Money, Banks and Finance in Economic Thought

The 100% money proposal of the 1930s: a resurgence of the Currency School ideas?

Demeulemeester Samuel, ENS de Lyon and Paris 8 University

The recent 2008 global financial crisis has led to renewed concerns about the stability and sustainability of our monetary and financial systems. In this context, discussions have re-emerged about the ‘100% money’ reform idea that was proposed in the 1930s by such authors as Henry Simons of the University of Chicago (the main designer of the so-called ‘Chicago Plan’ of banking reform), Lauchlin Currie of Harvard, and Irving Fisher of Yale—cf., for example, Benes and Kumhof (2012), Jackson and Dyson (2013), Wolf (2014), King (2016), Turner (2016), or Huber (2017). The 100% money proposal rested on the argument that the dependence of the money supply upon bank loans was a cause of inherent monetary instability, leading to cumulative expansions or contractions of deposit currency largely responsible for booms and depressions. The solution, therefore, was to divorce the process of creating and destroying money from the extension and contraction of bank loans. To this end, commercial banks would be divided into two departments: a check department, dealing with transferable (‘checking’) deposits subject to a 100% reserve requirement in lawful money, and a loan department, dealing with non-transferable (‘savings’) deposits only fractionally covered by reserves. This idea of splitting the banks into two compartments was reminiscent, of course, of the English Bank Charter Act of 1844, which, following the Currency School doctrines, required the Bank of England to be divided into an Issue Department, subjected to a 100% marginal reserve requirement for its note issues, and a Banking Department, dealing with the Bank’s lending activities. This resemblance with the 100% money proposal has been duly stressed in the literature, both by the 100% authors themselves and by their critics, including the most recent ones. Goodhart and Jensen (2015), for example, have interpreted the post-2008 discussions of the 100% scheme as a sign of the “ongoing confrontation” between the Currency and Banking schools. Beyond this resemblance, however, the English Bank Charter Act of 1844 and the 100% money proposal of the 1930s are far from being identical, and their theoretical foundations actually show some significant differences. Because no detailed comparative analysis of these two reform ideas appears to be found in the literature, the present paper aims at filling this gap.

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Keywords: 100% money, Chicago Plan, Irving Fisher, Currency School, Bank Charter Act, Peel Act of 1844