On Money and Banks

Irving Fisher’s 100% Money – are banks criminal institutions?

Whoever tends to see the main evil of our time in the concentration of economic and ultimately political power in a few hands, will be skeptical as to promises of salvation based on mere technical modifications, be it in the sphere of money or anywhere else. Such promises were made more than half a century ago by the American economist Irving Fisher who proposed a reform of the monetary system. He wanted to introduce what he called 100% Money. At his time the proposal attracted some attention and does so again nowadays. It seems to offer a simple and seemingly plausible explanation for the current crisis as it is based on the assumption that banks act in a criminal way!

Now, hardly anyone will deny that Goldman Sachs, other big investment or shadow banks and lots of bank-like institutions such as hedge funds have in fact committed many acts of manifest illegality. So the answer to the question raised in the title is quite unequivocal: Yes, these banks behaved in a criminal way. Moreover, we have probably only got to the tip of the iceberg as far as their criminal activities are concerned!

Commercial banks stubbornly deny any misdemeanor

But that is not the primary concern of the 100% Money initiative – even if it does, of course, benefit from the general revulsion against criminal activities in the financial sector. This initiative aims at a much deeper level: It asserts nothing less than that even all those supposedly respectable commercial banks which together with the Deutsche Bundesbank used to represent to the average German the very model of honesty and reliability are in fact infested with criminal energy. The root of the problem, therefore, did by no means originate with the crisis, it was always present in private commercial banks anywhere in the country. For these banks, that is what Fisher and his followers assert, usurped in a sneaky way a function which should have been the exclusive monopoly of the Central Bank: Commercial banks commit the crime of creating money out of nothing.

Only Fisher’s theory of money creation implies criminal behavior

Sometimes they do this in a perfectly legal manner. Up to the present day the so-called “Multiple Credit Money Creation” keeps its place of honor among the dogmas of textbook economics and whatever its logical shortcomings nobody ever believed it to be criminal. (1) But this version of alleged ex nihilo creation of money is definitely not the subject matter of Fisher’s book. Fisher deals with a totally different kind of pseudo money creation – and this clearly is criminal.

Florentine goldsmiths

In order to illustrate what they mean, Fisher as well as his later adepts like to refer to the example of medieval Italian goldsmiths (p. 20, 28 and analogous statements on pp. 30, 34, 101). In exchange for gold, which they took into custody on behalf of their clients, the merchants had issued certificates. They soon found out that their customers using these certificates as a convenient means of payment, never called back more than a small fraction of their gold deposits; let’s say never more than 10%. This fact inspired clever goldsmiths with an all too obvious idea. They themselves now brought additional certificates into circulation, which were, however, not backed up by gold. In this way they made gigantic profit as they could demand as many goods and services for these phony certificates as for the real ones covered by precious metal. They just had to make sure that one tenth of all certificates remained backed up by gold since that much would, statistically speaking, be called back in any given period. In other words, the Italian goldsmiths generated a tremendous amount of counterfeit money, because 90 of it was money created in fact out of nothing. (2)

It need not concern us whether or not this example is historically true. All that matters within the present context is the fact that the proponents of the 100% Money theory frequently use it to prove their point.

The behavior of commercial banks explained in the same way

According to Fisher and his followers private commercial banks practice a similar kind of criminal activity and continue to do so up to the present day. On the basis of a small fraction of actual Central Bank money they create huge amounts of pseudo money out of nothing. And that activity is, so they believe, even much more reprehensible than all misdoings which have been uncovered in investment banks, hedge funds, etc. For, after all, these have been brought to justice and they had to admit their crimes. But managers as well as the staff of seemingly respectable commercial banks stubbornly deny all wrong doing. They pretend not even to know any such money creation out of nothing! In other words, the entire private commercial banking system is united in its conspiracy against truth!

We are, in fact, dealing with a conspiracy theory

It is important to emphasize this circumstance at the beginning. In stark contrast with the comparatively harmless theory of “Multiple Credit Money Creation” which I have shown to be void of any practical relevance, Fisher’s 100% Money doctrine does indeed imply the same kind of utter criminal intent that was the mark of those misled Italian goldsmiths. As a matter of fact he assumes nothing less than that banks do normally behave in a criminal way. In other words, Fisher assumes a general criminal conspiracy on the part of banks. This bold assumption, does not diminish the success of Fisher’s theory, on the contrary. As lately as a few weeks ago two scientists from the IMF published a positive comment. (3) Since then the doctrine has made it into leading German and Austrian media such as the Zeit, the Viennese Standard, the Süddeutsche Zeitung, the Spiegel and the Handelsblatt. (4)

The promise

It is the mark of all conspiracy fables, that, on the one hand, they pretend to have a clear understanding concerning the origin of evil, while, on the other hand, they offer a recipe of salvation as how to fight it successfully. This also applies to Fisher’s theory of 100% Money as well. He offers the following solution. The privilege of providing the economy with money should be committed to the government only – so that private banks can no longer busy themselves with creating pseudo money. Once this reform successfully carried through – and it is by no means difficult to achieve – there will be no more inflation or deflation, there will be neither boom nor bust in the real economy and, of course, no run on the banks. It sounds like a definite deliverance from all the evils of capitalism, for a run on the banks with the ensuing economic collapse has always been regarded as a kind of doomsday for capitalism: a day of reckoning with its inherent injustice.

In this article I will deal mainly with the ideas of Irving Fisher, as they have been formulated in his book on 100% Money. For these ideas are at the bottom of all later thoughts on the matter. (5) I will therefore not refer to the earlier approaches of Henry Simons and hardly mention the later ones by Bernd Senf and Joseph Huber. Nor do I wish to consider the arguments of the above mentioned IMF scientists who by their positive approach to 100% Money made the idea acceptable to leading German media. But I will present a somewhat systematic sketch of the banking system in its present form and then describe the shape it would assume if Fisher’s ideas were realized:

1) How does the current banking system work?

Commercial banks as securities-, savings- and deposit-banks

2) How will the new banking system according to Irving Fisher work?

Commercial banks as securities-, savings- and deposit-banks

3) Criminal money creation – Fisher’s core assumption

4) The Facts: How do commercial banks actually proceed?

5) What are they theoretically capable of doing?

6) Conclusion

1) How does the current banking system work?

Traditional commercial banks perform three different functions, which could even be separated in order to form three different institutions. We would then speak of securities-, savings- and deposit-banks. This functional separation is important since we may ask at the outset where we could expect a possible “run” and where not.

a) The commercial- qua securities bank

In this capacity, a commercial bank accepts first-class securities from the government or from private actors in exchange for Central Bank money. When so doing, the commercial bank acts on behalf of and under the supervision of the Central Bank, which, of course, could have assumed this function itself without delegating it to the commercial sector. This, however, is not a really important point. For it is the quality of securities accepted against real money that matters. As of late the American Fed as well as its European counterpart, the ECB, take the risk of accepting potentially worthless securities (Greek government bonds, for instance). This means that they generate “arbitrary money” (Willkürgeld) which in the long run always leads to inflation. It should be added that this is an instance of illegal behavior according to the rules of both the Bundesbank and the European Central Bank.

There is, however, no danger at all, that commercial qua securities banks will become the object of a “run”. This would make as little sense as a run on the Central Bank itself.

b) The commercial- qua savings bank

Here again, a “run” is practically out of the question. If you lend money for ten years, you know that you will recover it only ten years later. Savings banks lend the money of savers (investors) or their own capital to households, businesses and the government. In the latter case they transmit interest-bearing government bonds to investors. Certainly, savings banks may operate carelessly by giving investors’ money to unreliable borrowers and without insisting on good securities. Then bad loans may occur. But sound business may fail anywhere, not just in banks.

c) Commercial- qua deposit banks (with transfer function)

In their capacity of deposit banks commercial banks accept overnight ie permanently accessible deposits. The majority of such deposits are handed out as short-term loans to borrowers. Here bankers follow the statistically substantiated rule that on any given day customers will only retrieve a fraction of their deposits, for instance one tenth of the total amount. This means that the bank need not actually keep the remaining nine-tenths in its safe. It may use them instead as short-term credit for only if it does so, will it earn money. There is no profit on money it keeps in a safe.

The statistical rule just mentioned is, however, no longer valid in a panic situation. That’s when the dreaded run on the bank may happen. Everybody wants to pick up his money before it’s too late. But this is impossible since only the tenth part of deposits is still to be found in the bank’s vaults. If a commercial bank is not to go bankrupt in a similar situation, the Central Bank as “lender of last resort” must provide the remaining nine-tenths as a short-term credit – which it usually does subject to the condition that the commercial bank has carried on its normal business in a serious way that is without accumulating a large number of bad loans that would anyway lead it to bankruptcy.

Irving Fisher’s new interpretation

The preceding description of a private commercial- qua deposits bank does not include any creation of money. However, since the time of Henry Simons and Irving Fisher a substantially different view has come to attract attention. According to Fisher, deposit banks proceed in a quite different way which is tantamount to criminal action. That is, they act in the same criminal way as did the Italian goldsmiths mentioned above. These, we have seen, considered the total amount of gold in their vaults as reserve on which to build a ten times larger pyramid of pseudo money. Likewise commercial banks consider the total amount of all overnight cash deposits as reserve with regard to that ten times larger quantity of pseudo money which they then create out of nothing (Fisher p. 33, 37, 102). This huge amount of pseudo money is used as credit in the same way as real money. Pocketing in all the interest they raise profits too to a ten times greater level.

Proceeding in this manner, commercial banks not only compete with the Central Bank as the only legitimate creator of money, but they even largely exceed the latter’s activities. According to Fisher’s new theory, private commercial banks provide money to the economy in two different ways. In their capacity as securities banks they behave legally correct as the executive arms of the Central bank as they hand out Central Bank money in exchange for first class securities. However, in their capacity as deposit banks, they act clearly against the law by conjuring up lots of fictitious money.

2) How does the new banking system according to Irving Fisher work?

Fisher’s main proposal is a government-appointed “Currency Commission”. The three functions of a commercial bank are substantially modified in his system.

a) Commercial qua securities banks

In the new system this feature becomes completely separated from commercial banks and is instead transferred to a single government institution, the so called Currency Commission. This has serious implications for sovereign debt. By getting the printing press under its own control, the government supplies itself and the economy directly with money, ie without the intervention of commercial banks.

Here two separate functions coalesce that had been carefully distinguished in the old system:

a) the role of providing Central Bank money to the economy whenever this appears necessary because of increasing GDP, and

b) the financing of government debt.

In the old system participants of the private economy could give first class securities to commercial banks in order to obtain Central Bank money. The key interest rate levied on all Central Bank Money was meant to make sure that this process could be reversed in case the GDP was shrinking. Then the key interest rate would be forbiddingly high so that Central Bank money (provided by the Central via commercial banks) would be given back in exchange for securities. The amount of Central Bank money in relation to all circulating goods and services was thus fine-tuned in order to secure price stability. Ceteris paribus an excess of circulating money would lead to inflation, while too little money would produce deflationary consequences.

Irving Fisher was strongly influenced by Silvio Gesell

Irving Fisher knew and appreciated the ideas of Silvio Gesell who had proposed a different solution for the problem of how to supply the economy with money. In accordance with a growing real economy a state-run “Currency Board” would provide the government with freshly printed money the exact amount of which should at the same time be deducted from taxes. (6) Conversely, the Board would give part of the government’s tax revenue money to the shredder in times of declining economic performance, when money would have to be drained out of the economy. Thus, all extra money needed for a growing economy is no longer channeled into private hands, but instead into the coffers of government.

That is, certainly, an excellent idea, even if it has the same pro-cyclical effects as the present regime. In times of economic boom government and citizens alike will be happy, in a downturn they suffer all the more.

National debt

All money channeled into the economy beyond the need of growth is by definition inflationary. This is, of course, perfectly true with regard to all money that the “Currency Commission” hands out to government in order to pay for national debt.

If government gets money from the printing press as interest-free loan (Fisher, p. 18), thus providing credit to itself, it must commit itself to later collect this money as a tax from its citizens. If it did not, it would inflate the money supply. In the old system, there was no danger that this would happen. The government acquired the funds it needed from the economy itself, more exactly from mostly rich people who were willing to lend their money at interest. In order to pay the credit back, the government had to tax the population at large.

Redistribution from bottom to top

If government doesn’t want to simply depreciate the money of its citizens through inflation whereby it specifically expropriates the poorer part of the population, it must necessarily drain out of the economy at a later time all the money that it had previously poured into it. In the old system, this was tantamount to social redistribution from bottom to top as the majority had to pay back the initial debt plus interest to a privileged minority Even if debt produces growth it nevertheless always favors the rich more than any other part of the population since the very wealthy are pretty sure to find many legal as well as illegal means to avoid taxation. It is here that we hit on the main problem. A socially acceptable way to solve the problem of public debt can not lie in the usual procedure where government borrows from a wealthy minority, only to make it still richer. Instead it must collect this money from them by a reasonable degree of taxation.

Who is taxed by government and in what manner?

Now, do we make any important progress by taking the financing of government debt away from commercial banks in order to put it into the hands of government as proposed by Irving Fisher? Mind you, in both instances the state must drain out of the economy by way of taxes the very money he had poured into it in the first place. He is obliged to do so because otherwise he would inflate the money supply far beyond that part of fresh money needed to compensate for a growing economy. So does the situation really get better when – as required by the new system – the government lends money to itself?

The answer depends on how and whom the government taxes. Fisher’s Currency Commission and similar ideas are only worth our attention if this point has been sufficiently clarified in the first place, in other words, if we insist on the taxation of large fortunes.

Otherwise national debt will become even more dangerous

Otherwise we are faced with an obvious difficulty. I do not quite understand why government and politicians should resist a very alluring temptation. In the 100% Money scheme the government becomes master of the printing press. Why should it refrain from creating any amount of money which it then lends to itself? And what could detain it from making an additional gift to its citizens by not taxing them (especially the rich, who tend to be most successful in resisting such efforts) So why should government resist the temptation of just printing the money it wants and be mindless of later inflation? After all, inflation does not hurt everybody in the same way. The wealthy will in time get rid of their money, which they will invest in real values, only the poor will get much poorer. I am afraid the advantage undoubtedly gained by government through obtaining interest-free loans, will most likely be more than offset by this misuse of a state-run printing press.

After all, the independence of Central Banks (from government interference) is no minor accomplishment!

We should keep in mind how national debt arises in the first place. It occurs when governments want to spend more money than they get by way of taxation. Previously, they turned to the rich for loans. And the rich are always happy to make profit by lending against interest. They know quite well that government would lack the courage to take that money from them in the shape of taxes so as to make them contribute their due share to the common good. Do we think that government will show this courage in the new system? That would be a bold assumption. Rather it will print all the money it wants to please the rich and reduce taxes to please the poor. After all, inflation always comes with a certain delay.

Institutional incentives for mismanagement

In Germany and some other countries the ruling power was deliberately kept away from the printing press by conferring a status of political independence to the Central Bank (Bundesbank) the exclusive task of which should consist in the maintenance of price stability. Financing sovereign debt by means of the Central Bank’s printing press was thus excluded as a matter of principal. As we see things have considerably changed nowadays. The ECB is far more subject to political pressure – obviously not to the advantage of the monetary system. I think that a Currency Commission which strictly follows Gesell’s proposal in providing money only in strict accordance with the economy’s growth is an excellent idea indeed. A Currency Commission, however, which would finance government debt, could become a most dangerous institution as it presents an efficient incentive to utter mismanagement.

b) Commercial qua saving banks

are meant to remain largely unchanged within the new system (Fisher, p 19, 63). Just as before they act as mediating agencies between savers, from whom they get cash, and borrowers to whom they lend it. No word of money creation out of nothing in this instance! As far as savings are concerned Fisher unequivocally sides with reason and common sense: Savers give their money to investors through the agency of a commercial- qua savings bank! “Under both the 10% and the 100% money system the chief source of loan accretions is not newly created money, but savings…” (Fisher, p. 64)

It may be said, however, that Fisher deviates from his own theory when he deals with commercial- qua savings banks. Clinging to reason and common sense he becomes inconsistent. This is not true of most of his followers who, in utter disregard of observable fact, introduced money creation out of nothing in savings banks too. I will speak about this under the head of “Criminal money creation – Fisher’s core idea “.

In one single respect, the new savings banks are meant to differ significantly from their predecessors. They may no longer hand out any money from savers to the government. This function will simply no longer be needed as it is transferred to the Currency Commission.

c) Commercial qua deposit banks

In this capacity they change from temporary depots with additional credit function to mere lockboxes. All overnight deposits are brought in cash and may at any moment be called back in cash. There full amount is permanently stored in the vaults of the bank. They may not be handed out as credits.

A run on banks impossible

This is a big advantage of the new system! It is, however, negatively outbalanced by a serious disadvantage. Considering the fact that in Germany, the savings rate is about ten percent, so that on average the tenth part of disposable income goes to savings banks, we may infer that the remaining 90% remain for a more or less extended period within the lockboxes of deposit banks and would therefore be frozen out of the economy.

That’s exactly  how things are in economically underdeveloped countries

In India, for example, the family fortune was usually worn by women in the shape of golden bracelets on hands and feet or it disappeared within the treasure houses of princes and temples. The significant achievement of modern society and its banking system consists in an exactly opposite strategy: A maximum of money is constantly kept in circulation (with the exception, of course, of those cash reserves which must be ready for expected daily withdrawals). Stored money is dead money – being withdrawn from circulation it disables the circulation of real goods.

A better solution

Here we are confronted with a dilemma which I believe does not allow for an unambiguous and certainly not for an easy solution. In my new book “EuroKalypse Now? Es gibt einen Weg aus der Krise!” (Eurokalypse Now? There is a way out of the crisis!) I propose the following solution:

“This evil can be resolved by distinguishing different types of Deposit Banks. There are those that may exclusively act as lockboxes with transfer function and those which may provide credits as well. Only the first ones give a 100% guarantee for the money of their clients. But since by renouncing all credit business they make no profit, they are forced to impose appropriate storage and service fees on their clients. The second type of deposit banks does make profit because it is allowed to use part of the overnight deposits money for credit. So it may either renounce all storage fees or keep it to a moderate level. However, it may no longer give a 100% guarantee for the safeguard of the money received. This, the customer knows and he is well aware of the fact that the government will not pay for his loss in the case of bankruptcy. It is up to him to decide whether to avoid all possible risk and pay service fees or to incur a certain risk for the benefit of paying no or lesser fees. So the first type is a deposit bank of guaranteed solvency while the latter is not wholly immune against bankruptcy. The existence of deposit banks of lower rating reduces deflationary tendencies to a minimum.”

This alternative solution does not fully avoid a run on the banks as does Fisher’s proposal, but it bypasses the paralyzing effect of deflationary tendencies. (7)

3) Criminal money creation – Fisher’s main idea

Reserve is a useful concept with regard to that part of overnight deposits which as a statistical rule may be withdrawn at any moment. In our above mentioned example, we presumed this part to be equal to 10% of total deposits as does Fisher in his own demonstrations. The reasoning remains the same for reserves in savings. These too are meant to protect creditors against failures as banks can never be sure that all credits will turn out to be sound. Statistics may teach them for example that 10% of total credits turn out to be lost and this loss must therefore be covered by a 10% cash reserve.

Reserve requirements for overnight deposits should be even more stringent. On the one hand those 90% of deposits which are handed out as credit may turn partially bad, so that this event must be covered by cash hold back in the banks vaults. On the other hand, statistics prove that a certain amount of all deposits may be withdrawn at any moment, so this requires an additional reserve. But whatever aspect we choose to stress and regardless of whether we deal with commercial banks in their capacity of savings or of deposit banks, in both cases reserves are meant to protect those who give their money to the banking institution. They are meant to protect creditors or savors.

That’s at least the opinion of thousands of bankers employed in commercial banks in Germany or any other country with a reasonably reputable banking system. And they act according to that conviction. However, if we are to believe Irving Fisher and his followers, commercial banks really behave in a totally different way. It is the above mentioned example of Italian goldsmiths and similar instances of criminal activity which raised their suspicions. When functioning as deposit banks private commercial banks deliberately renounce those profits they would obtain by using 9/10 of overnight deposits as credit. Instead they keep all overnight money back in their vaults regarding the total amount as reserve. They do so for a criminal purpose. Because this reserve of real money in their vaults is now used to heap 10-times more fictional money on top of it. This pseudo-money is created out of nothing, it exists in the shape of mere numbers scribbled on sheets of paper, but these numbers are then used to hand out real credit and to earn real interest and to make people end up in a goal if they can’t pay back with real money what they received as mere fictional money.

The term of reserve is twisted

The theorists of 100%-Money commit a striking logical error as they confer a new and rather unexpected meaning to the term “reserve”. While that tenth of total deposits actually retained in the bank’s vaults was a indeed a real reserve meant to protect depositors (because this was the statistically proved sum which could at any moment been withdrawn), the total amount which according to Fisher the bank now considers as a reserve, is no reserve at all as it provides a total protection to creditors. Obviously these may now at any moment withdraw 100% of their overnight deposits since these remain in the bank. And the creditors need not the least be worried about the 10-times larger amount of pseudo money presumably created on top of this so called reserve. They are simply not concerned. (8)

Florentine goldsmiths – a misleading parallel

At this point it should be evident how much Fisher and his followers are led astray by the example of Italian goldsmiths (9) The goldsmiths have increased the number certificates ten times beyond the actual amount of gold in their vaults, and nobody knows by looking on the certificate he owns whether it represents part of that tenth actually covered by precious metal or whether he owns only a sheet of paper referring to those nine tenths that are backed by nothing. If all certificate holders would suddenly demand the promised gold in exchange for the notes, the goldsmith would immediately go bankrupt because they actually store no more than the tenth part of it.

The situation is quite different with the commercial banks. Fisher himself as well as his followers always insists that the pseudo money presumably created by commercial banks has no backing at all in real value: It represents pure nothingness. So why this alleged “reserve” consisting of cash deposits? You will get no answer to this question from the 100%-Money-community.

The reserve requirement becomes a logical nonsense

The designation of total demand deposits as reserves is a logical nonsense. But it becomes simply grotesque with the additional assertion by Fisher and his pupils that commercial banks submit to reserve obligations stipulated by the Central Bank when they resort to creating money out of nothing. Mind you, Fisher and his followers want to make us believe that commercial banks when pursuing their criminal activities nevertheless carefully submit to the rules of Central Bank supervision!

There is no natural limit to pseudo money creation

I think we may safely reject as absurd the idea that an actively criminal institution has its activities controlled by a non-criminal supervisory agency, in this case by the Central Bank. We are, therefore, forced to admit that commercial banks, supposed they do create fictional money, would be subject to no possible limit, at least to none that could or would be imposed by a supervisor. This view was held by John Maynard Keynes in his book “Treatise on Money”. Only in the “General Theory” he finally made up his mind to consider the idea of pseudo money creation by commercial banks for what it really is, namely a mental aberration. (10)

And why should savings banks not create pseudo money in just the same way?

At this point, we have not yet reached the apex of absurdity implied by Fisher’s conspiracy theory. If we assume his point of view, there is no logical reason why commercial banks should behave criminally only in their capacity as deposits- and not in their capacity of savings banks. Indeed, the bank may apply the same procedure in both fields alike creating money out of nothing and subsequently handing it out as credit. The savings bank would then retain all savings in cash and consider them in their totality as its “reserve”. Now, in case the Central Bank requires minimal reserves of one tenth, the total amount of cash savings in the bank’s vault would represents this 10% reserve on which to heap 90% of fictional check book money serving as freely created credit.

As we said above, Fisher himself was inconsistent with regard to his own theory. Empirical evidence and common sense made him refrain from such a conclusion. But most of his followers are neither hampered by factual evidence nor by reason. They make a final leap into the absurd by asserting that almost all credit is created out of nothing so that savings play no role at all. (11)

Just imagine what this would mean for Germany with its total amount of private savings equal to about 5 trillion Euros. Deeply immersed into crime as our commercial banks supposedly are, they could create 10×5 or 50 trillion Euros of pseudo money together with the corresponding credit. Why did they up to now refrain from this most bewitching money magic?

The transition from the old to the new system is practically impossible

Because the term of reserve has lost its real meaning within the new system and because furthermore it is a rather fantastic assumption that banks while being criminally active should nevertheless conform to strict regulations, there is no reason to assume any natural limit for pseudo money creation. This is, of course, quite a blow to Fisher’s proposal for a transition from the old to the new system of 100%-Money. According to Fisher the Currency Commission should buy sovereign bonds and private securities from commercial banks up to the point when all their freely created pseudo money is finally backed up by real money. For this is exactly what 100% Money means: the total transformation of all presumable existing pseudo money into real one.

I am afraid this could well prove to be the riskiest transaction ever carried out within the banking system. In case freely created fictional money never really existed anywhere else than in the minds of Irving Fisher and his adepts, the whole banking system would hopelessly get out of balance. If, on the contrary, such pseudo money does really exist, the situation is by no means better. Since it is an all but absurd assumption that criminal banks follow the rules of an officially prescribed minimum reserve, they are likely to create money without any possible limit. The Currency Commission would therefore be forced to buy up debt indefinitely! And how can it possibly know whether it has finally attained full coverage of pseudo money?

4) The Facts. How do commercial banks actually behave?

Irving Fisher wrote in the wake of the biggest economic collapse, capitalist society had ever suffered up to his time. He quotes the following figures.

In 1926, the private wealth of Americans amounted to approximately $ 26 billion, of which 4 billion were cash and 22 billion in checkbook money. From 1926 to 1929 this sum climbed up to 27 billion as the checkbook money was raised by one billion.

Those 22 billion checkbook money were composed of 19 billion in deposits plus government and corporate bonds together with 3 billion “to furnish any depositor all the money or cash he asked for” (Fisher, p. 13).

Between 1929 and `33, checkbook money shrank from 23 to 15 billion. In combination with 5 billion cash the sum total of privately owned wealth had fallen from 27 in 1929 to 20 billion in 1933.

Now, the increase of 26 to 27 billion dollars between 1926 and `29 is interpreted by Fisher as inflation – caused by the presumed creation of pseudo-money. Inversely, he understands the decrease from 27 to 20 billion between 1929 and `33 as deflation arbitrarily induced by commercial banks. These first created and then destroyed fictional money created out of nothing.

Fisher’s interpretation not convincing

For Fisher the cause of deflation is to be sought for in the willful destruction of checkbook money by commercial banks (Fisher, p 15). This certainly is a very strange view. I think that Marriner Eccles, the Fed chief under President Franklin D. Roosevelt, was much more clairvoyant when he interpreted the money side of the Great Depression within the frame work of profound changes that had preceded it in the real economy. “By 1929 and ’30 [ie prior to the onset of the economic crisis] a huge suction pump had diverted an increasing share of the wealth generated in a few hands … and so put the purchasing power out of the hands of the majority …”

Both Fisher and Eccles were experts on money but only the former was so absorbed with money that he failed to penetrate the veil of money so as to see the deeper roots of this historic collapse, namely its underlying socio-economic causes.

The real causes not to be found in money but in the real economy

The destruction of personal wealth demonstrated by the two numbers of 23 and 15 billion dollars in assets allows for a quite different interpretation. But there is no doubt whatsoever concerning the relevant statistical data of the German Bundesbank between 1950 and the end of the twentieth century. During these fifty years, the annual amount of loans granted by commercial banks never exceeded the annual amount of savings. On the contrary, they were always somewhat lower, as banks did and do not immediately find suitable borrowers. In other word, these statistics leave no room whatsoever for the assumption that German Commercial Banks during these 50 years would have resorted to any lending based on fictitious money. (12)

Furthermore, not a single bank has ever been indicted because of criminal money creation!

In view of these facts it need not surprise us that for half a century no German prosecutor ever found it worth his while to order the confiscation of a commercial bank’s documents in order to prove criminal money creation. Nor did we hear of any criminal prosecution because commercial banks did not follow the rule of minimum reserve when creating pseudo money. Moreover, I can hardly believe that up to the present day no banker ever raised his pen in order to write a bestseller titled “Bankers. We are all shameless criminals!” Even dictatorships are wont to turn out those daring people who report their misdemeanors confronting even the risk of their lives!

Fact resistance

To the question why all such things never happened all clear minded people find an immediate answer while conspiracy theorists never hit on the right solution. Those who believe in dark powers usually live in a closed universe created by their own imagination. They live in a world almost impermeable to factual evidence. That is why even to this day none of these people ever hit on the obvious idea, to have the prosecutor request a review of the accounting records of all these supposedly criminal institutions. I suspect that the conspiracy theorists do not even want to know the truth – checking the facts may, after all, falsify their theory and expose them as cranks and fantasists. Prof. Bernd Senf, one of Germany’s spiritual leaders of conspiracy theory, does in fact casually refer to the above-mentioned Bundesbank statistics which unambiguously prove that credit did never exceed savings. But he does so only to dismiss them as irrelevant. They certainly do not shake his innermost beliefs.

5) What may commercial banks actually do?

If we imagine that in a small country the size of the Maldives we only have a single central bank and furthermore a single commercial bank, then the latter would have to pay off any credit in cash. Criminal money creation would have no chance in such a system. Now suppose that there are two commercial banks – whether two or a thousand remains irrelevant for our present demonstration. Even in this case none of the two banks could put borrowers off with mere numbers instead of cash but it could make transfers to the other bank in pure book money represented by mere numbers.

Transfers between banks happen every day, and they do indeed consist in mere numbers wiped off the account of one bank and added to that of another. At the end of the day the balance of these various flows in both directions will, however, be determined conclusively. If it adds up to zero, then nothing happens. If Bank A, however, has a surplus and Bank B a deficit, then the Central Bank will adjust the accounts of the two banks in question accordingly – and this adjustment is done in central bank money! The same process applies to the daily traffic of a thousand commercial banks. Supposed that bank A creates EUR 10,000 of fictitious money and transfers it to one of the accounts of bank B, then the balance will be changed accordingly by the Central Bank so that bank A incurs a real loss of 10,000 Euros in Central Bank money.

How could it be otherwise? If this did not happen, any bank might get rich at the expense of its competitors!

The Central Bank as the third criminal member?

Theoretically, it would be possible to assume that commercial banks add to their first criminal action of creating pseudo money a second one by forming illegal cartels. Bank A and bank B would, for instance, make a deal whereby each of them creates an identical amount of 100,000 Euros pseudo-money per month. (13) Then, however, they will also need 200,000 Euros in cash every month, as borrowers do not accept mere numbers. The central bank would therefore be required to enter this cartel as the criminal third party. Month after month the Central Bank would not only be required to provide real money in accordance with increased economic performance (which it does against first rate securities). It would furthermore be urged by commercial banks to act criminally for their own benefit that is to provide them with cash up to the amount of willfully created pseudo money. Just think of those astronomical sums needed for such a purpose! After all there are tens of thousands of commercial banks in Germany!

Was such a cartel ever observed? I don’t think so. There is no evidence to prove such action by the German Bundesbank. Between the end of World War II and the beginning of the new century, the total amount of central bank money maintained a nearly constant level at about 10% of GDP. But, of course, no system whatsoever is totally immune against violations or abuses of its own rules. (14)

6) Conclusion

Irving Fisher has invented a conspiracy theory, which like most intellectual products of a similar nature originated in a kind of ivory tower, in other words quite removed from reality. As we know, Fisher had a strikingly low grasp of economic reality. A few days before the stock market crash on Black Friday 25 October 1929 he ascribed particular health and wellbeing to the U.S. economy. This was such a glaring misjudgment that it cost him not only his material fortune, but destroyed his reputation as an economist. Perhaps it was this personal failure that made him particularly receptive to theories of conspiracy. Let me add that his followers in this country do not inspire with much more confidence. (15)

Distraction from real causes

Fisher’s conspiracy theory as well as the promises connected with 100% Money gives the impression of a failed attempt to belittle the real causes of the Great Depression and reinterpret them as a merely technical problem to be overcome by means of an alluringly simple formula. A profoundly mistaken social development had in his time caused the Great Depression and is just now leading to a crisis of similar dimension. The machinations of individual bankers may be bad enough, as they testify to an alarming loss of public spirit that by now has spread over to the entire population. But the main evil, that is a progressive concentration of economic and political power in a few hands, is now and then a truth only reluctantly spoken of. Those who do so may easily be tainted with the suspicion of being wild revolutionaries or even communists. (16)

1 For “Multiple Credit Money Creation” see: “Eurokalypse Now? Es gibt einen Weg aus der Krise!” (Eurokalypse Now? There is a way out of the crisis!). Metropolis 2012; S. 262. Or see my article “The Money Multiplier – a dead end of economic theory” (http://www.gerojenner.com/portal/gerojenner.com/Money_Multiplier.html). This strange dogma appears to be logically unassailable and does, of course, not imply any criminal action. Contrary to popular and academic opinion, it is, however, without any practical relevancy. To book money creation as envisaged by Irving Fisher I refer in: “Wohlstand und Armut” [Wealth and Poverty], but committed a historical error in wrongly ascribing it to Prof. Bernd Senf. As a matter of fact the latter has simply copied the central assertions found in Fisher’s book on 100% money.

2 A I already tried to prove in “Wohlstand und Armut” the example of medieval goldsmiths is totally useless for the explanation of alleged money creation ex nihilo by commercial banks. It does, however, quite appropriately explain what Central Banks actually do. As long as these provide money to the economy against first rate securities (that is in exchange for actual economic output) they behave like honest goldsmiths who hand out certificates only in exchange for real gold. As soon, however, as Central Banks accepts bad securities or no securities at all when giving money to the government or the economy they act precisely as the criminal goldsmiths of our example.

3 Jaromir Benes and Michael Kumhof, The Chicago plan Revisited. (Http://www.imf.org/external/pubs/ft/wp/2012/wp12202.pdf)

4 See http://www.zeit.de/wirtschaft/2012-08/vollgeld-banken-geldschoepfung, http://derstandard.at/1345165440122/Das-Bankenzeitalter-geht-zu-Ende, http://www.spiegel.de/wirtschaft/soziales/goldstandard-und-vollgeld-zweifel-am-finanzsystem-a-853621-3.html, http://www.sueddeutsche.de/wirtschaft/massnahmen-gegen-die-bankenkrise-alle-macht-der-notenbank-1.1461222, http://www.handelsblatt.com/politik/oeko­nomie/nach­­richten/vollgeld-iwf-forscher-spielen-radikale-bankreform-durch/7008170.html.

5 Irving Fisher, „100% Money“. Global Financial History Series, 2011.

6 Silvio Gesell, Die natürliche Wirtschaftsordnung [The Natural Economic Order]. 4.1.5; 4.3.

7 Because of these economically debilitating tendencies Keynes too did not like the idea of 100% Money. See Helge Peukert, “Die große Finanzmarkt- und Staatsschuldenkrise“ [The great financial and sovereign debt crisis]. p. 334.

8 Fisher refers to the example of medieval goldsmiths (p. 23, 31), which he then confirms with a lengthy explanation of excessive lending (pp. 33, 37, 102).

9 The goldsmith example reappears in Bernd Senf, Der Tanz um den Gewinn. Verlag für Sozialökonomie, 2005; S. 77, 91.

10 See “Wohlstand und Armut”. Page 156

11 Witness Ellen Hodgson Brown, „Dollar deception: how banks secretly create money“ (http://www.webofdebt.com/articles/dollar-deception.php) Juli 3rd 2007. The book „Web of Debt“ to which the article refers was faithfully copied by Hörmann and Pregetter, see below.

12 See “Die Causa Hörmann-Pregetter – Theodor von Guttenberg lässt grüßen” (http://www.gerojenner.com/portal/gerojenner.com/Das_Ende_des_Geldes.html).

13 This possibility was probably in Keynes’ mind when in his “Treatise on Money” he expressed the opinion that commercial banks proceed with equal pace in their production of pseudo money.

14 This happened in interbank transactions were loans and debts were accumulated on a very large scale (about 2 trillion Euros) by German commercial banks. A well functioning banking supervision should have prevented such a development, since in a time of crisis, when banks suddenly call back their respective loans, the system is in danger of collapse. Such an event could be avoided if the functional distinction of securities-, deposits- and savings-banks were reproduced on an institutional level. There would then be no danger that these banks would become too big to fail.

15 The two Austrian professors Hörmann and Pregetter not only like to copy ideas of other people as previously demonstrated in Germany by Theodor von Guttenberg (see their book “Das Ende des Geldes” [The demise of Money], they are furthermore undisputable experts in denying the obvious. In the just mentioned book they believe to have established the final proof that commercial banks do not, nay, even cannot, lend money received by savors as credit to borrowers. This, they maintain, is logically impossible. Commercial banks only and always create pseudo money and use this for credits. It should be noted that no such nonsense is to be found in Irving Fisher’s book.

16 Let me emphasize once more: I truly admire socio-economic Marxian analysis but I am taken aback by his therapy. It has led mankind to disaster – as witnessed by its concrete manifestations in real socialism. In my view free ownership society (unappropriately named capitalism) should be tamed but not abolished. For its only real and viable alternatives have up to now been those many different types of modern or ancient feudalism where freedom was changed for the tyranny of kings or politburos.