“Because under the Chicago Plan banks have to borrow reserves from the treasury to fully back liabilities, the government acquires a very large asset vis-à-vis banks. Our analysis finds that the government is left with a much lower, in fact negative, net debt burden.”

The IMF paper says total liabilities of the US financial system – including shadow banking – are about 200pc of GDP. The new reserve rule would create a windfall. This would be used for a “potentially a very large, buy-back of private debt”, perhaps 100pc of GDP.

The Chicago Plan Revisited

While The American Monetary Institute is responsible for its present form, the Act is based on Aristotelian monetary concepts in existence since at least the 4th century BC and employed successfully in a variety of monetary systems since then, ranging from democratic Athens to republican Rome. It is not merely a theory – its main elements have a long history of successful implementation in major societies around the world, including the American Colonies and the United States. These concepts enabled us to first establish the U.S. and then to maintain it as one nation.

The following brief summary: The Need for Monetary Reform serves as a preface to the American Monetary Act. (It was written before the banks brought down the world economy!)

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Having in mind that:

i. Despite of the increasing number of national and international financial institutions, the increasing amount of the available statistical data and computing power, economic crises are not predicted by governments, central banks and the academic community.
ii. The effectiveness of fiscal and monetary policy tools in an economy decreases over time. Just like in the human body, over time the same dose of a medicine or a drug has a diminishing effect.
iii. The complexity of the economic environment (of the theoretical models, of the institutions, of the financial products and of the attempts to regulate them) has led to an increasing level of national and private debt in almost every country and in increasing the concentration of wealth of the top 1% of the population.
iv. To simplify economic environment would be of great value to the society and the policy maker.

It is proposed that a sovereign currency*, public debt repayment with sovereign currency** and full reserve banking***, followed by balanced budgets in the public sector would be beneficial to the Greek, the European and the world economy.

* http://en.wikipedia.org/wiki/Monetary_sovereignty
and http://sovereignmoney.eu/35-defining-the-monetary-prerogative/
** http://www.themoneymasters.com/monetary-reform-act/
*** http://www.positivemoney.org/2011/07/what-exactly-is-full-reserve-banking-2/
and https://www.imf.org/external/pubs/cat/longres.aspx?sk=26178.0

IMF Working Paper, Research Department

Prepared by Jaromir Benes and Michael Kumhof, August 2012

Abstract

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%, and steady state inflation can drop to zero without posing problems for the conduct of monetary policy.

The Chicago Plan Revisited