The Chicago Plan Revisited

August 1, 2012

Preview Citation

Format: Chicago

Michael Kumhof, and Jaromir Benes. The Chicago Plan Revisited, (USA: International Monetary Fund, 2012) accessed December 21, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

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.

Subject: Bank credit, Banking, Capital adequacy requirements, Credit, Financial institutions, Financial statements, Loans, Money, Public debt, Public financial management (PFM)

Keywords: 100% reserve banking, Bank capital adequacy, Bank credit, Bank lending, Banking system, Boom-bust cycles, Business cycle, Cash flow, Chicago Plan, Chicago School of Economics, Credit, Europe, Financial statements, Financial system, Government debt, Interest rate, Lending risk, Loans, Middle East, Monetary policy, Money creation, Money demand, Money supply, Nominal interest rate, Opportunity cost, Private debt, Private money creation, Treasury credit, WP

Publication Details

Pages:

71
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2012/202
Stock No:

WPIEA2012202
ISBN:

9781475505528
ISSN:

1018-5941

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