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The Chicago Plan Revisited

John Hermann

Review: the Chicago Plan Revisited, by Jaromir Benes and Michael Kumhof
Date: August 2012. Authors’ email Addresses: [email protected]; [email protected]

This is an important paper by Jaromer Benes and Michael Kumhof. It may be downloaded at The research is well referenced, and surprisingly published as an IMF working paper (that revelation raised my eyebrow immediately; perhaps the true nature of the topic slipped under the IMF’s guard?). The investigations reported in the paper will serve as a valuable reference in support of any serious case made for reforming banking in favour of a full reserve system. Its main defect, in my view, is the authors’ insistence on embedding a model of banking into a DSGE model of the U.S. economy. A much better alternative approach would be to embed banking in a non-equilibrium economic model (in the manner of Steve Keen). Michael Kumhof will be speaking at the American Monetary Institute conference to be held in Chicago in late September. The following abstract of the paper reveals why it is valuable from a monetary reform perspective.


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.