The Chicago Plan Revisited: An Austrian critique

Abstract

Within the context of the economic crisis since 2007 a space for fundamental reflection on the institutional structure of the finan-cial system has been opened, allowing for the introduction of sig-nificant reform proposals in the economic discourse. The IMF economists Jaromir Benes and Michael Kumhof published a work-ing paper in August 2012, reintroducing the Chicago Plan as such a proposal.2 Following up the work of Irving Fisher (1935)3 the au-thors propose the separation of the monetary and the credit func-tions of the banking system, by requiring 100% reserve backing for deposits. This plan is designed to eliminate the possibilities for private banks to create money through fractional reserve banking and is supposed to give governments the complete control over money issuance. The central bank, upgraded as a powerful mone-tary commission, is seen as the best candidate to serve as a state’s monetary authority in the exercise of its monetary prerogative (monopoly of currency, money issuance, and seigniorage).
 The purpose of this paper is to provide an overview of the ele-ments of this reform proposal, contrast it with a recapitulatory display of the Austrian analysis and evaluate the plan based on its political desirability.
 In the first step, the original plan from 1935 by Irving Fisher is presented. Second, the newest version and the key findings of Ben-es and Kumhof are summarized. Third the Austrian critique of fractional reserve banking and central banking is laid out. In the fourth step, a response to a peculiarity of the working paper about the origin of money is offered. In conclusion a brief discussion on the likelihood of political implementation and the evaluation from the Austrian perspective close the argumentation.