The Chicago Plan Revisited

By Michael Kumhof, Jaromı́r Beneš. Social Science Research Network, 2012

306 citations recorded by the source corpus.

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.

Subfields: Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/66fa09d0804a001d1fce97b2dd20b465aacf6043

How researchers see this paper

The researchers whose trusted networks rank it highest, strongest advocate first. Every researcher gets a different order.

In Economics and Econometrics

1. John Barrdear
2. U. Bindseil
3. R. Werner
4. Benjamin Braun
5. Nigel Dodd
6. M. McLeay
7. Michael Kumhof
8. A. Prasad

In Finance

1. John Barrdear
2. U. Bindseil
3. R. Werner
4. Benjamin Braun
5. Nigel Dodd
6. M. McLeay
7. Michael Kumhof
8. A. Prasad

Citations in the corpus

• Islamic Finance:Opportunities, Challenges, and Policy Options (2015, background): “Indeed, IB resembles the proposal made in the 1930s under the Chicago plan, which required full backing of bank loans, and which recent research has suggested would lower macroeconomic volatility and the risk of bank runs (Benes and Kumhof 2012; and Wolf 2014).”
• Speaking to the people? Money, trust, and central bank legitimacy in the age of quantitative easing (2016, background): “Examples include discussions by IMF economists (Benes and Kumhof, 2012) and Nobel Prize winners (Prescott and Wessel, 2016), parliamentary consultations in Iceland, and the successful calling of a referendum in Switzerland (to be held in 2018).”
• Tiered CBDC and the Financial System (2020, methodology): “…arguments D1 and D2 in favor of CBDC relate to the vision that CBDC is a tool to make feasible the “sovereign money” idea, i.e. a monetary system in which banks would no longer “create” sight deposits and thus means of payment (Benes and Kumhof, 2012, Häring, 2018, 214-223, Mayer and Huber, 2014).”
• How do banks create money, and why can other firms not do the same? An explanation for the coexistence of lending and deposit-taking☆ (2014, background): “Indeed, it would appear that monetary reformers (see, for instance, Benes and Kumhof, 2012) could very simply achieve their goal of revoking the banks' ability to create money through credit creation, by simply scrapping banks' exemption from the Client Money Rules.”
• The Macroeconomics of Central Bank Issued Digital Currencies (2016, methodology): “The model of banking is based on a combination of Benes and Kumhof (2012) and Jakab and Kumhof (2015).”
• The Social Life of Bitcoin (2018, background): “For more recent investigations of the merits of this plan, see Benes and Kumhof (2012) and Jackson and Dyson (2012).”
• Money Creation in the Modern Economy (2014, background): “(3) Benes and Kumhof (2012) discuss the money multiplier myth in more detail. (4) As discussed by Disyatat (2008). (5) Bindseil (2004) provides a detailed account of how monetary policy implementation works through short-term interest rates. (6) Carpenter and Demiralp (2012) show that changes in qua”