Irving Fisher: Loan Transactions

Posted by admin on Sunday, July 25, 2010

Irving Fisher Money Quotation tells us that the money in circulation is controlled by banks that don’t actually have possession of that money.
 

 

“Thus, our national circulating medium is now at the mercy of loan transactions of banks, which lend, not money, but promises to supply money they do not possess” — Irving Fisher

 

 

In this quote, Irving Fisher is criticizing the fractional reserve banking system. He notes that under this system, banks lend out more money than they actually hold in reserves, in the form of promises to pay (checks, deposits, etc.). Fisher argues that this means the overall money supply is effectively controlled by banks through their lending activity, even though they “do not possess” all the money they are providing credit for.

The interpretation is that Fisher believes banks should not be able to create money through lending without sufficient hard assets to back it up, and this private control of the money supply could introduce economic instability if not properly regulated. He is suggesting the national currency supply should not be so dependent on profit-seeking bank lending behaviors.