We've been [the people at Positive Money have been] in a state of mild shock since Saturday, after discovering strong support forÂ full reserve bankingÂ from a working paper by economists at the International Monetary Fund (IMF), an institution that many have come to see as preserving the status quo and protecting the banking sector against the interests of ordinary people.
The discussion paper "The Chicago Plan Revisited"Â supports the proposals of Irving Fisher – those which are theÂ basis forÂ Positive Money's proposals[and many others including yours truly (with certain enhancements)] - using state of the art economic modelling.
In their summary the authors write [our emphasis]:
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.
Here are few extracts from the paper:
We therefore conclude that Fisher's (1936) claims regarding the ChicagoÂ Plan, as listed in the abstract of this paper, are validated by our model.
The effectiveness of countercyclical policy would be further enhanced underÂ the Chicago Plan relative to present monetary arrangements.Â [B]ank runsÂ can obviously be completelyÂ eliminated...Â It would lead to an instantaneous and largeÂ reduction in the levels of both government and private debt, because money creation no longer requires simultaneous debt creation...
By validating these claims in a rigorous, microfounded model, we were able to establishÂ that theÂ advantages of the Chicago Plan go even beyondÂ those identified by Fisher (1936)...
One additional advantage is largeÂ steady state output gains due to the removal or reduction of multipleÂ distortions,Â including interest rate risk spreads, distortionary taxes, and costly monitoring ofÂ macroeconomically unnecessary credit risks.
Another advantage is the ability to driveÂ steady stateÂ inflation to zeroÂ in an environment where liquidity traps do not exist...Â This ability to generate and live with zero steadyÂ state inflation is an important result, because it answers the somewhat confused claim ofÂ opponents of an exclusive government monopoly on money issuance, namely that such aÂ monetary system would be highly inflationary. There is nothing in our theoreticalÂ framework to support this claim. And as discussed in Section II,Â there is very little in the monetary history of ancient societies and Western nations to support it either.
TheÂ History of Monetary Thought inÂ Section II is very interesting and certainly worth reading is the analysis of Government versus Private Control over Money Issuance (p 12).
On the other hand, the historically andÂ anthropologically correct state/institutional story for the origins of money is one of theÂ arguments supporting the government issuance and control of money under the rule ofÂ law. In practice this has mainly taken the form of interest-free issuance of notes or coins,Â although it could equally take the form of electronic deposits.
The historical debate concerning the nature and control of money is the subject ofÂ Zarlenga (2002), a masterful work that traces this debate back to ancient Mesopotamia,Â Greece and Rome. Like Graeber (2011), he shows that private issuance of money hasÂ repeatedly led to major societal problems throughout recorded history, due to usuryÂ associated with private debts.Â Zarlenga does not adopt the common but simplisticÂ deï¬nition of usury as the charging of "excessive interest", but rather as "taking somethingÂ for nothing" through the calculated misuse of a nation's money system for private gain.
To summarize, the Great Depression was just the latest historical episode to suggest thatÂ privately controlled money creation has much more problematic consequences thanÂ government money creation. Many leading economists of the time were aware of thisÂ historical fact. They also clearly understood the speciï¬c problems of bank-based moneyÂ creation, including the fact that high and potentially destabilizing debt levels becomeÂ necessary just to create a suï¬ƒcient money supply, and the fact that banks and their ï¬ckleÂ optimism about business conditions eï¬€ectively control broad monetary aggregates.Â TheÂ formulation of the Chicago Plan was the logical consequence of these insights.
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