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Banking in the Abstract – The “Chicago Plan”

JKH has written the definitive assessment of the IMF’s “Chicago Plan”.  This paper is incredibly thorough, insightful and detailed.  It’s probably not appropriate for most novices, but I highly recommend it as he reinforces many of the most important lessons from Monetary Realism.   Read the full paper at the Monetary Realism website. 

The IMF recently published a working paper (August 2012) “The Chicago Plan Revisited”:


The authors are IMF staffers Jaromir Benes and Michael Kumhof. The views expressed are those of the authors, and not of the IMF. Accordingly, we will refer to this paper as the “BK Chicago Plan”.

The original “Chicago Plan” is a proposal (or a family of similar proposals), put forward in the 1930’s, with ideas for fundamental banking system reform. The BK paper updates the general framework with a version of its own. The key elements are 100 per cent reserves against deposits, a massive “debt jubilee” for bank borrowers, and a greatly restricted scope for bank lending. It is specific with respect to tangible steps that are required in order to transform the existing system into the proposed Chicago Plan system. This should be of interest to those who are curious about actual and/or potential structural change for the financial system. For that reason, the subject seems like a good fit for the “Contingent Institutional Approach”:


The “Contingent Institutional Approach” is a general framework for comparing various monetary system designs, from the perspective of monetary and fiscal policy. The framework was applied in a follow up essay examining the design of the Eurozone system:


The assessment of the Chicago Plan will include some points of comparison with standard Federal Reserve operations, quantitative easing, and certain proposals associated with ‘Modern Monetary Theory’. So the examination of the IMF Chicago Plan, while detailed on its own account, is part of a broader analysis.

The monetary and the financial system is a design of double entry bookkeeping. It may be other things as well, but it is certainly that. But even with the financial crisis, many mainstream economists still seem unconvinced as to the importance of accounting and even the monetary system to the study of economics.

With this fundamental characteristic in mind, the overarching feature of monetary design is the relationship between the state and the “non-state”. I’ll occasionally refer to the “non-state” as the private sector, indicating the same general understanding, allowing that “private-sector” for this purpose includes its extension into the open economy foreign sector. The detailed treatment of the foreign sector is not critical in this essay.

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