IMF Paper Backs Full Reserve Banking!

We’ve been in a state of mild shock since Saturday. We discovered one of the strongest advocates of full reserve banking in the institution where we would expect it least.

 

The International Monetary Fund has released a paper “The Chicago Plan Revisited” that supports the proposals of Irving Fisher – those which are the basis for Positive Money’s proposals - using state of the art economic modelling.

This sounds to be in opposition to the system which is currently in use, built upon the works of economists like Keynes and Krugman. Maybe the IMF knows something that the rest of us don't...

In their summary the authors Jaromir Benes and Michael Kumhof write:

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.

But even that backing requirement went away eventually with the end of the Gold Standard. But this system is actually what causes the boom-and-bust business cycles which lead to recessions and depressions.

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.

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