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The Chicago Plan Revisited

Author

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  • Mr. Michael Kumhof
  • Mr. 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.

Suggested Citation

  • Mr. Michael Kumhof & Mr. Jaromir Benes, 2012. "The Chicago Plan Revisited," IMF Working Papers 2012/202, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2012/202
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    References listed on IDEAS

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    More about this item

    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;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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