The Chicago Plan Revisited

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Price:  $18.00

Author/Editor: Jaromir Benes, Michael Kumhof
Release Date: © August, 2012
ISBN : 978-1-47550-552-8
Stock #: WPIEA2012202
Stock Status: On back-order

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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.


Business cycles , Economic development , Economic policy , Monetary policy , Money supply

More publications in this series: Working Papers

More publications by: Jaromir Benes ; Michael Kumhof