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Anthony de Jasay

Helicopter Money and Stone-Age Banking

Anthony de Jasay*

Teaching aids can be treacherous instruments. Images, metaphors and little tales, addressed to all and by no means only to children, are designed to convey some truth in an easy to grasp and hard to forget. Some of these aids however, also contain half-truths and falsehoods. Worse still, some of them do this by design, deliberately implanting lies in people's minds. They are easier to plant than to eradicate once they have taken root.

A classic example is the representation of the national product as society's "cake". Some good fairy flies in overnight, deposits the cake on the communal table, ready for "society" to slice it and hand out the slices to its members. The next step is unsaid, but suggested almost irresistibly: everyone is entitled to the same size of slice as everyone else. Unequal shares would be "socially unjust"—which it presumably would be if the cake really fell from heaven, unaided by human hand. Once it waits on the table, ready to be sliced, it is all too easy too ignore that human hands had first to bake it.

Helicopter money is a less insidious, but no less misleading example of the wrong sort of teaching aid. When the economy is producing at less than a comfortable rate, with capacity utilisation at less than 90 and unemployment at more than 5 or 6 per cent, it stands to reason that easy remedies must be available to put this right and only a government of retarded half-wits will fail to reach for one. It needs nothing more clever and complicated than using helicopter money. It can print a few hundred tons of banknotes, load them into helicopters and have then fly up and down the country, letting the money pour down like blissful rain in a drought. People will pick up the money, quickly spend most of it, and add the rest to their savings. Consumption, investment and the production to match them will rise to the desired capacity level and, like the pump once it has been primed, will carry on at that level. Should it fall short, the government can always dispatch a few more helicopters with cargoes of fresh money. Admittedly, some of the money would be spent on extra imports and may also absorb goods that would otherwise been exported, but these leakages will only siphon off a small part of the beneficial irrigation of the economy.


From The Purchasing Power of Money, by Irving Fisher:

Fisher's Velocity of Money
Source: Irving Fisher, The Purchasing Power of Money, paragraph II.29. Library of Economics and Liberty.

Fisher explains his illustration as follows: "The equation of exchange has now been expressed by an arithmetical illustration. It may be also represented visually, by a mechanical illustration. Such a representation is embodied in Figure 2. This represents a mechanical balance in equilibrium, the two sides of which symbolize respectively the money side and the goods side of the equation of exchange. The weight at the left, symbolized by a purse, represents the money in circulation; the "arm" or distance from the fulcrum at which this weight (purse) is hung represents the efficiency of this money, or its velocity of circulation. On the right side are three weights,—bread, coal, and cloth, symbolized respectively by a loaf, a coal scuttle, and a roll of cloth. The arm, or distance of each from the fulcrum, represents its price."

However, for much of the non-economist public, all this is a little too good to be true. The graphic image of the "velocity of circulation" of money, drawn by Irving Fisher as a teaching aid to his quantity theory, is still lurking in the sub-conscious.1 Money, of course, has no "velocity" in the physical sense; it may stay with the same owner for a long time, or it can pass from one owner to the next at the seed of light, as the history of great depressions and great inflations has shown. Nevertheless, the idea of money moving around with a velocity of its own lives on in the mind of the lay public. It mistrusts helicopter money as blissful rain. Instead, it sees it as a fuse that will trigger off inflation before we know where we are. Fear of it might well nullify the good the spraying of the parched land with banknotes could be hoped to do. Teaching aid would be working against teaching aid.

He who sees that "helicopter money" has the symbolic form of "quantitative easing" uses it to explain how it works. In fact, it works quite differently. Instead of spraying with banknotes, the traders of the Federal Reserve Bank in New York are buying securities, primarily U.S. Treasury bonds, at an annual rate of one trillion dollars or about 6 or 7 per cent of U.S. national income. The sellers are paid by credits added to their balances at the Federal Reserve System. In plain language, this is the Fed "printing money". What the lay public overlooks and the commentators fail to mention, however, is that while the Fed is issuing a trillion dollars of new money, it also takes out of the economy a trillion dollar's worth of securities that are the closest thing to money in the spectrum of assets. Both the assets and the liabilities of the Fed increase by a trillion, but those of the economy do not change. Only their composition is altered a little, holders of securities that yield them interest of between near-zero and 2 per cent willingly sell them to the Fed in exchange for money yielding zero. Manifestly, they are not rushing to spend this money, nor even a significant part of it, on consumer goods. Judging by how the stock markets are rising, some of it is invested in shares in industry and commerce, and the indirect effect is a potential stimulus to both consumption and investment. How the stimulus works out depends on many things. One of them, alas, is the instinctive mistrust and fear that the poorly understood "quantitative easing" is the same as helicopter money and must come to some dire end. London and Tokyo are copying the Fed and Frankfurt differs more in form than in substance, so that if a dire end must come, it will come to us all. It need not come, unless by our mistrust and lack of clear thought we bring about its coming.

By quantitative easing, the authorities gently press the accelerator. By partially dismantling the banking system to punish it for its post-2007 misbehaviour, they are standing on the brake pedal. They seem surprised and disappointed that the banks are shrinking their balance sheets, pulling in their horns, and starving small business of credit. Except for household names, non-bank sources of credit in Europe are embryonic and the withdrawal of bank credit from medium and small firms is one of the chief reasons for Europe's present stagnation.

Whether the near-crash of several large banks in 2008 was the fault of the bankers or of the perverse incentives created by benevolent and confused regulation is something economic historians will take decades to decide. The current consensus is that insufficient regulation was the cause and that bankers must be brought to heel with the severity they richly deserve. Everybody seems to remember schooldays when they learnt how the Medicis, the Fuggers and the early Rothschilds used to lend their own money rather than money entrusted to them by others for safe-keeping. Instinctively, many observers and even some central bankers feel nostalgia for such stone-age banking.

Suppressing fractional reserve banking altogether, and requiring 100 per cent equity to cover loans and investments, as some eccentric economists have advocated, would be too much of a good thing. Yet the regulators feel that if banks had more equity, they would somehow be safer, though it is not obvious how, nor why. Deposit insurance, now ubiquitous, protects the vast majority of depositors and for short-term liquidity there are lenders of last resort. Problems may arise with solvency, which is assured by the intelligent selection of the bank's assets rather than by the backing provided by its own equity capital. However, under present accounting rules that require assets to be valued in balance sheets at market prices, a 20 per cent decline of the prices in a major asset class, a decline that easily happens in nervous markets, may render a bank momentarily insolvent, although the assets in question need not be liquidated and have every chance to recover their value if time is allowed for it.


Between 2008 and 2012, the Basel committee of European banking regulators has twice raised the required solvency ratio in the rather touching belief that while neither 5 nor 7 per cent of equity capital is sufficient to withstand major economic upset, 9 per cent will be. An extra 2 per cent more or less in a storm will hardly be decisive for solvency under the present accounting rules. Since, however, 2 per cent more capital for the entire banking system cannot rapidly be found, most European banks were forced to start shrinking their balance sheets. Hence the sometimes brutal reduction in their lending to small business, which has been a major reason for Europe's present stagnation.

Perhaps the regulators believe that if the world got along from the Stone Age to the 17th Century without fractional reserve banking, with bankers lending only their own money and not acting as intermediaries between persons and between the short and the long term, it can surely get along with one based on a modest 9 per cent solvency ratio. The bankers should be grateful that more is not demanded of them. Some economists, including the Nobel laureate Maurice Allais,2 believe that only 100 per cent solvency would do. Among silly beliefs fostered by false teaching aids and false lessons of recent history, this would surely be one of the silliest.


See Irving Fisher, The Purchasing Power of Money, its Determination and Relation to Credit, Interest and Crises, by Irving Fisher, assisted by Harry G. Brown (New York: Macmillan, 1922). New and Revised Edition. Chapter II, paragraph II.29.


Maurice Allais (1911-2010) was a French economist and the 1988 winner of the Nobel Memorial Prize in Economics. See his Nobel Prize Lecture given on December 9, 1988, "An Outline of My Main Contributions to Economic Science".

* Anthony de Jasay is an Anglo-Hungarian economist living in France. He is the author, a.o., of The State (Oxford, 1985), Social Contract, Free Ride (Oxford 1989), Against Politics (London, 1997), and Justice and Its Surroundings (Indianapolis, 2002). His most recent publications include Political Philosophy, Clearly (Indianapolis, 2010) and Political Economy, Concisely (Indianapolis, 2010). His next volume, Economic Sense and Nonsense: Reflections from Europe, 2007-?2012 (a volume in The Collected Papers of Anthony de Jasay), edited and with an introduction by Hartmut Kliemt, is forthcoming from Liberty Fund.

The State is also available online on this website.

For more articles by Anthony de Jasay, see the Archive.
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