The Chicagoplan: 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.

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.

link to the full study:

http://www.imf.org/external/pubs/ft/wp/2012/wp12202.pdf

2
Contents
I. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
II. The Chicago Plan in the History of Monetary Thought . . . . . . . . . . . . . 12
A. Government versus Private Control over Money Issuance . . . . . . . . . 12
B. The Chicago Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
III. The Model under the Current Monetary System . . . . . . . . . . . . . . . . . 20
A. Banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
B. Lending Technologies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
C. Transactions Cost Technologies . . . . . . . . . . . . . . . . . . . . . . . 26
D. Equity Ownership and Dividends . . . . . . . . . . . . . . . . . . . . . . 26
E. Unconstrained Households . . . . . . . . . . . . . . . . . . . . . . . . . . 27
F. Constrained Households . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
G. Unions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
H. Manufacturers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
I. Capital Goods Producers . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
J. Capital Investment Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
K. Government . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
1. Monetary Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
2. Prudential Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
3. Fiscal Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
4. Government Budget Constraint . . . . . . . . . . . . . . . . . . . . 33
L. Market Clearing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
IV. The Model under the Chicago Plan . . . . . . . . . . . . . . . . . . . . . . . . 33
A. Banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
B. Households . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
C. Manufacturers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
D. Government . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
1. Monetary Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
2. Prudential Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
3. Fiscal Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
4. Government Budget Constraint . . . . . . . . . . . . . . . . . . . . 41
5. Controlling Boom-Bust Cycles – Additional Considerations . . . . . 42
V. Calibration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
VI. Transition to the Chicago Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
VII. Credit Booms and Busts Pre-Transition and Post-Transition . . . . . . . . . . 52
VIII. Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57

 

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About ottwf

The capitalistic and imperialistic system and its systematic aims: profit and power over others, still dominates our world and not the aims of the Universal Declaration of Human Rights, as 1948 agreed! After the world-economic-crisis after 1929 and the following World-War the world hat decided with agreeing the Universal Declaration of Human rights, to create a new world order; conflicts should be solved with peaceful means, not nations and their power, but the dignity of human beings around the world should be the aim of the policies and the economy, of every state and the community of states. But soon after the end of the war, when the victims and destruction were forgotten, all continued as before, with all risks, we had seen before. The split in rich an poor is getting bigger and bigger. We also overuse our global environment already, even if the big majority of mankind still lives in poverty! We are not victims, this world is men-made and be changed from men and women! It will be possible, if those, who do not want or serve (because of system-pressure) profits first, but want for themselves and everybody a life in human dignity unite and develop in a global base-democratic movement a common vision for our world, and learn, how to make this vision real. We need for it a big empowerment of many, many common men and women and their activities. Our chances are because of new communication technologies, of common languages, of the level of education and the mixture of people from different backgrounds better then ever. The occupy-movement is a good start for such a global movement. We support it and try to contribute to its success! We choose news and make comments and so try to unite people for an Occupy-Think-Tank: Its tasks: creating a news-network, self-education, working on global-reform programs and learning to organize projects for those, who are suffering. Join us, so that we can build teams for these aims for all subjects and countries as a base for the unification. We have Wan(n)Fried(en) in our name, because it means When peace and it is a modification of the name of the town our base is, in Wanfried, a small town in the middle of Germany, where we can use a former factory for our activities. Our telefon: 0049-5655-924981, mobil: 0171-9132149, email: occupy-think-tank@gmx.de
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