

After Aristotle, Thomas Aquinas (1225-74) is the most important philosopher in the history of western civilization. He set the stage for the Renaissance by bringing Aristotelianism to the forefront of western philosophy. Like Aristotle, Aquinas distinguished between the loan contract and the deposit contract. He argued that the depositor retains ownership of money deposited in the bank. Since depositors own the money, the depository cannot use money left on deposit: “The difference between a loan and a deposit is that a loan is in respect of goods transferred for the use of the person to whom they are transferred, whereas a deposit is for the benefit [use] of the depositor.”6 Given this statement, Aquinas must be considered an advocate of 100% banking.

The Crisis of 1340-42 in Venice created a 100% banking movement. In 1356, Giovanni Dolfin (1303-61) proposed a 100% reserve “deposit bank” in Venice. The bank would limit its activities to taking deposits and clearing checks. The proposed bank would be prohibited from lending or investing, and it would not be allowed to pay interest on deposits. The bank would charge depositors a small fee to finance its operations. After debate, the Council of Forty rejected the proposal in 1356. Although he advocated more government involvement, Michele Morosini (1308-82) revived Dolfin’s proposal during the Panic of 1374-75. Zaccaria Contarini (f. 1374) and Philippe de Mezieres (1327-1405) endorsed Morosini’s 100% bank.

Cardinal Thomas Cajetan (1469-1534) anticipated the quantity theory of money, and he introduced expectations theory into monetary economics.7 As a follower of Aquinas, he maintained that depositors, not depositories, own the goods held on deposit. Depositories cannot appropriate their depositors’ property for personal gain, meaning they must hold 100% reserves:

the handing over of a thing and the transferal of the ownership of that thing are not inseparably connected. For it is possible to hand over a thing – for example, a piece of clothing – to another without transferal of ownership because it can be given in many ways – namely, on deposit … It is certain, however, that the transferal of ownership does not follow on the voluntary handing over of the item, as is clear when it is handed over in trust [i.e., a deposit].8

Francisco de Vitoria (1483-1586) is the father of international law and the founder of the school of Salamanca. He echoes Aquinas: “He who lends money transfers the ownership of the money to the borrower…. On the other hand he that entrusts his money to a merchant or craftsman so as to form a kind of society, does not transfer the ownership of his money to them, for it remains his.”9 Following Aquinas, Vitoria must be considered an advocate of 100% reserves.

Luis Saravia de la Calle (c. 1500-60) was an early subjective value theorist and critic of the labour theory of value. Of all the scholastic philosophers, he was the harshest critic of banking. Like Aquinas, Cajetan, and Vitoria, he distinguished between the loan contract and deposit contract. Saravia de la Calle specifically prohibits banks from using deposits for gain: “it is very true that the banker sins by using your money to do business.”10 For Saravia de la Calle, those who engage in fractional reserve banking commit a mortal sin.

Martin de Azpilcueta (1491-1586) is one of the greatest monetary theorist of all time. He was the first to explicitly state the quantity theory of money and the purchasing-power-parity theory of exchange rates.11 Azpilcueta wrote on deposit banking, “This exchanger’s occupation is to receive the money from the merchants; to deposit it; to have it ready”12 Azpilcueta’s requirement that deposit banks keep money ready is tantamount to a 100% reserve requirement.

Thomas de Mercado (1525-75) argued that money deposited in the bank belongs to the depositor, not the bank. Thus, deposit banks cannot use their depositors’ money to earn a profit: “they [deposit banks] have to understand that the money is not theirs but the money of others, and it is not just that by using it, they stop serving its owner.”13

Domingo de Soto (1494-1560), Luis de Molina (1535-1600), and Juan de Lugo (1583-1660) were more sympathetic to fractional reserves. Still, such thinkers hedged their support and maintained, “[bankers] mortally sin if they dedicate themselves to the type of transactions where they run the risk of getting involved in a situation where they will be unable to pay for the deposits.”14 As Reverend Bernard Dempsey concludes, “a Scholastic of the seventeenth century viewing modern monetary problems would readily favor a 100% reserve plan.”15

100% deposit banks were created in Genoa and Valencia in 1408 and in Palermo in 1555. In 1587, the famous 100% reserve Bank of Venice was founded to combat the inherent instability of the fractional reserve system. The prominent Contarinis were one of the founding families of Venice, and, as noted, Zaccaria Contarini supported 100% banking in the 1370s. In 1584, Tommaso Contarini argued for the establishment of the 100% reserve Bank of Venice. He argued that fractional reserve banks are inherently unstable and bound to fail:

Of the hundred and three banks opened in the city, of which there is a record, ninety-six of them went bankrupt, and only seven of them had a successful outcome…. A private bank certainly cannot last many years since its conservation depends on many accidents, circumstances, business differences and a great variety of individuals, which as soon as they experience a change, even the slightest one, may cause the end of the bank…. If a rumor arises, a cry, that there are no reserves or that the banker has suffered losses, and just one person decides to withdraw cash, that is reason enough to excite everyone and make them withdraw all their money from the bank, money which the bank cannot provide, and the bank has no choice but to go bankrupt. The bankruptcy of a debtor, a disaster in some business, or the fear of war are reason enough to destroy this kind of business, because if all the clients became suspicious they may lose their money, they would withdraw all of it to avoid a loss and oblige the bank to go bankrupt. It is extremely unlikely, in fact impossible, that some of the things mentioned above will not occur sooner or later and make a bank go bankrupt.16

The Bank of Amsterdam is the most famous 100% bank in history. The bank was established in 1609 after a period of monetary chaos in Europe, and it was designed to stabilize the monetary system. The Bank of Amsterdam was highly successful, and it maintained a 100% reserve ratio until the 1770s. Similar deposit banks were established in Middleburg in 1616, Hamburg in 1619, Delft and Nuremberg in 1621, and Rotterdam in 1635.

A 100% banking movement emerged in response to John Law’s disastrous banking experiment in France. In 1720, Isaac Gervaise (d. 1739) outlined the specie-flow-price mechanism for the first time. He did this to show “the ill consequences of the unnatural use of credit.”17 He argues money creation by fractional reserve banks disrupts the free markets’ natural tendency toward domestic and international equilibrium. He concludes, “whatever else bears a denomination of value, is only a shadow without substance, which must either be wrought for, or vanish to its primitive nothing, the greatest power on Earth not being able to create anything out of nothing.”18

Ferdinando Galiani (1728-87) has been called the grandfather of the marginalist revolution. A critic of John Law, Galiani praises the 100% deposit banks of Naples:

Money deposited in them [our banks] is kept religiously…. [I]t is, therefore, better for the money to be kept in the banks…. [T]he money which has been deposited … should always be on hand for withdrawals…. I would properly regard, as an enemy of the state and of the public tranquility, anyone who dares propose (as some have) that the money be taken from the banks and placed back into circulation.19

David Hume (1711-76) was one of the greatest monetary theorists in the history of economic science. As Hume recognized, fractional reserve banks create money and thereby cause price inflation: “[Banks] render paper equivalent to money, circulate it throughout the whole state, make it supply the place of gold and silver, [and] raise proportionally the price of labour and commodities.”20 Hume explicitly supported 100% banking: “no bank could be more advantageous, than such a one as locked up all the money it received, and never augmented the circulating coin, as is usual, by returning part of its treasure into commerce.”21

Joseph Harris (1703-64), master of the mint, was England’s highest authority on coinage. Harris warned that fractional reserve banks cause mischief. He says, “they would prove mischievous two ways: by increasing in effect the quantity of circulating cash beyond its natural level; and by endangering, in a cloudy day, their own credit.”22 Further, he recognized that fractional reserve banking causes wealth redistribution: “a natural consequence of a sudden flux of money [is] the enriching of one part of the community, at the expence of the other.”23

Harris supported 100% banking: “a public bank that issued no bills without an equivalent in real treasure, whether in cash or bullion it matters not much, must needs, I think be very convenient.”24 Like Hume, he wanted money deposited in banks to be “locked up.”25 Harris concluded, “The established standard of money should not be violated or altered, under any pretence whatsoever.”26

100% Banking in the 1800s

The French economists Destutt de Tracy (1754-1836) and Jean-Baptiste Say (1767-1832) advocated 100% banking. In A Treatise on Political Economy (1803), Say applauds the 100% deposit banks of “Venice, Genoa, Amsterdam, and 27Hamburgh.” He writes,

A medium, composed entirely of either silver or gold, bearing a certificate, pretending to none but its real intrinsic value, and, consequently exempt from the caprice of legislation, would hold out such advantages to every department of commerce, and to every class of society, that it could not fail to obtain currency even in foreign countries.28

John Adams and Thomas Jefferson were advocates of 100% banking. Adams wrote, “[the banking system] was contrived to enrich particular individuals at the public expense. Our whole banking system I ever abhorred, I continue to abhor, and shall die abhorring.”29 To Adams, fractional reserve banking is an inflationary, redistributive, and fraudulent practice:

Our medium is depreciated by the multitude of swindling banks, which have emitted bank bills to an immense amount beyond the deposits of gold and silver in their vaults, by which means the price of labour and land and merchandise and produce is doubled, tripled, and quadrupeled in many instances. Every dollar of a bank bill that is issued beyond the quantity of gold and silver in the vaults represents nothing, and is therefore a cheat upon somebody.30

Thomas Jefferson recognized that fractional reserve banks create money and thereby cause price inflation and wealth redistribution.31 He realized that loan and deposit banking are essential and productive businesses. However, he argued that deposit banks must be prohibited from engaging in fractional reserve banking. Actually, for Jefferson, fractional reserve banking is fraud:

To the existence of banks of discount for cash [loan banks], as on the continent of Europe, there can be no objection…. I think they should even be encouraged … Even banks of deposit, where cash should be lodged, and a paper acknowledgment taken out as its representative, entitled to a return of the cash on demand, would be convenient for remittances, travelling persons, &c. But, liable as its cash would be to be pilfered and robbed, and its paper to be fraudulently re-issued, or issued without deposit, it would require skilful and strict regulation.32

David Ricardo (1772-1823) was the most influential economist of his day. He recognized that fractional reserve banking artificially reduces the interest rate “under its natural level.”33 Ricardo advocated 100% banking in his famous textbook Principles of Political Economy and Taxation (1817): “A currency is in its most perfect state when it consists wholly of paper money, but of paper money of an equal value with the gold which it professes to represent.”34

James Pennington (1777-1862) was the first economist to outline the theory of multiple deposit creation – the most fundamental theory in banking.35 However, Pennington was an opponent of multiple deposit creation. To him, the business cycle is caused by the multiple expansion of loans and deposits in the fractional reserve system. Pennington developed the Currency Principle to abolish fractional reserve banking and, with it, the business cycle:

Are there, then, no means to be found, of preventing those alternations of excitement and depression – of extravagant expectation and disappointed hope – but in the exclusive employment of so expensive a medium of interchange as gold, and the suppression of paper? The difficulty which this question implies, is not insuperable. It is possible so to regulate an extensive paper currency, convertible into gold at the pleasure of the holder, as to render its contraction and expansion, and the occasional variation of its value, subject to the same law as that which determines the expansion and contraction of a currency wholly, and exclusively, metallic.36

Robert Torrens (1790-1847) was the first economist to specify the simple money multiplier.37 Pennington anticipated the multiplier, but Torrens explicitly shows that the multiplier is the reciprocal of the reserve ratio. To Torrens, fractional reserve banking causes the business cycle and banking panics:

when bankers thus abandon their duty to themselves and to the public, they inflict upon the country the most serious injury, render more sudden and severe that contraction of the circulation and of credit incident upon a protracted drain of bullion, intensify pressure into panic, and excite a temporary doubt whether the advantages of discount banking, even when conducted under a metallic currency, balance the evils it inflicts.38

Significantly, Torrens advocated 100% banking in the very same work in which he developed the simple money multiplier:

The only measure of Banking Reform which can, under existing circumstances, be brought forward with a probability of success is, to place the banks of issue under such regulations as may secure the constant and uniform application of the cardinal principle, of making the paper currency expand and contract as an exclusively metallic currency would expand or contract, under similar circumstances.39

Pennington and Torrens were the first to explain how the entire fractional reserve system multiplies loans and deposits. But Thomas Joplin (1790-1847) was the first to trace the process of multiple deposit creation from bank to bank.40 He argued fractional reserve banking causes the business cycle by distorting the interest rate set in the loan market.41 Like Pennington and Torrens, Joplin opposed multiple deposit creation and advocated 100% reserve banking:

Our paper currency has been substituted for, and has been supposed to represent, a metallic currency; and to make it fully what it purports to be, is the improvement required…. the amount of [our paper currency] should never either be more or less than the sum of metallic money which would be in circulation were there no paper.42

The Currency School was a group of English economists and politicians who advocated 100% reserve banking in the form of the Currency Principle. Ricardo and Pennington were the fathers of the Currency School. Other members of the school included Henry Drummond (1786-1860), John Ramsey McCulloch (1789-1864), George Norman (1793-1882), Lord Overstone (1796-1883), John Benjamin Smith (1794-1879), and Mountifort Longfield (1802-1884). The Currency Principle gained consensus in England after the Crisis of 1839. Finally, 100% banking became official policy in England when Peel’s Act of 1844 enshrined the Currency Principle in law.

Peel’s Act was a great victory in the history of the 100% banking movement. However, it contained a fatal error. Pennington, Torrens, and Joplin recognized that bank deposits are part of the money supply. But Peel’s Act did not apply the 100% reserve requirement to deposits. Thus, fractional reserve banks were still able to expand the amount of deposits. Significant deposit expansion after 1844 resulted in the Crisis of 1847, and the crisis discredited Peel’s Act and the 100% banking movement.

Important American economists advocated 100% reserves during the 1800s, including Condy Raguet (1784-1842), Daniel Raymond (1786-1849), Amos Kendall (1789-1869), William M. Gouge (1796–1863), Charles Holt Carroll (1799-1890), Amasa Walker (1799-1875), John Bascom (1827-1911), and Arthur Latham Perry (1830-1905). Further, Presidents John Quincy Adams, Andrew Jackson, Martin van Buren, William Henry Harrison, and James Polk endorsed 100% banking.

Supporters of 100% banking were also to be found on the European continent. In Russia, the economist Heinrich Friedrich von Storch (1766-1835) advocated 100% reserves. German supporters included Johann Louis Tellkampf (1808-76), Otto Hubner (1818-77), and Philip Joseph Geyer (f. 1867). The Frenchmen Victor Modeste (f. 1866) and Henri Cernuschi (1821-96) endorsed 100% banking.

100% Banking in the 1900s

Milton Friedman described Ludwig von Mises as “one of the greatest economists of all time.”43 Mises advocated 100% banking in his classic work The Theory of Money and Credit (1912). He wrote, “The basic conception of Peel’s Act ought to be restated and more completely implemented than it was in the England of his time by including the issue of credit in the form of bank balances within the legislative prohibition.”44 He repeated four decades later,

for the future there should be no more credit expansion. In the future no additional banknotes should be issued, no additional credit should be entered on a bank account subject to check, unless there is 100% coverage in money. This is the 100-percent plan…. no more credit expansion!45

Friedrich Hayek endorsed 100% banking. Following Mises, Hayek argued that fractional reserve banking is the cause of the business cycle. Consequently, 100% banking is the way to abolish destructive booms and busts. Hayek wrote in 1925: “The problem of the prevention of crises would have received a radical solution if the basic concept of Peel’s act had been consistently developed into the prescription of 100 per cent gold cover for bank deposits as well as notes.”46

In 1933, a group of economists at the University of Chicago produced the Chicago Plan for 100% banking. The Chicago Plan proposed “the outright abolition of deposit banking on the fractional-reserve principle.”47 The proposal was signed by Henry C. Simons, Frank Knight, Lloyd Mints, Aaron Director, Henry Schultz, Paul H. Douglas, Garfield V. Cox, and Albert G. Hart. In this way, the Chicago school of economics was born out of the 100% reserve banking movement.48

Henry Simons drafted the Chicago Plan. Still, Frank Knight provided the “philosophical inspiration” for the proposal.49 To Knight, the business cycle is due to fractional reserve banking: “The answer [to the cycle] is to be found in the banking and credit mechanism…. The cycle is due mainly to credit expansion and contraction.”50 He wrote in 1927,

[Fractional reserve banking] is absurd and monstrous for society … [T]here is no sense in having it at all, since the effect is simply to raise the price level … [I]mportant evils result, notably the frightful instability of the whole economic system and its periodical collapse in crises, which are in large measure bound up with the variability and uncertainty of the credit structure if not directly the effect of it.51

The Chicago Plan had support inside the Roosevelt administration from Jacob Viner, Gardiner Means, Rexford Tugwell, and Henry Wallace. On June 6, 1934, Senator Bronson Cutting and Representative Wright Patman introduced a bill that would require deposit banks to maintain a 100% reserve on deposits (S. 3744 and H.R. 9855). On July 25, 1935, Senator Gerald Nye attempted to amend Title II of the Banking Act of 1935 to impose a 100% reserve on deposits. However, President Roosevelt and Carter Glass opposed 100% banking and blocked any legislation requiring 100% reserves.52

Irving Fisher is often described as the greatest American economist of all time. Fisher was the most diehard supporter of the Chicago Plan, and he dedicated the last decade of his life to establishing the 100% system. He could write in 1943, “As to economists, probably a majority favor it [the 100% plan], certainly a large majority of those who have expressed themselves – several hundred.”53 In 1944, he reported that over 300 economists supported 100% reserves.54

For Fisher, fractional reserve banking is “a very risky affair,” and “It is obvious that such a top-heavy system is dangerous.”55 He argued the business cycle is a creature of the fractional reserve system: “Inflation and deflation of bank loans and so of ‘check-book money’ are largely responsible for great booms and depressions.”56 Fisher lists the benefits of 100% banking: “There would be practically no more runs on commercial banks … There would be fewer bank failures … Our Monetary System would be simplified … Banking would be simplified … [and] Great inflations and deflations would be eliminated.”57 Most importantly, the 100% plan is “incomparably the best proposal ever offered for speedily and permanently solving the problem of depressions.”58

To Fisher, “the adoption of the 100% system seems the very best thing to do.”59 So why not establish a 100% system? Fisher answers, “As far as I know, the only real objection to doing so is the fear of the banker that he will not make as much money under the 100% system as he does now.”60 But he argues, “on the contrary, he can make more.”

On the Chicago Plan, government will play a significant role in the 100% banking system. Hence, Hayek described the plan as “an instrument of monetary nationalism.”61 Still, Hayek wrote of the “undeniable attractiveness” of the Chicago Plan: “By far the most interesting suggestion on Banking Reform which has been advanced in recent years … is the so-called Chicago or 100 per cent plan. This proposal amounts in effect to an extension of the principles of Peel’s Act of 1844 to bank deposits.”62

Milton Friedman endorsed 100% banking. Friedman argued fractional reserves play a role in the business cycle. In fact, Friedman and Paul Samuelson admit that “most students of business cycles believe that … our [fractional reserve] banking system has an effect in amplifying [cyclical] fluctuations.”63 Friedman declared in 1954, “For a long time I have been a proponent of 100% reserve banking.”64 He repeats in 1960,

As a student of Henry Simons and Lloyd Mints, I am naturally inclined to take the fractional character of our commercial banking system as the focal point in a discussion of banking reform. I shall follow them in also recommending that the present system be replaced by one in which 100% reserves are required.65

Murray N. Rothbard was the twentieth century’s staunchest advocate of 100% banking. Rothbard proposes “that each bank be legally required, on the basis of the general law against fraud, to keep 100 percent of gold to its demand liabilities.”66 To him, 100% banking is the only system compatible with free market capitalism. Beyond that, it is the only system that can eliminate chronic price inflation and the business cycle.

I therefore advocate as the soundest monetary system and the only one fully compatible with the free market and with the absence of force or fraud from any source a 100% gold standard. This is the only system compatible with the fullest preservation of the rights of property. It is the only system that assures the end of inflation and, with it, of the business cycle.67

As Fisher reports, the 100% plan had significant support with businessmen.68 For example, the legendary investor Benjamin Graham was the father of value investing and Warren Buffet’s mentor. Graham supported Fisher’s 100% plan.69 The prominent financial journalist Henry Hazlitt advocated 100% banking: “If the world, or at least this country, ever returns to its senses, and decides to reestablish a gold standard, the fractional reserve system ought to be abandoned.”70 Hazlitt advocates “a pure, a 100 percent, gold standard.”71

John Maynard Keynes rejected the 100% plan. He wrote to Fisher, “On the matter of 100 per cent money I have, however, as you know, some considerable reservations.”72 But in 1985, the prominent Keynesian economist James Tobin endorsed 100% banking: “Deposited currency – 100%-reserve deposits – payable in notes or coin on demand, transferable by order to third parties, secure against theft or loss, would be a perfect store of value in the unit of account.”73 Also, the Post Keynesian economist Hyman Minsky liked the 100% plan. Tobin and Minsky pose a challenge to those who oppose the 100% banking on Keynesian grounds.


The 100% plan is often dismissed as a radical proposal. But many of history’s most celebrated monetary theorists have advocated 100% reserves, including Azpilcueta, Hume, Say, Ricardo, Fisher, and Mises. Furthermore, the fathers of modern banking theory – Pennington, Torrens, and Joplin – were 100% bankers. 100% reserve banking is not radical. In reality, it is far more conservative than fractional reserve banking. As Fisher wrote,

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 or 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 being accepted as standard practice, evolved into modern [fractional reserve] deposit banking.74

  • 1.Inventing God’s Law (New York: Oxford University Press, 2009), pp. 242-43. One the applicability of law 120 to money, see pp. 43-44 and 244-45.
  • 2.Problems 950b.
  • 3.Digest 42.24.2.
  • 4.Digest 16.3.1.
  • 5.Digest 47.2.68.
  • 6.Summa Theologica I.II.105.2.
  • 7.On Exchange and Usury (Grand Rapids, MI: CLP Academics for the Acton Institute, 2014), p. 49.
  • 8.Ibid, p. 63.
  • 9.Comentarios a la Secunda Secundae de Santo Tomas, Vol. 4 (Salamanca: Apartado 17, 1934), pp. 176-77.
  • 10.Instruccion de Mercaderes (Madrid: Joyas Bibliograficas [1544] 1949), p. 197.
  • 11.“Commentary on the Resolution of Money,” Journal of Markets & Morality (vol. 7, no. 1: 171-312, 2004), p. 270-80.
  • 12.Ibid, p. 260.
  • 13.Suma de Tratos y Contratos, Vol. 2 (Madrid: Instituto de Estudios Fiscales [1571] 1977), p. 480.
  • 14.Luis de Molina, “Treatise on Money,” Journal of Markets & Morality (vol. 8, no. 1: 161-323), p. 294.
  • 15.Interest and Usury (London: Dennis Dobson, 1948), p. 210.
  • 16.La Libertà delle Banche a Venezia dal Secolo XIII al XVII (Milan: Valentiner e Mues Libraj-Editori, 1869), p. 124.
  • 17.The System or Theory of the Trade of the World (Baltimore, MD: The John Hopkins Press, 1934), p. 3.
  • 18.Ibid, p. 12.
  • 19.On Money (Ann Arbor, MI: University Microfilms International, [1751] 1977), pp. 249-50.
  • 20.David Hume Essays: Moral, Political, and Literary (Indianapolis: Liberty Fund, [1752] 1985), p. 316.
  • 21.Ibid, pp. 284-85.
  • 22.An Essay upon Money and Coins, Part 1 (London: G. Hawkins, 1757), p. 101.
  • 23.Ibid, p. 85.
  • 24.Ibid, pp. 100-1.
  • 25.Ibid, p. 101.
  • 26.An Essay upon Money and Coins, Part 2 (London: G. Hawkins, 1758), p. 27.
  • 27.A Treatise on Political Economy (New York: Augustus M. Kelley [1803] 1971), p. 268n.
  • 28.Ibid, p. 259.
  • 29.“Letter to Benjamin Rush, 28 August, 1811” The Works of John Adams, Vol. 9, 635-40 (Boston: Little, Brown and Co., 1856), p. 638.
  • 30.“Letter to F.A. Vanderkemp, 16 February, 1809,” The Works of John Adams, Vol. 9, 608-10 (Boston: Little, Brown and Co., 1856), p. 610.
  • 31.“Letter to John Wayles Eppes, 24 June, 1813,” The Works of Thomas Jefferson, Vol. 11, 297-306 (New York: G.P. Putnam’s Sons, 1904-5), pp. 304-6.
  • 32.“Letter to John Wayles Eppes, 6 November, 1813,” The Works of Thomas Jefferson, Vol. 11, 315n-32n (New York: G.P. Putnam’s Sons, 1904-5), p. 331n.
  • 33.“High Price of Bullion,” The Works and Correspondence of David Ricardo, Vol. 3, 46-127 (Indianapolis: Liberty Fund, [1810] 2005), p. 91.
  • 34.“Principles of Political Economy and Taxation,” The Works and Correspondence of David Ricardo, Vol. 1. (Indianapolis: Liberty Fund, [1817] 2005), p. 361.
  • 35.“Observations on the Private Banking Establishments of the Metropolis: First Memorandum to Huskisson,” Economic Writings of James Pennington, xlv-li (London: The London School of Economics and Political Science, [1826] 1963), pp. xvl-xvliii.
  • 36.“A Letter to Kirkman Finlay,” Economic Writings of James Pennington, 50-114 (London: The London School of Economics and Political Science, [1840] 1963), p. 85.
  • 37.A Letter to the Right Honourable Lord Viscount Melbourne on the Causes of the Recent Derangement in the Money Market and on Bank Reform (London: Longman, Rees, Orme, Brown, and Green, 1837),  pp. 15-19.
  • 38.“Lord Overstone on Metallic and Paper Currency,” Edinburgh Review (vol. 107: 248-93, 1858), pp. 269-70.
  • 39.Supplement to a Letter Addressed to the Right Honourable Lord Viscount Melbourne (London: Longman, Rees, Orme, Brown, & Green, 1837), pp. 8-9.
  • 40.The Cause and Cure of Our Commercial Embarrassments (London: James Ridgway, Piccadilly, 1841), pp. 33-34.
  • 41.Views on the Subject of Corn and Currency (London: Baldwin, Cradock, and Joy, 1826), pp. 15-16, 34, 38-39, 54-57.
  • 42.Ibid, p. 63.
  • 43.The University of Chicago Magazine (no. 67, Autumn, 1974), p. 16.
  • 44.The Theory of Money and Credit (Indianapolis: Liberty Fund, [1912] 1980), pp. 446-47.
  • 45.Marxism Unmasked: From Delusion to Destruction (Irvington-on-Hudson, NY: Foundation for Economic Education, [1952] 2006), pp. 74-75.
  • 46.“The Monetary Policy of the United States after the Recovery from the 1920 Crisis,” Money, Capital, and Fluctuations, 5-32 (London: Routledge, [1925] 1984), p. 29n12.
  • 47.“Banking and Currency Reform,” Research in the History of Economic Thought and Methodology, Archival Supplement 4, 31-40 (Greenwich, CT: JAI Press, 1994), p. 32.
  • 48.According to Lloyd Mints, “the Chicago School began formally in November 1933, when several faculty member signed the tract on ‘Banking and Currency Reform.’” See “In Memoriam: Lloyd W. Mints, 1888-1989: Pioneer Monetary Economist,” The American Economist (vol. 35, no. 1, 1991), p. 80.
  • 49.Ibid.
  • 50.“Two Minds that Never Met: Frank H. Knight and John M. Keynes Once Again – A Documentary Note,” Review of Keynesian Economics (vol. 4, no. 1: 67–98, 2016), pp. 84-85.
  • 51.“Review of ‘Wealth, Virtual Wealth and Debt,’” The Saturday Review of Literature (April 16, 1927), p. 732.
  • 52.See Ronnie J. Phillips, The Chicago Plan & New Deal Banking Reform (New York: Routledge, 1995).
  • 53.“Why Banks Could Make More Money Under the 100% Reserve System” The American Banker (January 6, 1943), p. 8.
  • 54.“Irving Fisher to John Maynard Keynes, 4 July,” Irving Fisher Papers (New Haven, CT: Yale University Library, MS/212, Series I, Box 14, Folder 235, 1944).
  • 55.100% Money (New York: Adelphi Company, 1936), pp. 8, 154.
  • 56.Ibid, p. 48.
  • 57.Ibid, pp. 11-13.
  • 58.Ibid, p. xviii.
  • 59.“100% Money and the Public Debt,” Economic Forum (April-June: 406-20), p. 419.
  • 60.100% Reserves: An Old System Adapted to Modern Needs (unpublished memorandum, 1937), p. 2.
  • 61.Monetary Nationalism and International Stability (Fairfield, NJ: Augustus M. Kelley, [1937] 1989), p. 81.
  • 62.Ibid.
  • 63.“The Problem of Economic Instability,” The American Economic Review (vol. 40, no. 4: 501-38, 1940), p. 516.
  • 64.“Why the American Economy is Depression Proof,” Dollars and Deficits, 72-96 (Englewood Cliffs, NJ: Prentice-Hall, [1954]), p. 76.
  • 65.A Program for Monetary Stability (New York: Fordham University Press, [1960] 1983), p. 65.
  • 66.The Mystery of Banking (Auburn, AL: Ludwig von Mises Institute, [1983] 2008), p. 264
  • 67.“The Case for a 100% Gold Dollar,” What has Government Done to Our Money and the Case for the 100% Gold Dollar, 123-86 ([1962] 2005) p. 176.
  • 68.100% Money (New York: Adelphi Company, 1936), pp. xi-xiv.
  • 69.Irving Fisher Papers (New Haven, CT: Yale University Library, MS/212, Series I, Box 16, Folder 277, 1947).
  • 70.The Inflation Crisis, and How to Resolve It (New Rochelle, NY: Arlington House, 1978), p. 175.
  • 71.Ibid, pp. 188, 190.
  • 72.“John Maynard Keynes to Irving Fisher, 7 July,” Irving Fisher Papers (New Haven, CT: Yale University Library, MS/212, Series I, Box 14, Folder 235, 1944).
  • 73.“Financial Innovation and Deregulation in Perspective,” Bank of Japan Monetary and Economic Studies, III, pp. 19-29 (1985), p. 25.
  • 74.100% Money (New York: Adelphi Company, 1936), pp. 18-19.

Edward Fuller, MBA, is a graduate of the Leavey School of Business.


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2 replies on “100% Banking and Its Advocates: A Brief History”
  1. Yes we need 100% banking BUT:

    When the world population rises from 100 000 people to 7 billion people we need more money.

    The problem with using gold as the base is that we will then also need more gold.

    The problem is to know how much money is needed.

    The problem with not having any gold backing is that governments tend to take control of the money supply and abuse their power. This is not an abuse when there is an urgent need to re-direct the economy onto an urgent war footing. Having a 100% money system is then inappropriate and can lose the war. Instead, as we know, governments print money and can win the war. But there is a price to pay in terms of inflation.

    The problem with governments having control through appointing the governor and others in the reserve / central bank is that the interests of governments is in staying in power and hence winning the next election. As we know this leads to pre-election booms and post election slowdowns or busts.

    The truth is that the people, not the government should appoint the members of the central / reserve bank.

    There needs to be a cap on how much new money can be created in any one year, war emergencies excepted.

    There is also a problem of what to do when less money is needed because for example the population is contracting or when this is necessary to stabilise the level of aggregate demand in the economy, or to keep the economy in balance.

    Keeping the economy in balance is an issue to be looked at. Spending can be from borrowed money and it can be from unborrowed money. It can be from government and it can be from others.

    So what we need to do is:

    A. To design a money management system that has a money supply authority elected by the people or competent representatives of the people, for example businesses, lawyers, and financial institutions.

    B. To have a way of removing money as well as adding money.

    C. Adding to (i) lendable money as well as adding to (ii) other spending money, for example by reducing taxes and paying for that with new money or allowing government to increase spending. Whatever keeps the level of spending in balance or is deemed to be politically responsible and necessary.

    D. Allowing the interest rate to find its own level.

    The suggestion is that all money is created by the money supply authority and is added to

    a) Lendable spending through auctioning new deposits at interest (the price) for lending to authorised lending institutions which may include banks (now deposit taking institutions), insurance companies, and managed funds.

    b) Treasury for the purpose of increasing government spending or spending by others through reduction of taxes.

    To remove money this can be done by not recycling lendable money that is returned to the bankers’ banker, the money supply authority, or by raising taxes or reducing government spending.

    Thus we can have the right amount of money to keep spending level or growing at a rate consistent with the capacity of the economy to deliver goods and services.

    There is, of course, more detail to be thought through, particularly in terms of how money for lending is put on offer – terms and conditions which I have discussed before – but I commend this design to the world for its further consideration.

    Thank you.

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