The Chicago Plan Revisited
72 Pages Posted: 1 Nov 2012
Date Written: August 2012
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.
Keywords: Chicago Plan, Chicago School Of Economics, 100% Reserve Banking, Bank Lending, Lending Risk, Private Money Creation, Bank Capital Adequacy, Government Debt, Private Debt, Boom-bust Cycles, Bank Credit, Banking Systems, Economic Models, Monetary Systems
JEL Classification: E44, E52, G21
Suggested Citation: Suggested Citation