The Chicago Plan Revisited

IMF Working Papers, August 1, 2012

Source details

The Chicago Plan envisaged the separation of the monetary and credit functions of the banking system by requiring 100% reserve backing for deposits.
Irving Fisher (1936) claimed four advantages for the 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.

The authors embed a comprehensive and carefully calibrated model of the banking system in a DSGE model of the U.S. economy to study the Chicago Plan claims.

The analysis finds support for all four of Fisher's claims:
- Improved control over business cycle fluctuations related to bank credit and bank-created money.
- Elimination of bank runs.
- Dramatic reduction of net public debt.
- Dramatic reduction of private debt because money creation no longer requires simultaneous debt creation.
Additional quantitative outcomes reported:
- Output gains approach 10 percent.
- Steady state inflation can drop to zero without posing problems for the conduct of monetary policy.

Bank credit; Banking; Capital adequacy requirements; Credit; Financial institutions; Financial statements; Loans; Money; Public debt; Public financial management (PFM).
Keywords include: 100% reserve banking, bank capital adequacy, Bank credit, bank lending, banking system, boom-bust cycles, business cycle, cash flow, Chicago Plan, Credit, financial system, government debt, interest rate, lending risk, Loans, monetary policy, money creation, money demand, money supply, nominal interest rate, opportunity cost, private debt, private money creation, treasury credit, WP.

Source: The Chicago Plan Revisited (IMF Working Paper) — Michael Kumhof and Jaromir Benes.