Modernizing Money 

Money ranks with fire and the wheel as an invention without which the modern world would be unimaginable. Unfortunately, out-of-control money now injures more people than both out-of-control fires and wheels. Loss of control stems from the privilege enjoyed by the private banking sector of creating money from nothing and lending it at interest in the form of demand deposits.  This power derives from the current design of the banking system, and can be corrected by moving to a system where new money can only be created by a public body, working in the public interest.

- Professor Herman Daly, former senior economist at the World Bank

The banker who operates with a fractional reserve with the criminal who commits the crime of misappropriation.

- Professor Murray N. Rothbard


While Charles Eisenstein masterfully traces the roots of our perfect storm of crisis to the dysfunctional economic system and thought leaders such as Eisenstein and David Loy trace the dysfunctional economic system even further back to a fundamental issue of separation, authors Andrew Jackson and Ben Dyson of perform a thorough analysis of the current economic system plus a concrete plan to reform the monetary system in their book Modernising Money.

The root cause of the problem is the self-interest of private banks to print and use money only for purposes that suit them. While you and I would be thrown in jail for counterfeiting money, the private banks have Carte Blanche to do it – and their behavior is as predictable as it is a sad commentary on what would happen if that quality of human greed found within all of us were given free reign. Modernising Money does something rare, it not only provides insights on how we ended up in this global crisis but also recommends a concrete solution to the problem.

A Program for Monetary Reform – A 1939 Paper relevant today and calling for Full Reserve Banking

“A Program for Monetary Reform,”  (PMR) is a an extraordinary consensus paper written and circulated in 1930 among the top economists in the United States shortly after the Great Depression struck but finding urgently renewed relevance in today’s even greater looming economic debacle. Paul H. Douglas, an esteemed professor of economics at the University of Chicago was the lead author. Douglas later became a U.S. Senator and was described by Dr. Martin Luther King, Jr. as “the greatest of all the Senators.” It is unfortunate that this paper never reached the light of day but among the economists who read it, there was overwhelming consensus that it was the solution to the same problem that now threatens to engulf us today. The document states that it had been approved without reservations by 235 economists from 157 universities and colleges. Additionally, forty more economists had approved it with some reservations and only 43 had expressed disapproval.

Among them were:

  • Irving Fisher – Yale University
  • Frank D. Graham – Princeton University
  • Earl J. Hamilton – Duke University
  • Willford I. King – New York University
  • Charles R. Whittlesey – Princeton University

The paper describes the destructive boom and bust cycle:

If the purpose of money and credit were to discourage the exchange of goods and services, to destroy periodically the wealth produced, to frustrate and trip those who work and save, our present monetary system would seem a most effective instrument to that end.

 Practically every period of economic hope and promise has been a mere inflationary boom, characterized by an expansion of the means of payment, and has been followed by a depression, characterized by a detrimental contraction of the means of payment [the money supply]. In boom times, the expansion of [money] accelerates the pace by raising prices, and rising prices conjuring up new money, the inflation proceeds in an upward spiral till a collapse occurs, after which the contraction of our supply of money and credit, with falling prices and losses in place of profits, produces a downward spiral generating bankruptcy, unemployment, and all of the other evils of depression. 

 The monetary reforms here proposed are intended primarily to prevent these ups and downs in the volume of our means of payment with their harmful influences on business.


The document then outlines the main features of an equitable and just monetary system; to create and maintain stability in the quantity of money and establishing a strictly regulated monetary authority that would control this quantity while keeping it away from self-interest and Congressional manipulation.

 Our own monetary policy should… be directed toward avoiding inflation as well as deflation, and in attaining and maintaining as nearly as possible full production and employment. The criteria for monetary management adopted should be so clearly defined and safeguarded by law as to eliminate the need of permitting any wide discretion to our Monetary Authority.


Two Tools of Balancing the Money Supply

1. Constant-per-Capita Standard

Establish a constant-average-per-capita supply or volume of the circulating medium, including both “pocket-book money” and “check-book money”…. One great advantage of this “constant-per-capita-money” standard is that it would require a minimum of discretion on the part of the Monetary Authority….

Under [this system] all the Monetary Authority would have to do would be to ascertain the amount of circulating medium in active circulation, and whatever amount of circulating medium seemed necessary to keep unchanged the amount of money per head of population. For this purpose, the statistical information regarding the volume of [the money supply] should be improved.


This is exactly the opposite of the current US situation where since 2006 the Federal Reserve has hidden the broadest measure of the money supply (M3) from public view.

2. Constant-Cost-of-Living Standard

The cost of a number of commodities would be regularly sampled and then the volume of money would be adjusted to keep the average cost of this basket of commodities constant.

Unfortunately, this method is exploited today by those in power for personal gain.  The weakness in strategy in today’s computerized economy is that when a certain commodity fluctuates in price in a way that does not suit the political need of those in power, it is removed from this market basket of commodities.

Complete Elimination of Fractional Reserve Lending

When the music stops, in terms of liquidity, things will get complicated. But as long as the music is playing, you’ve got to get up and dance.

- Citigroup CEO Charles Prince in Financial Times, July 9, 2007

In the above statement, the Citigroup CEO tried to excuse his bank’s excessive money creation through the issuance of risky sub-prime loans. It is proof that under the fractional reserve system, banks are driven to ever-greater distortions of the reserve requirements by the competitive demands for profits.

A chief loose screw in our present American money and banking system is the requirement of only fractional reserves behind demand deposits. Fractional reserves give our thousands of commercial banks power to increase or decrease the volume of [money] by increasing or decreasing bank loans and investments. The banks thus exercise what has always, and justly, been considered a prerogative of sovereign power. As each bank exercises this power independently without any centralized control, the resulting changes in the volume of the circulating medium are largely haphazard. This situation is a most important factor in booms and depressions….

 It is a system which permits, and practically compels, the banks to lend and owe five times as much money as they must have on hand if they are to survive in the competitive struggle, which causes much of the trouble.

The 100% reserve system was the original system of deposit banking, but the fractional reserve system was introduced by private Venetian bankers not later than the middle of the Fourteenth century…. bankers began to lend some of this [money], though it belonged not to them but to the depositors. The same thing happened in the public banks of deposit at Venice, Amsterdam, and other cities, and the London goldsmiths of the Seventeenth century found that handsome profits would accrue from lending out other people’s money… a practice which, when first discovered by the public, was considered to be a breach of trust. But what thus began as a breach of trust has now become the accepted and lawful practice. Nevertheless, the practice is incomparably more harmful today than it was centuries ago, because, with increased banking, and the increasing pyramiding now practiced by banks, it results in violent fluctuations in the volume of the circulating medium and in economic activity in general.

Despite these inherent flaws in the fractional reserve system, a Monetary Authority could unquestionably, by wise management, give us a far more beneficial monetary policy than the Federal Reserve Board has done in the past. But the task would be much simplified if we did away altogether with the fractional reserve system; for it is this system which makes the banking system so vulnerable….


In the late 1930’s the reserve requirement was 20% and gradually declined to 10% by the modern era. After the economic collapse in 2008, some of the biggest banks had thrown the rule out -with an incredible ratio of 2%,  loaning out 50 times the amount of their reserves. Mortgage giants Freddie Mac and Fannie Mae had loaned out an incredible 70x more than their reserves.

In order for the  new Monetary Authority to be able to keep the volume of money constant, it is obvious that we must eliminate the  fractional reserve system employed by commercial banks that results in constant and completely unknown inflation of the money supply.

Establishing the 100% Reserve System

The simplest method of making the transition from fractional to 100% reserves would be to authorize the Monetary Authority to lend, without interest, to every bank or other agency carrying demand deposits, sufficient cash … to make the reserve of each bank equal to its demand deposits.

The present situation would be made the starting point of the 100% reserve system by simply lending to the banks whatever money they might need to bring the reserves behind their demand deposits up to 100%. While this money might largely be newly issued for the occasion … it would not inflate the volume of anything that can circulate. It would merely change the nature of the reserves behind the money that circulates…. The bank would simply serve as a big pocket book to hold its depositors’ money in storage.


If banks resist the efforts for them to profit in the same disgusting way, they can try, as they have done many times in the past to cause depressions by coordinated action to get their way politically. In this case, the PMR could counter the greed of the banks in the following way:

In such a case, it would, of course, be imperative for the Monetary Authority to increase the volume of circulating medium still further.


The Government could effectively create and spend free money into the economy without debt or increasing taxes – they could even reduce taxes while increasing spending levels.

The profit to the Government from the creation of new circulating medium would be a fitting reward for supplying us with such increased means of payment as might become necessary to care for an increased volume of business….

In early times, the creation of money was the sole privilege of the kings or other sovereigns – namely the sovereign people, acting through their Government. This principle is firmly anchored in our Constitution and it is a perversion to transfer the privilege to private parties to use in their own real, or presumed, interest.

The founders of the Republic did not expect the banks to create the money they lend. John Adams, when President, looked with horror upon the exercise of control over our money by the banks.


Even banks would ultimately be transformed and gain from a 100% reserve system:

Lest anyone think that the 100% reserve system would be injurious to the banks, it should be emphasized that the banks would gain, quite as truly as the Government and the people in general. Government control of the money supply would save the banks from themselves – from the uncoordinated action of some 15,000 independent banks, manufacturing and destroying our check-book money in a haphazard way.

With the new steadiness in supplying the nation’s increasing monetary needs, and with the consequent alleviation of severe depressions, the people’s savings would, in all probability, accumulate more rapidly and with less interruption than at present. Loans and investments would become larger and safer, thus swelling the total business of banks….

Incidentally, there would no longer be any need of deposit insurance on demand deposits.


Eliminating the National Debt

A by-product of the 100% reserve system would be that it would enable the Government gradually to reduce its debt, through purchases of [existing outstanding] Government bonds by the Monetary Authority as new money was needed to take care of expanding business. Under the fractional reserve system, any attempt to pay off the Government debt, whether by decreasing Government expenditures or by increasing taxation, threatens to bring about deflation and depression.

Whatever increase in the circulating medium is necessary to accommodate national growth could be accomplished without compelling more and more people to go into debt to the banks, and without increasing the Federal interest-bearing debt.


Under our current system, all our money is created out of debt. Attempting  to pay down the debt during a deflationary period is impossible in the current system as it shrinks the money supply and brings about hardship.

Final Warnings of the Paper 

If we do not adopt the 100% reserve system, and if the present movement for balancing the budget succeeds without providing for an adequate money supply, the resulting reduction in the volume of our circulating medium way throw us into another terrible deflation and depression, at least as severe as that through which we have just been passing.

When violent booms and depressions, in which fluctuations in the supply of money play so vital a part, rob millions of their savings and prevent millions from working, Constitutions are likely to become scraps of paper.