Irving Fisher, 100% Money, 1935

Irving Fisher’s “100% Money” is remarkable in the context of our present credit crunch. While The Cobden Centre pursues copyright permission to scan and distribute this book, we offer this summary of the preface, foreword and first chapter, which outline Fisher’s proposal1.

100% Money
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.

Irving Fisher, LL.D.
Professor Emeritus of Economics
Yale University

Irving Fisher (1867-1947)2 was an important American neoclassical economist who found his “debt-deflation” analysis of the Great Depression was overlooked in favour of Keynesianism. His theories have made a comeback since the 1980s and several important concepts are named after him. He laid the foundations of monetarism.

Fisher’s “100% Money” proposal was to raise reserve requirements against checking deposits to 100%. That is, to keep money on deposit at the bank safe and ready for withdrawal. This was startling in 1935 but, then as now, it represented a return to ancient principle.

From the preface to the first edition:

The revival now of this ancient 100% system, with the readjustments demanded by modern conditions, would effectually restrain the monetary inflation and deflation incident to our present system; that is, would actually stop the irresponsible creation and destruction of circulating medium by our thousands of commercial banks which now act like so many private mints. For these and other reasons, the 100% system would be a great boon, even to bankers.

That this is true is recognized by a few bankers who have studied the economic effects of the system under which they now operate and who see that the 100% system would largely save them from great depressions.

Over four pages, Fisher lists the many bankers and economists who agreed with the proposal or who contributed to the book through criticism.

He writes:

My chief object is to make every possible relationship of the plan so clear that any intelligent and open-minded reader may be fully convinced as to its soundness and practicability. …

The essence of the 100% plan is to make money independent of loans; that is, to divorce the process of creating and destroying money from the business of banking. A purely incidental result would be to make banking safer and more profitable; but by far the most important result would be the prevention of great booms and depressions by ending the chronic inflations and deflations which have ever been the curse of mankind and which have sprung largely from banking.

This would be a return to ancient principle — not a new idea — and it would “speedily and permanently” solve the problem of depressions — “recessions” as we call them today — by removing their chief cause: “the instability of demand deposits” — i.e. the money supply — “tied, as they now are, to bank loans”3.

The “Foreword by a banker” explains that the ordinary man would be surprised to discover that his wages, salary or income depends on the total loans outstanding by the banks. The chief problem in the Depression was the availability of too little money: there must be a dollar — or substitute — in circulation for every three dollars of wages, salary or income.  This ratio was stubbornly constant but the money supply collapsed in the Great Depression.

Fisher’s banker continues: borrowed money creates further new book entries which serve as money. That is, lending creates new money which expands the money supply. Paying back a loan destroys money and ultimately:

If all bank loans were paid, no one would have a bank deposit, and there would not be a dollar of currency or coin in circulation.

This is a staggering thought. We are completely dependent on the commercial banks. Someone has to borrow every dollar we have in circulation, cash or credit. If the banks create ample synthetic money, we are prosperous; if not, we starve. We are absolutely without a permanent monetary system.

When one gets a complete grasp upon this picture, the tragic absurdity of our helpless position is almost incredible–but there it is.

The “Foreword by a banker” concludes that the depression was lengthened by the banks’ failure to lend, which destroyed the money needed in the economy: bank deposits drawn by cheque. There was no mysterious force at work: they had not the necessary money or equivalent substitute in circulation. He writes:

Our statesmen have consistently declined to study this question and provide a sound monetary system, an adequate permanent currency, scientifically calculated to expand consistently with our increasing population and increasing ability to produce.

Chapter 1 — Summary in advance

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.

People believe they are drawing against the money they have at the bank when they write a cheque4 and this was the main circulating medium in the economy. Fisher called it “check-book money” as opposed to physical cash, which he called “pocket-book money”.

Check-book money was intangible but could be converted into physical pocket-book money by cashing a cheque. People imagined that cheque-book money was real money, when in fact it was just the bank’s promise to furnish money to its depositors when asked.

In 1926, there was not enough cash to furnish to all the depositors if they asked for it.

By 1933, $8bn of $23bn of check-book money had been destroyed. This caused unemployment and bankruptcies. If the 100% system had been in use, this monetary deflation could not have taken place and the Great Depression would have been prevented. The destruction of this check-book money was due to a faulty system.

Fisher explains in detail how the banks create and destroy check-book money — demand deposits, your current account balance — by granting and calling loans. The money existed only as pen and ink records: today it is computer records.

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.

It may be important to remind ourselves at this point that these are the words of one of the most important economists of the twentieth century.

The trouble was that the banks loaned not money, but the promise to furnish money on demand — money they did not possess — and so a pyramid of credit-based money was built on just a little cash. This system was a danger to depositors, banks and the general public. It was essentially the same practice as that of issuing bank notes in excess of coin, the practice outlawed in England by Peel’s 1844 Bank Charter Act.

Whereas bank deposits drawn by cheque could be created and destroyed invisibly, bank notes had 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 of 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 proposal

Let the Government, through an especially created “Currency Commission,” turn into cash enough of the assets of every commercial bank to increase the cash reserve of each bank up to 100% of its checking deposits. In other words, let the Government, 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. Then all check-book money would have actual money — pocket-book money — behind it.

This money would merely back the demand deposits of the banks, neither increasing nor decreasing the quantity of money in circulation5.

After this substitution of actual money for securities had been completed, the bank would be required to maintain permanently a cash reserve of 100% against its demand deposits. In other words, the demand deposits would literally be deposits, consisting of cash held in trust for the depositor.

Depositors would then pay for safekeeping services (or move their deposits into real savings accounts, that is, those on time-deposit).

The advantages

Fisher offers the following advantages which are briefly justified and later developed in the book:

  • No more runs on banks
  • Fewer bank failures
  • The interest bearing government debt would be substantially reduced6
  • The monetary system would be simplified
  • Banking would be simplified
  • Great inflations and deflations would be eliminated
  • Booms and depressions would be greatly mitigated
  • Banker-management of industry would almost cease

The objections

Fisher briefly dismissed the following objections, handling them in detail later in the book:

  • Wouldn’t there be inflation? — No, not one dollar.
  • Would the money be asset-backed? (by bonds) — Yes
  • Would not the gold standard be lost? — “No more than it is lost already! And no less.” Fisher explains that a return to the “old-style” gold standard would be easier under 100% money7.
  • How would the banks get any money to lend? — (1) From their capital (2) From savings accounts (3) From the money repaid on maturing loans.
  • Would not the bankers be injured? — “On the contrary…”
  • Would the plan be a nationalization of money and banking? — “Of money, yes; of banking, no.”


The 100% proposal is the opposite of radical. What it asks, in principle, is a return from the present extraordinary and ruinous system of lending the same money 8 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 deposit banking.

If our bankers wish to retain the strictly banking function — loaning — which they can perform better than the Government, they should be ready to give back the strictly monetary function which they cannot perform as well as the Government. If they will see this and, for once, say “yes” instead of “no” to what may seem to them a new proposal, there will probably be no other important opposition.

  1. Bold emphasis, errors and omissions mine. []
  2. Wikipedia entry []
  3. And yet today our chief concern is the collapsing economy in a credit crisis. []
  4. Or swipe their Maestro card []
  5. I like to imagine this as forcing the barman to serve a full pint, not a short measure that he says is a pint. []
  6. Bonds would be purchased not with demand deposits to go into circulation as in QE, but in cash to back demand deposits. Other mechanisms are available today: see de Soto. []
  7. Which casts an interesting light on the popular perception of the gold standard. []
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7 replies on “Irving Fisher, 100% Money, 1935”
  1. says: G.F.Courtney

    Irving Fisher’s claim that 100% money will not harm the banking industry (as above “the Objections “) seems dubious.
    100% money will reduce the banks current lending capacity in the sense they will no longer be allowed to create money i.e. to expand the money supply.
    In Australia today (2011) the current money supply is $1,000b
    and the annual increase in the money supply has been 10% p.a. for past 20 years (source Australain Bureau of Statistics )
    Thus the projected increase (under the present banking system ) is say $100b which will be created by the banks and on which the banks will receice (say) $10b interest .
    100% money will prevent the banks from creating money ;and thus deprive banking system of $10b in revenue ,most of which is profit.
    In Australia that means the banking system will go from making a profit of $5b p.a. to making a loss of $5b p.a.
    This sounds unbelievable even to me.I invite rebuttal

  2. says: Jamie Walton

    Do you have permission to scan and distribute Irving Fisher’s 100% Money book yet?

  3. says: G.F.Courtney

    Following Irving Fisher’s 100% money plan ,Milton Friedman advocates setting ‘Growth-of-money goals”
    A microscopic step from here to advocate that any growth in the money supply should be as a credit ;ie.Social Credit to turn up in Federal budget as a credit item subject neither to interest nor repayment

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