The Encyclopedia of Central Banking by Louis-Philippe Rochon

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100% money
Usually associated with the work of Fisher (1935), although supported by other promi-

nent authors (most notably Friedman, 1960), “100% money” refers to a full- reserve 
backing of bank deposits by a commodity (silver or gold, for instance) or an asset (such 
as government- issued money, to wit, “outside money”). As it is expected to contribute 
to the stability of the economic system as a whole, “100% money” is the Gordian knot 
of some proposals aiming at reforming the monetary system, such as the “Chicago Plan” 
and the “narrow banking” proposals. In the aftermath of the 2008–09 global financial 
crisis, “100% money” has become very popular among several civil society movements 
across Europe (Positive Money in England, for instance), which argue for giving the State 
the monopoly over the issuance of money.
Fisher (1935) suggests a monetary reform that is inspired by the Bank Charter Act of 
1844, although it does not reproduce its mistakes. For instance, the Act imposes a strict 
connection between the notes issued by the Bank of England and its gold reserves, in 
order to ensure monetary stability. Yet, as the Banking School argues, money, as a means 
of payment, is not restricted to the notes issued by the central bank, but covers a wide 
range of credit instruments, such as bills of exchange. Against this background, the 1844 
Bank Charter Act was not able to prevent the occurrence of monetary crises in the nine-

teenth century. This is so because the issuance of notes does not allow the central bank 
to control the quantity of other credit instruments, which are endogenously determined 
by the needs of trade.
Fisher’s (1935) reform, however, takes into account bank money, notably checking 
deposits. According to the author, the problem with a fractional reserve system is the 
“fact that the bank lends not money but merely a promise to furnish money on demand – 
money it does not possess” (ibid., p. 7). In other words, the credit instruments issued 
by banks are partially backed by effective money, to wit, government- issued money. 
Accordingly, the implications of a fractional reserve system are twofold: (i) banks are 
subject to a liquidity risk, which represents a major threat for financial stability, notably 
in the case of a bank run; and (ii) this system exacerbates business- cycle fluctuations, 
because bank money is issued during periods of expansion and destroyed (when banks 
demand the reimbursement of loans) during phases of contraction, which may initiate a 
debt- deflation spiral.
For these reasons, Fisher (1935) suggests separating the issuance of bank money from 
the granting of credit, thereby transforming banks into purely financial intermediar-

ies. To achieve this, “100% money” advocates a full- reserve backing of bank deposits 
by government- issued money, whereby the supply of money is governed by a monetary 
growth rule. In this framework, money will be injected in the economic system by the 
government, so that a given bank cannot grant any credit to a non- bank agent or another 
bank, unless it has collected deposits in the form of government- issued money. Among 
the advantages pointed out by the tenants of “100% money”, two stand out. First, 
as the credit instruments issued by banks are fully backed by the government- issued 
money in a full- reserve system, the central bank has complete control over the supply of

money – which is not the case under a fractional reserve system, whereby the level of the 
money multiplier is unstable. Against this background, “[t]he true abundance or scarcity 
of money is never registered in the loan market. It is registered by the index number of 
prices” (ibid., pp. 166–7). Secondly, the full backing of bank deposits by government-

issued money reduces banks’ liquidity risk, since the demand for government- issued 
money by the public is always served. Hence, according to its proponents, “100% money” 
contributes to both monetary stability and the stability of the economic system as a 
whole.
However, “100% money” is not immune from critics. From a conceptual point of 
view, one of its major shortcomings stems from its dichotomous conception of the 
economic system. As a proponent of the quantity theory of money, Fisher (1935, 
pp. 166–7) determines the value of money on the product market. This is tantamount 
to confronting an already- existing quantity of goods, to wit, an initial endowment, with 
a given quantity of money, which circulates in the opposite direction of these goods. 
In this respect, as Patinkin (1965) notes, the value of money is the relative price of a 
composite good exchanged against money at equilibrium. Now, a term of the relative 
equivalence between goods and money is not defined: the composite good refers to 
a collection of heteroclites objects, which are not homogenized by money, since the 
latter is only confronted to goods at the very instant of the exchange. Against this 
background, the value of money cannot be determined before the exchange takes place. 
Consequently, economic agents have no reason to hold money during a positive period 
of time.
As the value of money cannot be determined on the product market, Fisher (1935) 
imposes an arbitrary scarcity on the market for loanable funds, which renders money 
a commodity and, thereby, favours a dichotomous conception of the economic system. 
In other words, since the supply of money required in a real- exchange economy is unde-

termined, Fisher (ibid.) tries to limit the risks caused by the over- issuance of money by 
implementing a full- reserve backing of bank deposits and a monetary growth rule, both 
of which rest on a flawed conception of money.
A more relevant reform of the monetary architecture has to take into account the 
specificity of the purchasing power of money, which is not an ordinary price, as the 
value of money is not determined during the market session but has to be assessed before 
the exchange takes place. In this respect, money is a bookkeeping entry devoid of any 
(intrinsic or extrinsic) value, unless it is associated with output through the payment 
of wages, as the monetary theory of production explains (see Graziani, 2003). Such an 
objective relationship between money and output determines, through the remunera-

tion of labour, the supply of money that is necessary to dispose of the whole output in 
a monetary economy. All in all, any monetary reform has to distinguish two kinds of 
banking intermediation: a monetary intermediation, which generates a new income 
through the monetization of firms’ production (when banks issue money for the payment 
of wages); and a financial intermediation, whereby an existing income – that is, the bank 
deposit resulting from the remuneration of labour – is lent for non- productive purposes. 
Contrary to the reform ensuing from “100% money”, such a reform will rest on a coher-

ent association of money and output, in line with the circuitist approach (see Rochon, 
1999, for a discussion on that subject).
Jonathan Massonnet

The Encyclopedia of Central Banking by Louis-Philippe Rochon