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The Chicago Plan Revisited

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Author Info

  • Michael Kumhof
  • Jaromir Benes

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.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 12/202.

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Length: 71
Date of creation: 01 Aug 2012
Date of revision:
Handle: RePEc:imf:imfwpa:12/202

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Keywords: Bank credit; Banking systems; Economic models; Monetary systems; debt; loans; interest; liabilities; debts; credit risk; bank loans; mortgage loans; taxes; private debt; fiscal policy; interest charges; payments; debt instruments; usury; debtors; defaults; repayment; taxpayers; debt cancellation; deficits; expenditures; debt contracts; debt burden; credit systems; default rates; public debt; solvency; borrowing costs; risk premium; commercial paper; personal bankruptcy; liquidity management; interest costs; credit risks; household debt; debt outstanding; debt financing; default risk; credit unions; debt crises; creditor; government securities; debt forgiveness; creditors; credit market; debt finance; tax revenues; corporate debt;

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References

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  1. Todd Keister & James McAndrews, 2009. "Why are banks holding so many excess reserves?," Staff Reports 380, Federal Reserve Bank of New York.
  2. Aoki, Kosuke & James Proudman & Gertjan Vlieghe, 2003. "House prices, consumption, and monetary policy: a financial accelerator approach," Royal Economic Society Annual Conference 2003 7, Royal Economic Society.
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  6. Vasco Cúrdia & Michael Woodford, 2009. "Credit Spreads and Monetary Policy," NBER Working Papers 15289, National Bureau of Economic Research, Inc.
  7. Romain Ranciere & Nathaniel A. Throckmorton & Michael Kumhof & Claire Lebarz & Alexander W. Richter, 2012. "Income Inequality and Current Account Imbalances," IMF Working Papers 12/8, International Monetary Fund.
  8. Laurence Ball, 1998. "Another Look at Long-Run Money Demand," NBER Working Papers 6597, National Bureau of Economic Research, Inc.
  9. Bentham, Jeremy, 1787. "Defence of Usury," History of Economic Thought Books, McMaster University Archive for the History of Economic Thought, number bentham1787.
  10. Ronnie Phillips, 1992. "The 'Chicago Plan' and New Deal Banking Reform," Economics Working Paper Archive wp_76, Levy Economics Institute.
  11. Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "This Time Is Different: Eight Centuries of Financial Folly," Economics Books, Princeton University Press, edition 1, volume 1, number 8973.
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  14. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
  15. Menger, Carl, 1892. "On the Origins of Money," History of Economic Thought Articles, McMaster University Archive for the History of Economic Thought, vol. 2, pages 239-255.
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Cited by:
  1. Degens, Philipp, 2013. "Alternative Geldkonzepte - ein Literaturbericht," MPIfG Discussion Paper 13/1, Max Planck Institute for the Study of Societies.
  2. McLeay, Michael & Radia, Amar & Thomas, Ryland, 2014. "Money creation in the modern economy," Bank of England Quarterly Bulletin, Bank of England, vol. 54(1), pages 14-27.

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