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A Hard Anchor for the Dollar

The following is a guest cross-post from Warren Coats

For the last three years with zero interest rates and “quantitative easing” the Federal Reserve has been pushing on a string. It has been trying to stimulate an economy that suffers from problems that are not basically monetary. In the process it is distorting the limping economic recovery and potentially reflating housing and other asset bubbles. The Federal Reserve has jeopardized its revered independence by undertaking quasi-fiscal operations (buying long-term government debt and MBS to push down longer term interest rates in those markets while paying banks interest on their deposits at the Fed to keep them from lending the proceeds). The result has been an explosion of the Fed’s balance sheet (base money—the Fed’s monetary liabilities—jumped from around $800 billion in mid 2008 to over $3,200 billion in July 2013) while the money supply only grew modestly (over the same period M2 increased from about $8,000 billion to about $10,700 billion- about the same increase as over the five year earlier period from mid 2003 to mid 2008).

There is growing sentiment that our fiat currency system should be replaced with a hard anchor, such as the gold or silver standards in place in much of the world over the two centuries preceding gold’s abandonment by the United States in 1971. In order to avoid the weaknesses of the earlier gold standard, which contributed to its ultimate abandonment, three key elements of its operation should be modified. These are: a) the conditions under which currency fixed to a hard anchor is issued and redeemed; b) what the currency is sold or redeemed for; and c) what the anchor is.

Monetary Policy

During the earlier gold standard, the value of one U.S. dollar was fixed at $19.39 per ounce of fine gold from 1792 to 1934 and $35.00 per ounce from 1934 to 1971 when Nixon ended the U.S. commitment to buy and sell gold at its official price because the U.S. no longer had enough gold to honor its commitment.  None-the-less, the official price was raised to $38.00 per ounce in 1971 and to $42.22 in 1972 before President Ford abolished controls on and freed the price of gold in 1974.

Under a strict gold standard, operated under currency board rules, the central bank would issue its currency whenever anyone bought it for gold at the official price of gold and would redeem it at the same price. In fact, however, the Fed engaged in active monetary policy, buying and selling (or lending) its currency for U.S. treasury bills and other assets when it thought appropriate. Thus rather than being fully backed by gold, the Fed’s monetary liabilities (base money) were partially backed by other assets. Moreover the fractional reserve banking system allowed banks to create deposit money, which was also not backed by gold. The market’s ability to redeem dollars for gold kept the market value of gold and hence the dollar close to the official value. Because the Fed could offset the monetary contraction resulting from redeeming dollars, this link was broken and in 1971 President Nixon closed the “gold window” altogether for lack of gold.

A reformed monetary system should be required to adhere strictly to currency board rules. The Federal Reserve should oversee the interbank payment and settlement systems and provide the amount of dollars demanded by the market by passively buying and selling them at the dollar’s officially fixed price for its anchor (gold, in a gold standard system) in response to market demand. Banks should be denied their current privilege to create deposit money by replacing the fractional reserve system with a 100% reserve requirement (a subject for another time).

Indirect redeemability

Historically, gold and silver standards required that the monetary authority buy and sell its currency for actual gold or silver. These precious metals had to be stored and guarded at considerable cost. More importantly, taking large amounts of gold and/or silver off the market distorted their price by creating an artificial demand for them. Under a restored gold standard the relative price of gold would rise over time due to its limited supply, and the increasing cost of discovery and extraction. The fix dollar price of gold would mean that the dollar prices of everything else would have to fall (perpetual deflation). While the predictability of the value of money is one of its most important qualities, stability of its value (approximately zero inflation) is also desirable.

This shortcoming of the traditional gold standard can be easily overcome via indirect redeemability. The market’s regulation of the money supply in line with the official price of money in terms of its anchor does not require transacting in the actual anchor goods or commodities. As long as an asset of equal market value is exchanged by the monetary authority when issuing or redeeming its currency, the market will have an arbitrage profit incentive to keep the supply of money appropriate for its official value. In a future, hard anchor monetary system, the Federal Reserve could issue and redeem its currency for U.S. treasury bills rather than gold or other anchor goods and services. The difference between that and current open market operations by the Fed is that such transactions would be fully at the initiative of the market rather than of the central bank. The storage cost of such assets would be negligible and in fact would generate interest income for the Fed.

The Anchor

The final weakness of the gold standard was that the relative price of the anchor, based on a single commodity, varied relative to the goods and services (and wages) purchase by the public. In short, though the purchasing power of the gold dollar was highly stable historically over long periods of time, gold did not provide a stable anchor over shorter periods relevant to most business decisions

Expanding the anchor from one commodity to 10 to 30 goods and services carefully chosen for their collective stability relative to the goods and services people actually buy (e.g. the CPI index) would be an important improvement over anchoring the dollar to just one commodity (gold). There have been many such proposals in the past, but the high transaction and storage costs of dealing with all of the goods in the valuation basket doomed them. Replacing such transactions with the indirect convertibility described above eliminates this objection.

A Proposal

The United States could easily amend its monetary policy to incorporate the above features – a government defined value of the dollar as called for in Article 1 Section 8 of the U.S. Constitution and a market determined supply of dollars. First Congress would adopt a valuation basket of 10 to 30 goods and services chosen to give the dollar the most stable value possible in terms of an average family’s consumption (i.e. the Consumer Price Index). The basket would consist of fixed amounts of each of these goods and would define the value of one dollar. As with the gold standard, if the value of the goods in the basket were more in the market than one dollar, anyone could buy them more cheaply by redeeming dollars at the fed for an equivalent value of U.S. treasury bills (indirect redeemability). The resulting contraction of the money supply would reduce prices in the market until a dollar’s value in the market was the same as its official valuation basket value. The money supply would grow with its demand (as the economy grows) in the same way (selling t-bills to the fed for additional dollars). The Federal Reserve would be restricted to passive currency board rules. All active purchases and sales of t-bills by the fed (traditional open market operations) or lending to banks would be forbidden. During a two year transition period the fed would be allowed to lend to banks against good collateral in order to allow banks time to adjust their operations and balance sheets to the new rules.

A global anchor

The gold standard was an international system for regulating the supply of money in each country and between countries and provided a single world currency (fixed exchange rates). This led to a flourishing of trade between countries. This was a highly desirable feature for liberal market economies.

The United States could adopt the hard anchor currency board system described above on its own and others might follow by fixing their currencies to the dollar as in the past. The amendments to the historic gold standard system proposed above would significantly tighten the rules under which it would operate and strengthen the prospects of its survival.

However, there would be significant benefits to developing such a standard internationally as outlined in my Real SDR Currency Board proposal ( One way or the other, replacing the widely fluctuating exchange rates between the dollar and other currencies would be a significant boon to world trade and world prosperity.  Replacing the U.S. dollar as the world’s reserve currency with an international unit would have additional benefits for the smooth functioning of the global trading and payments system.

  • Mike Sproul

    Is this meant to be a 'second-best' proposal? I ask because a card-carrying free banker would want only for the government to get out of the money business, and leave it to private banks to decide what kinds of pegs and convertibility they want to use.

    A potential problem: Say the fed has pegged the dollar to a cpi basket, and it has issued $100, against which it holds bonds worth the specified amounts of each of the 10-30 goods comprising the cpi basket. I'll refer to this quantity as '100 baskets'. But then suppose the fed's bonds lose value, so that in total, the bonds that used to be able to buy 100 baskets can only buy 99 baskets. If the fed then tries to maintain convertibility at $1=1 basket, there will be a run on the fed and it will collapse, just like currency boards did in the 1990's.

    • Mike, This is meant to be first best. For the same reasons that the government established the standards of weights and measures (though consenting adult can agree to any other standards they want) it should establish the value of the dollar in real terms (fixed amounts of gold or preferably a broader basket of goods and services). Arbitrage will keep the market value of the dollar equal to its official real value in the way I described. Changes in the value of the assets held by the central bank (and bought and sale for its dollars) are of secondary concern. Only bills (very short term maturities) should be used to minimize the fluctuations in their value resulting from fluctuations in market interest rates. What is important is that selling and redeeming dollars by the central bank must be at the official value. If somehow prices doubled in the market for everything it would take two dollars to buy the goods in the basket in the market but only one dollar to do so at the central bank. If the price of everything is double the t-bill price of the basket would also be two dollars for one t-bill in the market but only one dollar per t-bill at the central bank. Everyone would have an arbitrage incentive to redeem dollars at the central bank (i.e. buy t-bills there for half the price they would have to pay in the market). As they did so, the supply of dollars in the market would fall as would market prices until they are equal to the official value of one dollar. It is only market values at the moment of transacting with the central bank that matters.

      • Mike Sproul


        Suppose the bank has issued a total of $100, backed by short term bills worth 100 baskets. If, for some reason, the bills fall in value to 99 baskets, then on the street, $1=.99 baskets, while at the issuing bank, $1=1 basket. Arbitragers will return $99 to the bank for 1 basket each. At that point the bank's assets are gone, but there is still $1 in private hands. That dollar has no chance of being redeemed by the issuing bank, so it will be worthless. It's a classic bank run, and happens because the bank tried to do the impossible: maintain a hard anchor for the dollar.

        • Mike,

          In my proposal only the central bank would issue dollars (banks would hold 100% reserves against demand deposits though this is not actually necessary for my proposal). You are right that arbitragers will return dollars to the central bank for a profit, but as they do so the money supply shrinks and market prices fall (i.e. dollar gains in value in the market long before the money supply falls to zero and before central bank assets fall to zero. Temporary losses by the central bank will reduce its seigniorage profits and thus its profit remittances to the treasury. I have added the following paragraph to the above paper that explains this is a slightly different way.

          The mechanism can be illustrated with a simplified numerical example. Thirty years ago Robert Hall proposed a valuation basket of four commodities. In 1967 prices he defined one dollar (resource unit or ANCAP) as 33 cents worth of ammonium nitrate, 12 cents worth of copper, 36 cents worth of aluminum, and 19 cents worth of plywood). The basket was defined as quantities of these four goods of well defined quality, as their prices and values could change every day. Assume that at the same time one-half U.S. Treasury bill had the same value as the basket and thus the same value as one dollar. If people wanted more dollars, they could buy them from the Fed for half a t-bill per dollar. What would happen if the supply of money did not keep up with the growth in its demand as the economy grew? Prices in dollars would fall. If the market prices of the goods in the valuation basket changed to 30, 13, 30, and 17 cents respectively, the dollar’s value in the market would be 10% higher, i.e. market prices would have fallen by 10% (if the valuation basket tracks the CPI fairly closely) and the price of a t-bill in the market would be 10% less as well. The basket that officially defines one dollar would have a value of 90 cents in the market. There would be a large arbitrage profit for anyone buying the basket in the market for 90 cents and selling it to the Fed for one dollar. However, the markets control and determination of the money supply so as to always equal its official value works just as well if people sell t-bills to the Fed for dollars. There would be a financial incentive to buy 45 cent t-bills in the market and sell them to the Fed for 50 cents (their official price relative to the valuation basket). This assumes that the relative price of t-bills and the basket have not changed. Whether it has or not, whenever the market value of the basket differs from its official price of one dollar, the market value of t-bills will differ from its official value (in this case the value of two t-bills are equivalent to the value of the basket). The new dollars thus purchased and added to the public money stock could be used to buy more t-bills at 45 cents to be resold to the Fed for 50 cents until the money stock had increased enough to eliminate any difference between the official value of the basket and its market value. Such arbitrage profit opportunities would prevent the market value of the dollar from differing from its official value in the first place.

          • Mike Sproul


            This seems to be the heart of our dispute:

            "arbitragers will return dollars to the central bank for a profit, but as they do so the money supply shrinks and market prices fall"

            That statement presumes the correctness of the quantity theory, and the incorrectness of the backing theory. As you might have guessed, I favor the backing theory. I'll focus on two points.
            1) If the central bank maintains metallic convertibility at $1=1 oz, and if the bank holds assets worth 99 oz against $100 of its notes, then $99 of notes will return to the bank, at which point the bank will have no assets, and the 1 remaining $ note will be worthless. It does not matter that the quantity of $ notes has fallen. Some rival money will take the place of the retired dollars. This is the way things work with runs on private banks. Their notes clearly do not gain value as the notes disappear into the collapsing bank. Why should it work differently for a central bank?Especially a central bank that maintains convertibility?

            2) Your proposal replaces metallic convertibility with 'basket' convertibility, but the bank run happens just the same.

          • Mike,

            What is the "backing theory"? I have never heard of it. Fixing the price of gold in the gold standard and thus "backing" the currency with gold, is a quantity theory proposition. The fixed gold price and right to redeem is a particular mechanism for regulating the supply of money (driven by market demand for it). Prices (values) always come done to supply and demand.

          • Mike Sproul

            The backing theory asserts that the value of money is determined by the value of the assets held against that money. The quantity theory, in contrast, asserts that the value of money is determined by "how much money is chasing how many goods".

            The backing theory holds that money is valued just like stocks, bonds, and any other financial security. For example, GM's assets consist of $60 bil worth of buildings. If GM has issued 1 bil. shares of stock, and has no other assets or liabilities, then the value of each share is $60 per share. The value of GM stock is determined by GM's assets and liabilities, and not by "how many shares are chasing how many goods".

            By extension, if GM issued 1 more share, sold it for $60, and used that $60 to buy a new chair, then that transaction will increase GM's assets by $60 as one more share is issued. The share price of GM will be unchanged, in spite of the fact that there is 1 more share. By analogy, when the fed issues another dollar, it will get $1 worth of bonds in exchange. The fed's assets move in step with its liabilities, and the value of the dollar is unchanged, even though there is 1 more dollar in existence.

            The backing theory is related to the real bills doctrine, which asserts that money-creation will not cause inflation as long as the money is issued for solid, short-term assets of adequate value. Unfortunately, economists have mistakenly thought that the real bills doctrine works by assuring that the economy's real output of goods moves in step with the quantity of money issued. This is incorrect. The real bills doctrine works by assuring that the issuing bank's assets move in step with the quantity of money issued by that bank. This error has led economists to reject the real bills doctrine.

          • Mike,

            Please provide a reference to this backing theory, which I have never heard of. I know that your example of GM stock was meant to be illustrative, but of course the value of GM stock does not reflect the value of its assets, but rather the present value of the expected profits from those assets (which for a rather long while a few years back was negative despite GM having tons of physical assets.)

            In your backing theory what is the economic mechanism by which the value of assets backing the currency is transmitted to pricing decisions in the market giving rise to what money can buy (i.e. the market value of money)? What keeps that equal to the value of assets backing it?

            I (and the economics profession) understand how that works for the gold standard (for example), but that is a quantity theory explanation.

        • Mike Sproul


          Two papers of mine, easily googled or available at

          1) The Law of Reflux
          2) Backed Money, Fiat Money, and the Real Bills Doctrine

          Most of the recent writing is under the heading of "The Fiscal Theory of the Price Level"

          Once you read John Cochrane "Money as Stock", you will be led to other works by Sargent, Buiter, Sims, etc.

          The best blogger on the subject if JP Koning. His blog, 'Moneyness' just had two posts on the analogy between the backing of stock and the backing of money.

          The mechanism of the backing theory is arbitrage, and JP does a good job of explaining it in his two recent posts.

          • Mike,

            Many thanks for the reference. I will look forward to reading it when I return from Kabul in a month (thus I must take a break from this for a while). I know and respect the writings of John Cochrane, Tom Sargent, Willem Buiter and Chris Sims (though I have never met Chris) and have never hear them say anything contrary to the quantity theory. If the mechanism of your backing theory is arbitrage, that sounds like the gold standard (and my Real SDR currency board) mechanism for regulation the money supply (very quantity theory based).

  • ShaneCRoach

    Money is an intermediate trade good. What it does is secure value over time. Commodity money was never truly necessary, and the concept is downright obsolete given current technology.

    Brokerages trading locally, regionally, nationally, and internationally in everything from stocks to labor to commodities could grant individual credit as free bankers seem to think banks should do. The advantage is brokerages would be backing their credit not with fiat dollars but with the service of creating the exchange through which trade is made. Instead of interest, brokers would simply take a transaction fee in the form of their own credits exchangeable for anything available for trade within their network. Brokerages would exchange each other's credit in exactly the way free bankers keep saying free banks could or should do despite the fact that they apparently never have succeeded in doing over time.

    Governments can accept their taxes in such credits, and would have no problems whatsoever enforcing it either. The government's involvement in the trade of the credits would probably be a big part of ensuring people trusted and honored them.

    I do not see the fascination with banks, gold, or any of the futzing around with having lending have anything to do with the money supply. Usury just in and of itself has been a hated form of business since the beginning of civilization. Why put these selfsame people in charge of the money supply?

    From the moment I began to understand the monetary system I have wondered why on God's Green Earth it developed as it has. It is nonsensical. I think if people are honest, they will have to admit that the money supply is what it is precisely because people in industry like the idea of having some measure of control over the money supply and its direction, and tend to work hand in hand with governments in order to maintain that control.

    I think that is the single most important underlying flaw in the entire system. People are not being open about the fact that BOTH business people AND government have a vested interest in this central control. In the end, we are being given variation after variation after variation on the theme that somehow we NEED a money supply – that someone somewhere has to supply money, and that it has something to do with balancing private business and market concerns with government and the public good.

    In fact, neither government nor banks are needed for people to trade through an intermediary without necessarily having to barter one specific good for another specific good. They can simply consign their goods to a broker, accept his credit for anything he has available, and go from there. Instead, banks and governments point the finger back and forth at each other while quietly continuing to make only modest and cosmetic changes to the system and smiling all the way to the bank, as it were.

    Or, since they ARE the banks and governments, I guess they simply smile on the way home with all the money that there is.

    • Shane,

      How are units of credit defined or determined? A central function of money is providing the unit of account in which goods are priced. This makes possible the decentralized information on relative values on which Hayek placed so much importance. I am afraid that I don't follow how or why you think "people in industry like the ideal of having some measure of control over the money supply" They have no such control. We each decide how much money we want to hold and the market (supply and demand) determines its value and hence the real supply. "People in industry" have the same interest you and i do in having a unit of account with stable value, because it improves economic efficiency and decision making and reduces the cost of holding money (or units of credit or whatever you what to call them) between transactions (between generating and receiving income and spending it).

      We don't need a government to define units of measure and of weight etc, but a collective agreement on such measures is useful and increasing the possible division of labor thus increasing our standard of living. I have no problem with that.

      • ShaneCRoach

        Units of credit at the end of the day are measures of the relative value of goods and services at a specific place at a specific point in time. This is most easily achieved in the real world by using a relatively universally valued good. Gold serves the purpose admirably because it is not only universally valued, but it does not devalue over time. Grain has been used as money, but it eventually goes bad. Other metals can be used, but they tend to break down over time. So gold became a well nigh universal "money" over time. It is an intermediate trade good used as a place holder to mark the relative value of other goods and services. Good a is worth 2b, therefore I get 2 units of gold for every "a" I sell if b = 1 gold.

        A sufficiently informed merchant can simply consult their information (database, in modern times) and realize they need to credit the account of a person selling good a twice as much as they credit the account of person selling good b. As the database becomes more diverse, the credit ratios become more and more accurate across a wider set of goods and services, and people can bid credits accordingly. Gold, or any other underlying commodity, then becomes obsolete. Any credit, sufficiently trusted, serves as the intermediate trade good. It certainly need not be based on usury.

        There is no need of the intermediate trade good so long as the credits are universally honored, and we have seen the proof in the pudding of this theory in that fiat money works just fine as an intermediate trade good so long as faith in its utility remains high.

  • Justin Merrill

    This is an interesting New Monetary Economics (NME) variation of the Black-Fama-Hall (BFH) idea. I don't, however, support this. The proposal keeps the Federal Reserve and it wants to abolish fractional reserve banking. Also, by targeting a price level, it is pro-cyclical and would do the opposite of what a free banking system would do in the face of supply shock. What is even more disturbing is the probable consequence of adopting this (or any) full reserve system; the absence of maturity transformation and liquidity provision through the creation of inside money. Imagine a world where if you wanted to borrow money to buy a car you had to find an investor that was willing to lend to you exactly $40k for 5 years to your credit profile. Imagine trying to finance a mortgage for a house. The idea of full reserves is ridiculous if you think through it and understand banking.

    • Justin,

      Lending does not require banks to create money. Ultimately what is lent and invested is income someone saved. Most financial intermediate in the U.S takes place outside banks (not requiring your straw man example) and it works fine. Banks can be part of that (taking funds from people wanting to lend or invest and lending it it for them, which is why we call them financial intermediaries) without creating money (i.e. 100% reserving their demand deposits).

      • Justin Merrill


        The holders of inside money are saving out of their income and funding investment through the bank's balance sheet. Banks don't have the widow's cruse on money creation; they can only create what the public is willing to hold.

        It is a red herring to say that most financial intermediation is done outside banks and therefore the we don't need banking (in the normal sense of the word). Banks play a unique role of delegated monitoring, risk pooling, and overcoming information asymmetry. Individuals and small firms can't issue bonds and peer to peer lending is risky and inefficient.

        Full reserve banking doesn't serve those functions well. Banks are dealers of credit, not brokers. The economic argument against fractional reserve banking usually argues against maturity transformation because the time horizon of the saver and investor do not match. But if this is to be taken literally, then you should have just as much of a problem with funding a 30 year mortgage with 2 yr CDs as you do with demand deposits. But most corporations engage in duration mismatching by borrowing short and investing long and they on a "fractional reserve" basis with free cash being smaller than their current liabilities. Are full reservists for corporate finance reform too?

        • Banks are important and have valuable capabilities. I certainly would not do away with them, I just would not fund their lending with demand deposits. Reasonable arguments can be made on both sides.

          • Justin Merrill

            Fair enough. But by full reserving demand deposits you still have a paradox I call the "Currency Quandary" (title of a paper in progress I'm presenting at the SEA); that is when base money serves as currency, the economy experiences a credit crunch from the result of increased economic activity. By full reserving demand deposits you are effectively freezing the M1 money supply, which would have the inability to respond appropriately to changes in the transaction demand for money.

            Even in your proposal here, while the M1 supply would be slightly flexible in responding to changes is the price level, it effectively only closes the barn door after the horses have left. A free banking system would respond more quickly to changes in money demand. Also, as I pointed out, by targeting a price level of a basket of commodities it becomes susceptible to supply shocks and also would be pro-cyclical.

          • We seem to have run out of comment space. I look forward to seeing your article. Can you send me a draft? But with currency board rules the public has (buys) whatever M it wants. Existing currency boards (I lead the IMF team that set up the Central Bank of Bosnia and Herzegovina and helped establish the Bulgarian currency board) are working just fine in this regard. One way or another, under any system, when people want to increase their cash holdings (whether banks can create them or not) they must save. I have really said nothing about what should be in the basket and have no views other than the basic principles that would guide the choice (closely correlated with CPI, well defined goods or services, with deep markets and readily measurable prices).

  • Rob R.

    Would it possible for the nominal anchor to be NGDP related ?

    For example: You want to have a flat NGDP so you make each dollar convertible into assets worth 1/trillionth of NGDP (which is the target level of NGDP). If NGDP rises above target then each dollar buys less than 1/trillionth of NGDP so people convert them for assets at the fed and the amount of $ in circulation and NGDP falls back. If NGDP is below target then people can buy dollars from the fed with assets that they can purchase for less the cost. This will increase the dollars in circulation and increase NGDP.

  • I am proposing a real not a nominal anchor.

  • Gonzalo R. Moya V.

    Mr. Jansen, seems like you didn´t peer-review Mr. Coats´article carefully before posting it, which you should have keeping in mind that your endorsement is implied by presenting it on his behalf: "Banks should be denied their current privilege to create deposit money by replacing the fractional reserve system with a 100% reserve requirement"? This "subject for another time" is addressed by him in the "Response" section, in a conversaton he has with Justin Merrill, where he doesn´t seem to understand what full-reserve banking implies, thinking that it means that banks can only lend savers´ money only once and thus not have a multliplier effect in the base money, thus making it equal to the money supply. For banks to control that hard money has not being already through the banking system though, they would have to mark the bills and coins, which is non-sensical. What full-reserve system really implies is that 100% of the savers´ money goes to the banks´ vaults, and 0% of it is re-inserted into the economy via loans, at least with non-time deposits, so that it is always available in case every saver requests all of their savings back at the same time. Since the banks´ gross profit comes from the spread of interest rates times the volume allowed to re-insert in the market, not being able to re-insert these savings to profit from them would require banks to charge a fee for safekeeping them rather than pay a small interest for them, in which case they would stop being banks as we know them and become more like money-safehouses only. Thus, you cannot expect banks to be "financial intermediaries" and have them operate under a full-reserve system, because it is unavoidable that the money loaned from a saving will be spent in a sale and become that seller´s saving and consequently a new loan.

    • ShaneCRoach

      It would be simplicity itself to "mark the bills", in that you would not call them the same thing. If someone opens a savings account, that account would allow for lending. What is lent would be a promissory note against what is in that account. That promissory note would not then be allowed to be deposited by the borrower with a bank and lent against. The question then becomes what do we originally deposit?

      Banks had their start as warehouses of precious metals, and those who had excess could lend that excess at interest, but the interest needs to be payable in something other than more of the same in order to close the circle and make for a complete monetary "system" as opposed to clunky work arounds.

      Justin Merrill touches on this issue above. "Banks are dealers in credit, not brokers."

      Modern banks need to be transformed into brokers, and banks as we know them need to be phased out. They are demonstrably unreliable institutions.