The Chicago Plan Revisited by Jaromir Benes and Michael Kumhof

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

Abstract

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.

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