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An Unorthodox Solution to the World's Economic Problems

An Unorthodox Solution to the World's Economic Problems
Profile photo of Frank Hollenbeck

Federal_ReserveWe currently face a monumental dilemma. How do we extract ourselves from all this excessive debt without crashing the world economy? There is a solution which is totally counterintuitive: print even more money. In other words, to get out of the deep, deep hole we are in, dig even deeper.

It is called the Chicago plan. With a stroke of a pen, money would be substituted for debt, without the negative consequences of printing money. Banking would be restructured so that it never again leads to boom and bust cycles, and most debt, public and private, could be cancelled.  It’s basically a “one time” get out of jail card for the world economy.

The plan, and there are different versions, was first developed in the 1920s and 193os by the leading economists of the time. A version of this plan was actually put on Roosevelt’s desk, and was presented to Congress for implementation in 1934.

Back then, economists realized that it was the rapid expansion and contraction of credit, not driven by fundamentals of the real economy, which created most booms and busts. This is because banks can make a loan and then finance it out of thin air, through the fractional reserve banking system- something no other business can do. Of course, central banks adding unnecessary liquidity aggravated the problem and made the boom and bust cycles worse.

An essential feature of all the different Chicago plans is that it would require banks to hold 100% reserves against deposits.

Currently, banks in the U.S. normally are required to hold between 0 and 10 percent reserves against deposits. According to the Chicago plan, banks would be required to exchange their assets for enough money to bring their reserves up to 100%. It is basically an asset swap, with the government exchanging cash for almost all the banks private and public debt. This new money in the banking system just sits there since banks have a new 100% reserve requirement, so there are no inflationary consequences of all this new printing.  An IMF paper on the Chicago plan estimates that government could cancel the entire government debt held by banks and over $15 trillion of private debt!

Irvin Fisher, a Yale economist whom Milton Friedman called America’s greatest economist, said that the plan would greatly reduce the severity of business cycles, probably eliminating booms and busts. Bank runs would be impossible, making deposit insurance unnecessary, and it would greatly reduce the amount of public and private debt.

The IMF paper using state of the art economic modeling concluded that Dr. Fisher was right, and that the plan would be even more beneficial. Real GDP growth would initially surge by 10% resulting from the elimination of many distortions.

Many Austrians would normally cringe at such a plan since it implies massive government intervention and the strengthening, although temporarily, of government influence on the economy. This, however, can be viewed as one of the few legitimate roles for governments: enforcing property rights. Fractional reserve banking is fraud (see here and here) since it generates multiple claims to the same real resources or goods and services. The Chicago plan would simply be taking ill-gotten gains away from the counterfeiters.

The plan, if structured correctly, would achieve most of what Austrian economists have been proposing for many years, and would finally set the world economy on a stable path.

First, it is important to put a wall between the deposit function and the loan function. Historically, the incentive to engage in the FRB Ponzi scheme, committing fraud, is simply too great. These functions should not coexist in the same entity. We should have deposit banks and investment trusts, which should be 100% equity financed. These investment trusts or loan banks would then be like any other business and would not need any more regulation than that of the makers of potato chips.

A very interesting feature of the crypto-currency  bitcoin is the “bitcoin wallet.” To a large degree, this would eliminate the need for deposit banks. We could have a worldwide crypto-currency, call it the Dypre (first letters of major currencies), or multiple cryto-currencies linked to gold.  Banks would then finally act as true financial intermediaries instead of the fraudsters they are today. Some of the assets in the asset swap could be bank ATMs, to be converted to cryto-currency distribution points and then sold off to the private sector.

Governments should not be allowed to finance banks – a feature of the IMF plan. Investing in a loan bank or, more accurately, a 100% equity financed investment trust, should be like investing in the stock market. You know you could lose everything. However, money in a deposit bank is there, for sure, to pay your rent and electricity bills.

Second, central banks should be abolished. Every dollar that the central bank prints is a tax on cash balances: a tax which no one has voted for. Deflation should be the norm, as during much of the 19th century. A real gold standard should be seriously considered, since governments simply cannot be trusted. There is simply too much temptation to print money to fund spending, or to use the printing press to reach unattainable macroeconomic goals. This will finally stop governments from fiddling with the economy’s most important price: the interest rate.

Finally, private debt instruments should cease to exist if they are fraudulent in nature. This is a very important since past attempts to separate deposit banking from loan banking failed because banks were able to create near money-a demand deposit in a different dress (e.g., a money market mutual fund).

Many free market economist fear that such a plan would simply allow government and the private sector to ramp up borrowing all over again. The difference this time is that governments and households would have to compete with the demand for plants and equipment (investment) for a limited amount of funds coming from slow-moving savings. Higher interest rates would quickly create pressures for less borrowing.

The ideal solution would be to link a balance budget to the plan. Governments would then depend solely on direct taxation to fund spending. The government would have to explain to the taxpayer why he must forgo his flat screen television at Christmas to pay for soldiers in Afghanistan or planes over Lybia. The average citizen would finally realize there is no free lunch, and that government services require real sacrifices.

The Chicago plan failed in the 30s because the banking cartel killed it. Today the situation is different. People blame banks for the current monumental mess we are in. If academic economists can get together behind some version of this plan, as they did in the 30s, it is possible, with public support, to bring the banking cartel, obviously screaming and kicking, to the alter of 100% reserve banking.

Inaction is not an option. Today, we are between a rock and a hard place with no good choices. We are left with the increasing likelihood of severe depressions and hyperinflations eventually leading to dictatorships. If history is a guide, Napoleon and Hitler, both responsible for millions of deaths, rode to power on a wave of discontent that followed periods of excessive monetary printing. For Napoleon it was the hyperinflation of 1790-1797, and for Hitler the hyperinflation of 1921-1923. In that situation, no one really wins.

Europe is a runaway train with a certain crash in its future. European governments would be wise to discuss a rapid implementation of this plan for their economies, before extremism takes hold again, and Europe repeats its catastrophic past.

It is essential that we start a banking revolution before it is too late. The Chicago plan would restructure the banking system leaving a world for our children that is stable without the booms and busts that have created so much hardship for so many. See the following video for more information on the Chicago Plan.

  • biffula

    Was this article written by a 6th grader???

  • Elim Garak

    Changing to 100% banking (change banks to money warehouses) is the
    correct way for to future, but it can only prevent future cycles, it
    cannot stop the pain thats gonna be caused by the currently happening
    bust.

    I don’t see how the end result of this scheme is different from a default or inflating away the debt?!

    If all the outstanding future obligations (fiduciary media) based on
    deposits created by the FRB system get wiped out and turned into base
    currency (M0), in one fell swoop, that would fundamentally change
    people’s expectation and perception of future prosperity. (and thats
    what matters according to Mises)

    You go to bed one day everything seems normal, than you put this policy in place, and the next morning a hamburger gonna cost 20.000$.Thats gonna lead to societal collapse, riots, civil war, etc. (What seems inevitable anyways…)

    I think the author does not understand what the problem really is. Just forget dollars, euros, banking and all the those things for one minute. Take the whole situation and strip down the confusing terminology.

    What is the wolrd’s problem?

    Too many outstanding promises exist that are impossible to fulfill. This is due to massive multi decade long, credit inflation and malinvestment.

    The latest and most malicious scam is the subtype of derivatives where institutions can hedge aginst thier own default. This is not for mitigating market risk, but for hiding and shuffling it. (just one example: https://www.youtube.com/watch?v=ZnZnkaq8Nf8 )

    The reality is that with the existing capital structure, production and demographics, it is physically impossible that a pension held by an avarege person will have the purchasing power and provide the standard of living that he/she hopes it represents.

    With a cartoon analogy, it is like when Willy the coyote runs off a cliff and forgets to fall into the abyss. He can deny the existance of gravity for a while, but not forever.

    You can’t get around this with any kind of accounting scheme. This is a physical resource-production-labor allocation problem.

    Governments and central banks trying everything to hide this fact from the public, and also most of the public are trying to deny the existance and scope of the problem, due to its horrifying prospects.

    But some day it will be realised, and that will be a very, very ugly day. :(

  • joebhed

    First, my heartfelt congratulations to Dr. Hollenback for ‘going there’, with there being the taboo of publicly issued and administered ‘money’ ; with the operative understanding for ‘money’ here being limited to ‘the means for exchange’.
    There will be hairball objections raised based on a hundred plus years of anti-government Austrianism, but hey, what’s a little hairball-spitting among novel political bedfellows? Yeoman’s Work, Dr. H.

    If the Mises.org website went back through their ‘correspondence’ on related articles,it would find a half-dozen suggestions by this writer that we join ideals to the point of ending fractional-reserve banking (not to categorically eliminate those free-banking fractional-reservists out there). And then let’s argue about WHO should issue the money.

    But the reality is that a focus on ‘fractional-reserve’ banking at any reserve level is to evade the stronger political-economy reality ….. being …… that it is THROUGH fractional-reserve banking that a private cartel issues all of the nation’s money (c.e.), and that it is to END that practice that Fisher and the Chicago School economists aimed their public policies, with elimination of fractionally-reserved lending more of a residual benefit than the whole enchilada.

    I’ve always felt, because my Dad taught me as such, that both conservatives and progressives could, would and should,unite to end the private privilege of the banking cartel to determine the future of the nation with their flawed, pro-cyclical debt-based ‘money’. issuance, once and for all.

    Here’s what KPMG had to say on these alternative money ideas recently.
    http://internationalmoneyreform.org/blog/2016/09/kpmg-iceland-report-sovereign-money/

    Shall we?
    For the Money System Common.

  • aj54

    “….we will have world government by consent or by conquest….” pretty sure they have the conquest through destruction of global finance and economies, and capture of political machinery; the other item, consent, would require capitulation to the IMF? not so, the Chicago Plan works without world banks, which would mean that local government regulators would need to have strict oversight and enforcement. Enough of all the self-appointed global elites.

  • Himagain

    Not seeing the profit motive for the Deposit Banks. Negative interest?

    • aj54

      account fees

      • joebhed

        correct for the questioned ‘demand deposit’ bank accounts.
        OTOH, all banks will be deposit banks, and the savings/investment banks will ‘borrow’ their deposits in order to achieve lending parity, a task requiring the sharper pencil than used for ‘leveraging’.
        Now, banker equity becomes the first line of defense against moral hazard.
        Thanks.

  • Elim Garak

    I don’t see how the end result of this scheme is different from a default or inflating away the debt?!

    If all the outstanding future obligations (debt) based on deposits created by the FRB system get wiped out and turned into base currency (M0), in one fell swoop, that would fundamentally change people’s expectation and perception of future prosperity. (and thats what matters according to Mises)

    You go to bed one day everything normal, you put this policy in place, and the next morning a hamburger gonna cost 20.000$.Thats gonna lead to societal collapse, riots, civil war, etc. (it seems inevitable anyways)

    I think the author does not understand what the problem really is. Just forget dollars, euros, banking and all the those things for one minute. Take the whole situation and strip the confusing terminology.

    What is the wolrd’s problem?

    Too many promises exist that are impossible to fulfill. (This is due to massive multi decade long malinvestment.) The reality is that with this kind of capital structure, production and demographics, it is physically impossible that a pension held by an avarege person will have the purchasing power and provide the standard of living that he/she hopes it represents.

    With a cartoon analogy, it is like when Willy the coyote runs off a cliff and forgets to fall into the abyss, he can deny the existance of gravity for a while, but not for long.

    You can’t get around this with any kind of accounting scheme. This is a physical resource-production-labor problem.

    Governments and central banks trying everything to hide this fact from the public, and also most of the public are trying to deny the existance and scope of the problem, due to it’s horrifying prospects.

    But some day it will be realised, and that will be a very, very ugly day. :(

  • drpepper70

    ill pass on the one world government thanks.

  • Ironwoman05

    This avoids a glaring issue. On the other end of those debts is not just banks. It is people expecting that debt to provide them with something in the future. It’s the entire nature of the Ponzi-type currency expansion. IOW, it still results in a big bust, bankruptcies, etc.

    • aj54

      they would be made whole, and free to invest again as they choose.

      • Ironwoman05

        And just what is going to “make them whole” other than producing more diluted currency? You can’t fake your way out of a bad net worth sheet. The reality is many people and businesses are expecting value return disproportionately to what they will actually get. We have to accept that all of us have a lot less forward spending ability than we think we do and start over with pretty much nothing OR we have to live on a little less than we make for about 40 years.

        No formula, no printing, no extra special sauce rules will change that.

        Changing banking rules may help with future distortions, not fix the current imbalance.

        • aj54

          It does not merely change banking rules, it is a new monetary system. The Chicago Plan does not entail ‘more currency’, it kills the current system, but you would get 100% of whatever you have now. They do cross-cancellations of government debt. I think this may actually be ‘the plan’ for the future, as it may give 100% to the banks for their fraudulent derivatives, or they think the haircut won’t be as bad as a complete debt deflation. You have read it, haven’t you?

          • Ironwoman05

            There is no doubt we need a reset, but let’s not present it as a great solution because any reset is going to be painful.

            You can rename the debts and the assets but you can’t give people the debt to asset ratio that they think they have.

          • joebhed

            All you can really do is to make the monetary-financial-economic system workable again, simply be exchanging public equity for private debt.
            This has been a long time coming.
            Please read the KPMG study I linked above. Thanks.

Articles
Profile photo of Frank Hollenbeck

Frank Hollenbeck, PhD, teaches at the International University of Geneva.

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