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The Chicago plan involves to impose a 100% reserve on banks, so that banks can no longer create money by lending out. Recently, IMF published a note called The Chicago plan revisited. I'm no economist and I haven't read the full 71-page document, but this Daily Telegraph article summarises:

Specifically, it means an assault on "fractional reserve banking". If lenders are forced to put up 100pc reserve backing for deposits, they lose the exorbitant privilege of creating money out of thin air.

(...)

"The control of credit growth would become much more straightforward because banks would no longer be able, as they are today, to generate their own funding, deposits, in the act of lending, an extraordinary privilege that is not enjoyed by any other type of business," says the IMF paper.

"Rather, banks would become what many erroneously believe them to be today, pure intermediaries that depend on obtaining outside funding before being able to lend."

The US Federal Reserve would take real control over the money supply for the first time, making it easier to manage inflation. It was precisely for this reason that Milton Friedman called for 100pc reserve backing in 1967. Even the great free marketeer implicitly favoured a clamp-down on private money.

The switch would engender a 10pc boost to long-arm economic output. "None of these benefits come at the expense of diminishing the core useful functions of a private financial system."

Simons and Fisher were flying blind in the 1930s. They lacked the modern instruments needed to crunch the numbers, so the IMF team has now done it for them -- using the `DSGE' stochastic model now de rigueur in high economics, loved and hated in equal measure.

The finding is startling. Simons and Fisher understated their claims. It is perhaps possible to confront the banking plutocracy head without endangering the economy.

Benes and Kumhof make large claims. They leave me baffled, to be honest. Readers who want the technical details can make their own judgement by studying the text here.

What the article doesn't address is whether any legislation has ever tried to introduce such a system. Has it? Would it be possible for a single state to do so, or could it only be introduces globally?


This question is certainly similar, but I'm not sure if it's the same thing: Implications of governments borrowing from a central bank rather than issuing money directly

  • Although it predates the fundation of Chicago and the borth of Milton Friedman by a few centuries, isn't the monetary system of ancient Rome basically that ? – Evargalo Apr 3 '18 at 8:43
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There is very little incentive for a democratically elected government to undertake such an initiative. Increasing the money supply by lending inherently promotes investment and growth. The only alternative to increasing the money supply is to print more money, which is typically inflationary.

Restricting the ability of the banks to increase the money supply kills off the profits of private banks in the short term (there would be no incentive for banks to do anything other than charge storage locker fees), thus alienating a constituency in the short term, and makes it such that only an unelected central bank has any power in the long run.

The effects of such a plan are annoying at first, and downright lethal in the long run!

  • But the quoted article says it would cause a 10pc boost to long-arm economic output... – gerrit Jan 24 '13 at 12:58
  • This weeks issue of the economist has a great article on the failings of dsge models. That number is suspect, IMHO. Beyond that, you still are choosing an unelected body over an active constituency. – Affable Geek Jan 24 '13 at 13:00
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    @AffableGeek Is this the article in the Economist that you're referring to? If so, I'm a little skeptical, because while economic models aren't perfect, the article doesn't seem to understand actual uses of dsge models. Case in point: I've seen numerous models that incorporate banks, yet the article implies that such models don't exist. – John Bensin Oct 6 '13 at 0:05
  • But increasing the money supply by lending is also inflationary. In fact, the main difference with fractional reserve money creation is that the seigniorage benefit goes to the banks and not to the government. And the reserve requirement is only on on-demand investments. Banks could still offer CDs and other deposits that do not allow on-demand withdrawals. Or loan money to the government as Japanese postal banks do. – Brythan Mar 20 '18 at 16:25

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