The Chicago Plan

We find strong support for all four of Fisher's claims, with the potential for much smoother business cycles, no possibility of bank runs, a large reduction of debt levels across the economy ...

International Monetary Fund

chicago-plan Towards the end of the Great Depression in the USA (1929 - 1939), numerious economists including Professor Henry Simons of the University of Chicago and Irving Fisher of Yale University - put forward a proposal that came to be known as the Chicago Plan.

The proposal envisaged the separation of monetary and lending functions (i.e. the government should create the national currency while private banks are limited to lending such money). Specifically, the proposal called for the elimination of "fractional reserve banking" and imposing 100% reserves on deposits.

The authors claimed that if the Chicago Plan was implemented, the result would be:

no-1 Smoothing out of the business cycle. 
no-2 Elimination of bank runs.
no-3 Dramatic reduction of government debt.
no-4 Dramatic reduction of private debt.

 During 2012, the Research Department at the International Monetary Fund used computer models to test these claims. Not only did they find that these claims were valid - but they also found that Gross Domestic Product would increase by 10% and that price inflation would drop to zero.

 

 

Extracts from the IMF report

Below are a few extracts from the IMF document - that explain how our current monetary system works and why the Chicago Plan is a superior alternative.

Extracts from the IMF report

Because additional bank deposits can only be created through additional bank loans, sudden changes in the willingness of banks to extend credit must therefor not only lead to credit booms and busts, but also to an instant excess or shortage of money, and therefor of nominal aggregate demand.
We find support for all four of Fisher's claims. Furthermore, output gains approach 10%, and steady state inflation can drop to zero without posing problems for the conduct of monetary policy.
Private issuance of money has repeatedly led to major societal problems throughout recorded history, due to usury associated with private debts.
Private money has to be borrowed into existence at a positive intereste rate, while the holders of that money, due to the non-pecuniary benefits of its liquidity, are content to receive no or very low interest.
Solon [a Greek statesman and lawmaker 638BC - 558BC] provided much more plentiful government-issued, debt-free coinage [than the private lenders, to the extent] that [it] reduced the need for private debts. Solon's reforms were so successful that, 150 years later, the early Roman republic sent a delegation to Greece to study them.
Aristotle clearly states the institutional theory of money, and rejects any commodity-based or trading concept of money, by saying "Money exists not by nature but by law".
Shaw (1896) examined the records of monarchs thoughout English history, and found that, with one exception (Henry VIII), the king has used his monetary prerogative responsibility for the benefit of the enation, with no major crises.
A long line of distinguished thinkers argued in favor of a return to a system of government money issuance, with the intrinsic value of the monetary metal being of no consequence.
The Chicago Plan was never adopted as law, due to strong resistance from the banking industry.
The Chicago Plan could significantly reduce business cycle volatility caused by rapid changes in banks' attitude toward credit risk, it would eliminate bank runs, and it would lead to an instantaneous and large reduction in the levels of both government and private debt.
We find that the advantages of the Chicago Plan go even beyond those claimed by Fisher.
This ability to generate and live with zero steady state inflation is an important result, because it answers the somewhat confused claim of opponents of an exclusive government monopoly on money issuance, namely that such a monetary system would be highly inflationary. There is nothing in our theoretical framework to support this claim.

end of extracts

Below is an interactive version of the IMF document - with highlights to the most relevant sections. Further below is an attachment of the same document that contains embedded comments from the ASP. These comments are there to explain the overlap of the IMF conclusions with that of the ASP Monetary Policy.

The political and monetary implications of this IMF document are phenomenal. Basically - if a government creates and spends its national currency into circulation, then both government and private debt can be significantly reduced, while GDP can be increased by 10%.

 The ASP Monetary Policy shares the same principles as those set out in the Chicago Plan. Specifically, we believe that:

  • The government should create our national currency and spend it into circulation.
  • Banks can only lend out existing deposits.
  • The Reserve Bank must  ensure that the quantity of new money causes neither price inflation nor price deflation.

 

Attachments:
Download this file (The Chicago Plan.pdf)The Chicago Plan1193 kB