The Chicago Plan Revisited

Michael Kumhof and Jaromir Benes

No 2012/202, IMF Working Papers from International Monetary Fund

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.

Keywords: WP; interest rate; money supply; Chicago Plan; Chicago School of Economics; 100% reserve banking; bank lending; lending risk; private money creation; bank capital adequacy; government debt; private debt; boom-bust cycles; banking system; nominal interest rate; money demand; business cycle; cash flow; money creation; financial system; treasury credit; monetary policy; opportunity cost; Credit; Loans; Bank credit; Financial statements; Middle East; Europe (search for similar items in EconPapers)
Pages: 71
Date: 2012-08-01
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (135)

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Working Paper: The Chicago Plan Revisited (2014)
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