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IMF considers abolishing the Federal Reserve System

Last August the IMF web site put out an article discussing the revival of the so-called “Chicago Plan,” which was proposed in the 1930’s in the wake of the Great Depression. This plan advocated the use of government currency, rather than private currency such as Federal Reserve Notes.

http://en.wikipedia.org/wiki/Chicago_plan

The Chicago Plan was a viable alternative to the Federal Reserve System, put together by economists in Chicago. Although it was discussed in 1933, hardly any of its proposals were actually passed into law with the Banking Act of 1935. With the second recession of 1937-38, the Chicago Plan was discussed further, but nothing came of it. Obviously, the private banking families who owned the Federal Reserve Bank wanted to maintain control of the nation’s monetary system.

With the recent economic crisis, the Chicago Plan is again being revisited, and the IMF is now discussing the feasibility of switching over to government-issued money. If implemented, this would essentially abolish the Fed by not renewing its 99-year contract which ends today.

This is essentially the core of the monetary conflict between East and West. The IMF article can be viewed in its entirety here:

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

Here is the Abstract, or the thesis statement of the article:

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.

In other words, if the government created its own money and issued its own currency, it could eliminate fractional banking so that all loans would be backed 100%, rather than just 10%. Further into the article, we read more about these four propositions:

First, preventing banks from creating their own funds during credit booms, and then destroying these funds during subsequent contractions, would allow for a much better control of credit cycles, which were perceived to be the major source of business cycle fluctuations.

Second, 100% reserve backing would completely eliminate bank runs.

Third, allowing the government to issue money directly at zero interest, rather than borrowing that same money from banks at interest, would lead to a reduction in the interest burden on government finances and to a dramatic reduction of (net) government debt, given that irredeemable government-issued money represents equity in the commonwealth rather than debt.

Fourth, given that money creation would no longer require the simultaneous creation of mostly private debts on bank balance sheets, the economy could see a dramatic reduction not only of government debt but also of private debt levels.

We take it as self-evident that if these claims can be verified, the Chicago Plan would indeed represent a highly desirable policy.

The Federal Reserve Bank was sold to Congress on the grounds that it would stop the boom-and-bust credit cycles, as well as bank runs. It obviously failed to live up to its claims. The Chicago Plan is presented as a much better alternative.

But even more important, it would practically eliminate the national debt, because the government would no longer have to borrow money from the Federal Reserve, but could create money itself. It would be a Treasury Note, or a National Bank Note, rather than a Federal Reserve Note. The article continues,

In this context it is critical to realize that the stock of reserves, or money, newly issued by the government is not a debt of the government. The reason is that fiat money is not redeemable, in that holders of money cannot claim repayment in something other than money.  Money is therefore properly treated as government equity rather than government debt, which is exactly how treasury coin is currently treated under U.S. accounting conventions (Federal Accounting Standards Advisory Board (2012)).

I also find it interesting (astounding, actually) that this article mentions the “shadow banking system,” which is the banking system that contains the off-books, non-taxed assets of the truly wealthy:

The third advantage of the Chicago Plan is a dramatic reduction of (net) government debt. The overall outstanding liabilities of today’s U.S. financial system, including the shadow banking system, are far larger than currently outstanding U.S. Treasury liabilities.

It is because of this “shadow banking system” that the really wealthy people do not mind raising taxes on the wealthy, as President Obama is advocating. The reason is simple. The vast majority of their money is in the shadow banking system and is therefore not visible as taxable income. The only ones who would have to pay higher taxes are the medium-wealthy people who are not part of the shadow banking system. But they do not have much political power. The article continues,

We find strong support for all four of Fisher’s claims, with the potential for much smoother business cycles, no possibility of bank runs, a large reduction of debt levels across the economy, and a replacement of that debt by debt-free government-issued money.

It appears that the IMF is taking this Chicago Plan seriously, now that the Federal Reserve System has proven to be a failure. In my view, this could only happen because the Kings of the East have gained influence and control over the IMF, replacing the previous Babylonian owners.

For decades, men have advocated government-issued debt-free money, but they were considered to be quirks and quacks who did not have any serious knowledge of economics and financial matters. But now it is apparent that they were right all along, and the IMF is preparing to acknowledge this and make the change itself.

Babylon is falling.