Divorcing Money Creation from Bank Loans: Revisiting the “100% Money” Proposal of the 1930s

Abstract

The 2007-2008 global financial crisis has brought strong renewed interest in the “100% money” reform proposal, inherited from the 1930s, which aims at divorcing money creation frombank loans by imposing 100%reserves on checking deposits. This reformidea, however, is frequently subject to confusion, being sometimes likened to the idea of abolishing bank intermediation, sometimes to that of setting up a currency board, or yet mistaken for the more recent “narrowbanking” proposal. For this reason, this article offers to clarify its concept and objectives, by revisiting the works of the authors of this proposal in the 1930s—Henry Simons, Lauchlin Currie and Irving Fisher in particular. After briefly recalling the history of the “100% money” idea, I present its main arguments, and then discuss its implications for the payment system, bank intermediation, and the institutional framework of money issuance. I conclude on the importance of a conceptual clarification of this reformidea in respect of the ongoing discussions about it.