The Chicago Plan Revisited | IMF Working Paper

There is growing interest in this IMF Working Paper by Jaromir Benes and Michael Kumhof which discusses removing the role of monetary creation from fractional-reserve banks and assigning it to Treasury. Here is a brief abstract:

At the height of the Great Depression a number of leading U.S. economists advanced a proposal for monetary reform that became known as the Chicago Plan. It envisaged the separation of the monetary and credit functions of the banking system, by requiring 100% reserve backing for deposits. Irving Fisher (1936) claimed the following advantages for this plan: (1) Much better control of a major source of business cycle fluctuations, sudden increases and contractions of bank credit and of the supply of bank-created money. (2) Complete elimination of bank runs. (3) Dramatic reduction of the (net) public debt. (4) Dramatic reduction of private debt, as money creation no longer requires simultaneous debt creation. We study these claims by embedding a comprehensive and carefully calibrated model of the banking system in a DSGE model of the U.S. economy. We find support for all four of Fisher’s claims. Furthermore, output gains approach 10 percent, and steady state inflation can drop to zero without posing problems for the conduct of monetary policy…..

I believe that Fisher is right in targeting fractional-reserve banks as a major cause of instability in capitalist systems, facilitating rapid expansion of credit during booms, inevitably followed by rapid contraction during the bust. To introduce a system such as the Chicago Plan would risk an abrupt shock to the monetary system, but gradual increase of bank capital, leverage and reserve ratios could achieve the same eventual end without any noticeable side-effects.

via The Chicago Plan Revisited (pdf)

Hat tip to Ambrose Evans-Pritchard at The Telegraph.