D. A Note on Some Criticisms of 100-Percent Reserve

One popular criticism of 100-percent bank reserves charges that the bank could not then earn any income or cover costs of storage, printing, etc. On the contrary, a bank is perfectly capable of operating like any goods warehouse, i.e., by charging its customers for its services to them and reaping the usual interest return on its operations.

Another popular objection is that a 100-percent-reserve policy would eliminate all credit. How would businessmen be able to borrow funds for short-term investment? The answer is that businessmen can still borrow saved funds from any individual or institution. “Banks” may still lend their own saved funds (capital stock and accumulated surplus) or they may borrow funds from individuals and relend them to business firms, earning the interest differential.35 Borrowing money (e g., floating a bond) is a credit transaction; an individual exchanges his present money for a bond—a claim on future money. The borrowing bank pays him interest for this loan and in turn exchanges the money thus gathered for promises by business borrowers to pay money in the future. This is a further credit transaction, in this case the bank acting as the lender and businesses as the borrowers. The bank’s income is the interest differential between the two types of credit transactions; the payment is for the services of the bank as an intermediary, channeling the savings of the public into investment. There is, furthermore, no particular reason why the short-term, more than any other, credit market should be subsidized by money creation.

Finally, an important criticism of a governmentally enforced policy of 100-percent reserves is that this measure, though beneficial in itself, would establish a precedent for other governmental intervention in the monetary system, including a change in this very requirement by government edict. These critics advocate “free banking,” i.e., no governmental interference with banking apart from enforcing payment of obligations, the banks to be permitted to engage in any fictitious issues they desire. Yet the free market does not mean freedom to commit fraud or any other form of theft. Quite the contrary. The criticism may be obviated by imposing a 100-percent-reserve requirement, not as an arbitrary administrative fiat of the government, but as part of the general legal defense of property against fraud. As Jevons stated: “It used to be held as a general rule of law, that any present grant or assignment of goods not in existence is without operation,”36 and this general rule need only be revived and enforced to outlaw fictitious money-substitutes. Then banking could be left perfectly free and yet be without departure from 100-percent reserves.37

• 35Swiss banks have successfully and for a long time been issuing debentures to the public at varying maturities, and banks in Belgium and Holland have recently followed suit. On the purely free market, such practices would undoubtedly be greatly extended. Cf. Benjamin H. Beck-hart, “ To Finance Term Loans,” The New York Times, May 31, 1960.
• 36Jevons, Money and the Mechanism of Exchange, pp. 211–12.
• 37Jevons stated:
  If pecuniary promises were always of a special character, there could be no possible harm in allowing perfect freedom in the issue of promissory notes. The issuer would merely constitute himself a warehouse keeper and would be bound to hold each special lot of coin ready to pay each corresponding note. (Ibid., p. 208)