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‘The Chicago Plan Revisited’: Open Letter to Christine Lagarde

October 29, 2012

Dear Mme. Lagarde

In your recent speech in Toronto you rightly stress the need for reform of the banking sector, but we question whether the specific reforms you mention are sufficient. It seems to us that they are merely the reforms that the banking fraternity will allow public mention of. We believe that the financial sector should be servant rather than master. It should help businesses to finance investment in productive capacity, and individuals at particular stages in their life to meet their needs. It should help communities to recover from disasters. In other words banking should be socially useful.

UK governments have laid great stress on the economic importance of the earnings of the financial sector, but although in terms of turnover it is very large, we are not aware of any objective study of the net benefit to the UK over the business cycle.

We believe that in the interest of stability, and in order to prevent unsustainable levels of debt, there has to be effective control over the issue of credit money and the uses for which it is issued. This is not a message that bankers wish to hear because it is precisely these high levels of debt that make banks so profitable, at least in the ‘good times’. We therefore welcome the publication in August by the IMF of the working paper by Jaromir Benes and Michael Kumhof, entitled ‘The Chicago Plan Revisited’ (Working Paper No. 12/202). The authors summarise their paper as follows:

“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.”

If the authors’conclusions are correct the implications are huge, and we believe you should take this very seriously. The Chicago plan involves state or central bank money creation, rather than private bank money creation. Opponents of such a scheme would argue that state authorities cannot be trusted to get it right. Benes and Kumhof’s summary of the historical evidence suggests otherwise. We do not claim that any single academic study is a sufficient basis for action, but we believe the paper has made a strong prima facie case and ought to be followed up as a matter of urgency. Further studies should look not only at Full Reserve banking but also the kind of Direct Credit Control used in the West in the decades following World War 2 period and more recently in Asia. The Basel framework will not do the job. The authority of the IMF is needed to stimulate further studies.

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4 Comments
  1. Stephanie permalink

    Please Mme. Lagarde, implement the “Chicago Plan” and save humanity from more crushing austerity that is completely unneccessary. Why should the people pay for government borrowing when sovereign nations have the right to print their money debt-free and spend it into society. Why should future generations pay for debt and bad decisions that banks have made- something they have nothing to do with?! Let’s rid this planet of a debt-based monetary system, a giant ponzi-scheme. Please do the right thing.

  2. Thanks Stephanie. Not many people read this blog; I wonder how you found it. In making your comment you reveled your email address to me. May I use it, please?

  3. Stephanie permalink

    Yes you may use my email. I simply came across this blog by researching and trying to find out more about the IMF research paper “the Chicago Plan revisited”. I firmly believe that this is absolutely the most pressing issue facing humanity at this time…and not too many people seem to be aware. I’m glad you are.

  4. Nancy Sutton permalink

    This excellent and historically vertified money system is the answer to many prayers. Google Stephen Zarlenga, Bill Still, AMI, and many other heroes are are doggedly promoting this solution. See their websites, and videos, and check out Rep Kucinich’s bill, HR 2990, which is waiting for sponsors. It is now up to US to educate ourselves, every one we know, our representatives…. starting with the IMF 🙂 The OWS group is working on “Strike Debt” and “Rolling Jubilee” campaigns.. just the kind of enlightment we need to foster everywhere! … leading to the simple conversion of debt-money to debt-free money.

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