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The Chicago Plan Revisited
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The Chicago Plan Revisited

Jaromir Benes and Michael Kumhof
IMF, 2012
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Editorial Rating

8

Qualities

  • Analytical
  • Innovative
  • Scientific

Recommendation

International Monetary Fund economists Jaromir Benes and Michael Kumhof dust off a 1930s economic idea and update it with 21st-century analytical tools. During the Great Depression, leading economists proposed “the Chicago Plan” to abolish fractional reserve banking. The goal: to get banks out of the money-creating business and to restore that function to government, thus eliminating bank runs, cutting government debt and smoothing economic cycles. Today, in the aftermath of financial circumstances eerily reminiscent of those of the Great Depression era, Benes and Kumhof provide compelling new evidence that the Chicago Plan could hold the answer to monetary and economic reform. Unlikely as it may be that the plan could be enacted, though it is a topic of inside conversation, getAbstract recommends this treatise to economists, policy makers and academics for its alternative take on the US’s financial infrastructure.

Summary

“The Chicago Plan”

In the 1930s, the leading lights of economic and monetary policy attempted to understand the causes of the Great Depression, a catastrophic meltdown. They centered their attention on the behavior and actions of the banking sector, specifically private banks and the central bank, leading up to and during the crisis. A group of economists, led by Henry Simons at the University of Chicago and Irving Fisher at Yale University, proposed a radical change to the US’s financial system: “the separation of the monetary and credit functions of the banking system.”

Proponents of the Chicago Plan – as it came to be known – recommended that reserves cover bank deposits fully and that all extensions of bank credit be through “earnings that have been retained in the form of government-issued money, or through the borrowing of existing government-issued money from non-banks, but not through the creation of new deposits, ex nihilo, by banks.” In 1936, Fisher wrote the definitive summary of the Chicago Plan, listing its four major benefits:

  1. Taking banks out of the money-creating business would lead to “much better control of credit cycles” and ...

About the Authors

Jaromir Benes and Michael Kumhof are senior economists at the IMF.

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