IMF Working Paper Offers Support for Full Reserve Banking

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We’ve been in a state of mild shock since Saturday, after discovering strong support for full reserve banking from a working paper by economists at the International Monetary Fund (IMF), an institution that many have come to see as preserving the status quo and protecting the banking sector against the interests of ordinary people.

The discussion paper “The Chicago Plan Revisited” supports the proposals of Irving Fisher – those which are the basis for Positive Money’s proposals - using state of the art economic modelling.

In their summary the authors write [our emphasis]:

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.

Here are few extracts from the paper:

We therefore conclude that Fisher’s (1936) claims regarding the Chicago Plan, as listed in the abstract of this paper, are validated by our model.

The effectiveness of countercyclical policy would be further enhanced under the Chicago Plan relative to present monetary arrangements. [B]ank runs can obviously be completely eliminated… It would lead to an instantaneous and large reduction in the levels of both government and private debt, because money creation no longer requires simultaneous debt creation…

By validating these claims in a rigorous, microfounded model, we were able to establish that the advantages of the Chicago Plan go even beyond those identified by Fisher (1936)…

One additional advantage is large steady state output gains due to the removal or reduction of multiple distortions, including interest rate risk spreads, distortionary taxes, and costly monitoring of macroeconomically unnecessary credit risks.

Another advantage is the ability to drive steady state inflation to zero in an environment where liquidity traps do not exist… This ability to generate and live with zero steady state inflation is an important result, because it answers the somewhat confused claim of opponents of an exclusive government monopoly on money issuance, namely that such a monetary system would be highly inflationary. There is nothing in our theoretical framework to support this claim. And as discussed in Section II, there is very little in the monetary history of ancient societies and Western nations to support it either.

The History of Monetary Thought in Section II is very interesting and certainly worth reading is the analysis of Government versus Private Control over Money Issuance (p 12).

On the other hand, the historically and anthropologically correct state/institutional story for the origins of money is one of the arguments supporting the government issuance and control of money under the rule of law. In practice this has mainly taken the form of interest-free issuance of notes or coins, although it could equally take the form of electronic deposits.

The historical debate concerning the nature and control of money is the subject of Zarlenga (2002), a masterful work that traces this debate back to ancient Mesopotamia, Greece and Rome. Like Graeber (2011), he shows that private issuance of money has repeatedly led to major societal problems throughout recorded history, due to usury associated with private debts. Zarlenga does not adopt the common but simplistic definition of usury as the charging of “excessive interest”, but rather as “taking something for nothing” through the calculated misuse of a nation’s money system for private gain.

To summarize, the Great Depression was just the latest historical episode to suggest that privately controlled money creation has much more problematic consequences than government money creation. Many leading economists of the time were aware of this historical fact. They also clearly understood the specific problems of bank-based money creation, including the fact that high and potentially destabilizing debt levels become necessary just to create a sufficient money supply, and the fact that banks and their fickle optimism about business conditions effectively control broad monetary aggregates. The formulation of the Chicago Plan was the logical consequence of these insights.

Read the IMF Working Paper here.

 

 

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Comments (35)

  • comment_avatar

    João Granchinho

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    It seems to be good news, let’s see if they’re willing to act on it.

    Reply

  • comment_avatar

    simoncz

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    The mainstream seems to be slowly, very slowly, coming round to our way of thinking. Once the politicians see which way the bandwagon is rolling they’ll soon get onboard.

    Reply

  • comment_avatar

    Smell Da Quoffee

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    :-) This is very exciting news

    Reply

  • comment_avatar

    Greenbacker84

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    The banks are not lending but laundering our promissory contracts in every single loan. They are pretend lenders and the people create money via their promissory notes backed by their labour and production.
    This will merely deny us the right to do so in future, and FORCE us to go cap in hand to banks…just like today. Mathematically Perfected Economy is the only solution restoring the currency issuance directly to the people.
    australia4mpe

    Reply

  • comment_avatar

    Natasha

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    This is brilliant news, if we feed this to our MP’s how can they possibly resist the IMF?

    Reply

  • comment_avatar

    Dannyb2b

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    IMO even better than the government issuing money would be to establish a monetary agency that deals directly with each citizen for monetary policy purposes. This way you also remove the politicians from determining how money is allocated into the economic system. Check my proposal if you want for a better explanation: internationalmonetary.wordpress.com

    Reply

  • comment_avatar

    John Lynch

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    Wow.
    But don’t get too excited.
    A report may have slipped under the radar of the usual suspects but expect it to vanish without trace soon. The IMF have always been enforcers for the global financial elite.
    They won’t hand back their advantage because of a report like this. it will have to be taken from them.
    Great ammunition though!

    Reply

  • comment_avatar

    Jonathan Semple

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    Astonishing. I hope someone explains the long words to Christine Lagarde…

    Reply

  • comment_avatar

    Donald Last

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    Well done. At last perhaps there is a light at the end of the tunnel — and it is not a train coming the other way.

    Don Last

    Reply

  • comment_avatar

    Ronald Stamper

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    Mira: Your report and your smile reflect my feelings on the best day of my holiday. Positive Money cannot look back. Isaac

    Reply

  • Quora

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    Why is big government liberalism so popular despite its obvious failure as a system?…

    The big government/small government thing is hugely overplayed and employed as a stick to beat whoever displeases you in political discourse – in rather the same way as people employ the term ‘fascist’ when they mean ‘I disagree with you’. Perhaps …

    Reply

  • comment_avatar

    John KingofthePaupers Turmel

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    Jct: LETS timebanks work like poker chips issued in exchange for labor. Zero reserve. We don’t need any old LETS savings deposited in reserve before we issue our chips, our chips are issued based on the labor available for liquification. That’s zero reserve banking. 100% full-reserve banking is pure piggy banking where they lend out their depositors’ funds. Nothing particularly good about it. Doesn’t alleviate the shortage of money at all by creating new tokens. And wouldn’t you expect the positive money guys to think it’s some kind of blessing. Guess they still haven’t caught on to the superiority of zero-reserve banking if they think 100% is an improvement.

    Reply

    • comment_avatar

      DozyHole

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      What planet are you on? Take a look around at what 0% reserve banking has done to the UK, Europe and USA. Everyone is in debt(which people find undesirable believe it or not), mostly to no-one since money is mostly just an accounting entry which disappears upon repayment. The economies slowly grind to a halt until we can find more debtors, if you think this is working then you and I are on different planets.

      That said, your MMT point of view is valid and I would guess shared by positive money. Tokens(money) can be issued by the government in return for labour without prior savings, and positive money may argue, without going into debt, so thanks for that insight.

      Reply

  • comment_avatar

    Jonathan P. Chance

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    The multiple problems with the debt-based monetary hoax are resolved in The 2010 Constitution of the United States of America:

    http://Treasurynet.US

    Reply

  • comment_avatar

    jeff419

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    Can’t trust the govt or banks. Bitcoin will end up winning because it’s decentralized and truly fair.

    Reply

  • comment_avatar

    Bill Still

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    Unfortunately, “The Chicago Plan” was first disseminated on March 16, 1933, not 1936. Source:

    Phillips,
    Ronnie J., The ‘Chicago Plan’ and
    New Deal Banking Reform The Jerome Levy Economics Institute of Bard
    College, Working Paper No. 76, June 1992, p. 4-5.

    Reply

  • comment_avatar

    Freedom

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    You cannot trust the government with the money supply either. We are not the government — the government has always been the elite fleecing the masses under the guise of “public good.”

    Reply

  • comment_avatar

    Simon Thorpe

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    I am really thrilled about this. Imagine IMF economists stating that (and I quote) “”the “deposit multiplier” of the undergraduate economics textbook, where
    monetary aggregates are created at the initiative of the central bank,
    through an initial injection of high-powered money into the banking
    system that gets multiplied through bank lending… is simply, in the
    words of Kydland and Prescott (1990), a myth. And because of this,
    private banks are almost fully in control of the money creation
    process.”

    And also “This is of course the reason why quantitative easing, at least the kind
    that works by making greater reserves available to banks and not the
    public, can be ineffective if banks decide that lending remains too
    risky.”

    Perhaps someone can let Mervyn King know this before he embarks on yet another round of pointless QE.

    Reply

  • comment_avatar

    Ben Curtis

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    This is a sign of progress that the IMF are even accepting papers about this! Do you know when/if it will be published, and have the authors mentioned to anybody at PM what kind of reaction it is getting?

    Reply

  • comment_avatar

    Fools Crow

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    When a wolf begins to bleat like a sheep, beware!

    Reply

  • comment_avatar

    Ross Noble

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    Dr. Michael Kumhof of the International Monetary Fund; Prof. Kaoru Yamaguchi of Berkeley and Doshisha Universities, and Prof. Steve Keen of the University of Western Sydney, Australia, will be speaking at the 8th Annual AMI Monetary Reform Conference. (Sept. 20-23, at University Center in downtown Chicago). Yamaguchi and Kumhof model with different methods, but come up with similar outputs. If there are any questions it would be a good opportunity.

    Reply

  • comment_avatar

    Aidan Harris

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    Disclaimer: This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

    Why are you misrepresenting this?

    Reply

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