IMF Paper Backs Full Reserve Banking!

The International Monetary Fund has released a paper “The Chicago Plan Revisited” that 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 Jaromir Benes and Michael Kumhof write:

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.

Download: The Chicago Plan Revisited | IMF

Source: IMF Paper Backs Full Reserve Banking!

Fractional Reserve Banking and the Federal Reserve: The Economic Consequences of High-Powered Money | Ron Paul | Domestic Monetary Policy and Technology Subcommittee

This hearing, entitled "Fractional Reserve Banking and the Federal Reserve: The Economic Consequences of High-Powered Money," will be held on Thursday, June 28, at 2:00 p.m. in room 2128 of the Rayburn House Office Building.

Witnesses scheduled to testify:
Dr. John Cochran, Emeritus Professor of Economics and Emeritus Dean, School of Business, Metropolitan State College of Denver Dr. Joseph Salerno, Professor of Economics, Lubin School of Business, Pace University Dr. Lawrence H. White, Professors of Economics, George Mason University

"Fractional reserve banking underpins the entire banking system, yet its effects on society are completely ignored. Our financial system consists of vast amounts of credit pyramided on top of very small amounts of real savings-- all backstopped by explicit and implicit government guarantees. This poses significant risks to the stability of the economy and monetary system, which ought to give pause to any serious observer of financial markets. Hopefully this hearing will create a greater understanding among the American people about the nature of the banking system, and begin the movement towards serious systematic reform. The American people deserve a financial system that is stable and efficient; one that operates without taxpayer subsidies and bailouts." - Congressman Ron Paul

Hearing June 28 2012 Fractional Reserve Banking

MIND-BLOWING SPEECH! Victoria Grant, a 12-year old girl, Explains The Banking System

12-year old Victoria Grant explains why her homeland, Canada, and most of the world, is in debt. April 27, 2012 at the Public Banking in America Conference, Philadelphia, PA.

Victoria Grant