Guest Post: Why The Chicago Plan Is Flawed Reasoning And Would Fail

Tyler Durden's picture

Submitted by Martin Sibileau from A View From The Trenches

Why The Chicago Plan Is Flawed Reasoning And Would Fail

On October 21st, 2012, Ambrose Evans-Pritchard wrote a note titled “IMF’s epic plan to conjure away debt and dethrone bankers”, on UK’s The Telegraph. The article presented the International Monetary Fund’s working paper 12/202, also titled “The Chicago Plan revisited“. I will begin the discussion on this working paper with two disclosures: a) my personal portfolio would profit immensely if the Chicago Plan, as presented by the IMF’s working paper 12/202, was effectively carried out in the US. The reason I write today, however, is that to me, it is more important to ensure that my children live and grow in a free and prosperous world, and b) I have not read the so called Chicago Plan, as originally proposed by H. Simmons and supported by I. Fisher. My comments are on what the IMF working paper tells us that the Chicago Plan proposed, without making any claim on the original plan.

The Plan

According to the authors of the IMF working paper 12/202, Jaromir Benes & Michael Kumhof (from now on, the authors), the key feature of the plan was the separation of the monetary and credit functions of the banking system. This would be achieved by the requirement that deposits be 100% backed by government-issued money. This, according to the authors would be desirable (“….we take it as self-evident that if these claims can be verified, the Chicago Plan would indeed represent a highly desirable policy…” (p. 4)

Using charts republished from Laura Davidson’s “The causes of price inflation and deflation” (2011), what the authors suggest is a transition from here:

To here:

This charts are different from the ones presented by the authors: We include the money stock in our discussion and do not show Treasuries as an asset of the banks. They can be included as loans either from time deposits or from demand deposits. Below, I present the consolidated balance sheets represented in the first chart. On the asset side of the consolidated balance sheet of the Banks, we now add Treasuries, to be in line with the argument of the authors:

The authors propose that the following steps (shown below) to achieve the transition, be taken simultaneously, in one single act.

In stage 1, “…banks have to borrow from the Treasury to procure the reserves necessary to fully back deposits…” (p. 7). I will call this Treasury credit, “Govt credit”. As you can see in the chart above, the “Govt credit” is created ex-nihilo (an asset of the Government) and is coercively used to “purchase” the Loans made from Demand deposits and Treasuries. These latter two were an asset of the banks.

In stage 2, the banks simply have a change in the composition of their assets: Govt credit is credited, Loans made from Demand deposits and Treasuries are debited. The principal of all Treasury debt owned by the private sector and loans from demand deposits is cancelled against Govt credit. “…For government debt, the cancellation is direct, while for private debt the government transfers credit balances (Govt credit) to restricted private accounts that can only be used for the purpose of repaying outstanding bank loans…”(p. 7).

In stage 3, :… Banks pay out part of their equity to keep their net worth in line with now much reduced official capital adequacy requirements…” (p. 7 )My note: Bankers off course pay themselves with reserves, rather than Govt credit!

At the end of the experiment, this is how the consolidated balance sheets would look like:

Unlike me, the authors omitted two magnitudes: cash outside banks (i.e. currency) and bank reserves held at the central bank. In other words, the authors omitted to include what is called “money stock” (see our charts above). Why? “…because it is privately created deposit money that plays the central role in the current US monetary system, while government-issued money plays a quantitatively and conceptually negligible role…” (p. 10).

The authors find that “…the government is left with a much lower, in fact, negative, net debt burden. It gains a large net equity position due to money issuance, despite the fact that it spends a large share of the one-off seigniorage gains from money issuance on the buy-back of private debts…”(p. 8 )

The authors will point to the Figures 1 & 2 on pages 64 and 65, to question my position. They will say that “Govt credit”, an asset of the banks, should be shown as “reserves” as they did. Indeed, not only do they show it so, but also show the banks still liable to the government. This is because they really believe that by coercing banks to borrow from the government and apply that borrowing to assets with less liquidity than the money stock (i.e. assets “…that can only be used for the purpose of repaying outstanding bank loans…”) they will have created money, pari passu with the money stock (i.e. cash outside banks and bank reserves) and the public will look the other way and accept it. But that’s their assumption. It’s flawed. It’s wishful thinking. The fact is that the money stock they omit exists and the public knows it!

Observations on the Plan

Let’s begin calling things by their name: If a government seizes loans overnight, which belongs to the banks, in exchange of unilaterally imposed “credit”, we are in the face of a confiscation! Plain and simple confiscation! Credit can never be declared unilaterally! Credit is willingly an agreement “inter pars”. 

If the plan was implemented as above, two immediate results would yield:

The first result would be that depositors, bondholders and shareholders would find that they now own an asset that they cannot value, which the government has coercively priced against their new “government credit”. The natural reaction would be to run for the exits, selling the “Govt credit” below par, against the money stock (i.e. cash outside banks and bank reserves), which of course, the authors have carefully omitted because it’s “negligible”!

The second result is that the “government credit”, regardless of how the authors want to call it, will NEVER be treated as money, as they wish, generating a negative debt burden. Why? Because the authors have told us that this credit “…can only be used for the purpose of repaying outstanding bank loans…”!!!!

The authors seem to have forgotten a key rule from economics: Whenever one asset (i.e. same risk) has two different prices, there’s arbitrage, or its derivative version: whenever two assets (i.e. different risk) have the same price, there is arbitrage. Gresham’s law is an example of this derivative version, when the affected assets are legal tender. Indeed, if the government declares at par both the legal tender (i.e. money stock or cash outside banks plus bank reserves) and a new government credit that can only be used for the purpose of repaying outstanding bank loans, individuals will simply dump the latter at a discount, to obtain the former. THE BANK RUN WILL OCCUR!


A historical example: The Bonex Plan of 1989

Benes and Kumhoff share Alexander Del Mar’s observation that “…as a general rule, political economists do not take the trouble to study the history of money…” (p. 12). Unfortunately, I think Benes and Kumhoff themselves fell prey to the same mistake, because the seizure of assets from the banks, although in exchange of government debt –not credit- did actually occur in 1989 in Argentina, under the so called Bonex Plan (Bonex = Bonos externos).

This confiscation was even friendlier than the proposed by the authors, because the government continued to recognize its liabilities (i.e. Bonex bonds) and also paid a coupon on them. The Bonex/89 were fully repaid in 1999.

Below, I offer you the evidence of this example: Minister of Finance, Antonio Ernán Gonzalez himself, declaring the confiscation (minute 2:22 of the video):

English transcript: “…For this reason, and understanding that the best way to preserve not just the savings that stem from the work and savings of the people but also the totally legitimate property rights of the holders of guaranteed investment certificates, we have decided their mandatory repayment in Bonex series 1989…

I think the authors are correct in stating that the money stock, relatively speaking, is negligible in the system. Therefore, when the Bonex Plan was announced, the bank run that ensued had depositors claim their government bonds, sell them at a discount to obtain cash outside banks and, with that cash, buy US dollars. The demand for the “negligible” cash outside banks and the flight from anything related to the local currency were so strong, that by November 1990, the government was printing 100,000 and 500,000 Australes bills, but because the printing presses could not cope up with the inflation, the government had to stamp old pesos bills, to supply the market with Australes bills. Below is the picture of a 10 Australes bill, which had to be stamped on an old $10,000 pesos bill:


The Bonex Plan was announced in December of 1989. At that time, 1,950 Australes were needed to purchase 1 USD. A year later, by the time the government had to unwind the central bank and resort to a currency board fully backing the Australes with US dollars, 10,000 Australes were needed to buy 1 US dollar.

More recent examples

Another example of the reaction of market participants when the assets of the banks are affected is that of the Euro zone banking system in the periphery. In anticipation of the re-denomination in local currency of the bank’s assets, depositors have fled to other jurisdictions within the Euro zone (i.e. to the core of the Euro zone) and not only has the money stock contracted in those countries, forcing the ECB to intervene, but also, credit and production have decreased meaningfully. 

On the proposed advantages of the Chicago Plan

Even with substantial historical evidence available, the authors still remind us that Irving Fisher thought this transfer of wealth from the private sector to the public sector had four advantages:

The first advantage is that the Plan supposedly allows a better control of the volatility in bank credit and avoids business cycles. The quantity of money (i.e. Reserves + currency) and the quantity of credit (i.e. Time deposits) would be independent of each other.

This is completely mistaken, because there will not be any credit available, should the Plan be implemented. Once the confiscation is in place, why would the owners of time deposits renew them at maturity? If, for any reason, they need to redeem their interest-bearing deposits, they may be required to leave the funds in chequing accounts that could only be used to repay private debt outstanding with the government. Depositors would only renew their deposits at maturity if the interest rate payable on the deposits compensates for the potential discount they may suffer, if they want to liquidate the assets and obtain currency. The recent developments in the periphery of the Euro zone and the Target 2 imbalances vastly illustrate this point.

Furthermore, in a context of high inflation, and we cannot reject the possibility of seeing this Plan proposed in such context, the central bank would even lose control of the quantity of money, because in order to keep the system liquid (in the face of the arbitrage between money stock and Govt credit as well as the non-renewal of interest-bearing deposits), they would either have to buy Treasuries (i.e. quantitative easing) or pay a subsidy on interest-bearing deposits, for the banking system to afford attracting deposits. Argentina faced this dilemma in 1976-77 and chose to subsidize interest-bearing deposits (ref. Bill No. 21,572, article 3). The quasi fiscal deficit this situation triggered set the ground for the hyperinflation of 1985. Needless to add, that in this context, volatility spikes, opposite to what the authors suggest.

The second advantage the authors mention is “…that having fully reserve-backed bank deposits would completely eliminate bank runs, thereby increasing financial stability, and allowing banks to concentrate on their core lending function…”(p. 5)

It is correct to state that with fully reserved-backed bank deposits, bank runs are eliminated. But the Plan does not propose to do this. The Plan does not propose to back deposits with reserves. The Plan proposes to back deposits with “Govt credit”, and force the banks and the public to believe that this Govt credit can be treated just like regular reserves; like a component of the money stock before the Plan was implemented. This is incorrect. The authors clearly sustain that these new reserves “…can only be used for the purpose of repaying outstanding bank loans…” (p. 7). Therefore, financial stability is anything but guaranteed. In fact, the opposite will follow. As the capitalization of banks begins to crumble, because both the quality of the reserves and the availability of long-term funding is questioned, banks will be less able to concentrate on lending, becoming more dependent of the government. This is a story all too familiar and I think there is no need to add more examples.

The third advantage 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. Because (…) banks have to borrow reserves from the treasury to fully back these large liabilities, the government acquires a very large asset vis-à-vis banks, and government debt net of this asset becomes highly negative….” (p. 6)

I think the paragraph above is the confession, of two points: (a) that the whole plan is a confiscation in disguise. By reduction to the absurd, it would seem that the bigger the shadow banking system, the better results one gets, from it; and (b) that the authors seriously ignore how the shadow banking system in the USD zone works.

The first point is self-explanatory. With regards to the second, the authors should know that to include the shadow banking system of the USD zone is totally unfeasible. With the USD as the world’s reserve currency, the players in the inter-bank unsecured funding market, the money markets and repo markets are global!

Did the authors really think that the US government can innocuously take possession of inter-bank loans made to foreign institutions, commercial paper or Yankee bonds (for instance, USD denominated bonds issued by European corporations)? The consequences of such idiocy would be unimaginable! Even worse…Did the authors think that such a move could be carried out overnight, surprising everyone? That’s naiveness of the first order! The mere suspicion that such a possibility is in the cards would trigger a sell off worse than a Lehman moment and the Fed would be forced to confirm currency (i.e. USD) swaps with every central bank in the world. The US would lose their privilege as the issuer of the world’s reserve currency and the US Treasuries held as reserves by central banks would be written off by the market, unleashing horrible movements in the (cross)foreign exchange markets, as the market reassesses the relative value of fiat currencies against gold. The end result would be a failed move by the government and higher interest rates to pay. In other words, the burden of the debt would increase.

In countries like Argentina, where by the time such confiscation was implemented, the quasi fiscal deficit incurred by the central bank to fix this mess ended up constituting 80% of the consolidated deficit of the government. And it is quasi fiscal deficits that trigger hyperinflations, not primary fiscal deficits.

“…The fourth advantage of the Chicago Plan is the potential for a dramatic reduction of private debts. As mentioned above, full reserve backing by itself would generate a highly negative net government debt position. Instead of leaving this in place and becoming a large net lender to the private sector, the government has the option of spending part of the windfall by buying back large amounts of private debt from banks against the cancellation of treasury credit…” (p. 6)

I think that in light of my comments on the three previously suggested advantages, it is clear now that a net government debt position would be impossible to achieve.




On the format of the message (i.e. the IMF working paper)

 After reading the IMF working paper 12/202 , I observe two issues that I think are bad form for the discussion. The first one is the careless references to sources made by the authors, lacking actual quotes, on critical issues. But that, I acknowledge, is simple personal taste. Rather than reading sentences like: “…we find supportive statements from bankers arguing that the conversion to 100% reserve backing would be a simple matter. Friedman (1960) expresses the same view…” on page 18, I think the authors should present the exact quote proving such critical statements by Milton Friedman, in this case.

The second observation on form is the authors’ careless use of a general equilibrium model, the assumption of steady states and the use of continuous functions to analyze the impact of a confiscation, which by nature, is traumatic. Continuous functions are for analyzing small changes and this is no small change at all! To think in terms of equilibrium in a system based on a Ponzi scheme, where banks are levered, is also completely naïve.

On the authors’ understanding of money

I was surprised by the authors’ lack of understanding of financial markets. Unfortunately, their ignorance on this topic is surpassed by two serious confusions, namely, on money vs. credit and capital and on money itself.

The authors continuously confuse money with credit. Here is an example: “…The ?rst form of usury is the private appropriation of the convenience yield of a society’s money. Private money has to be borrowed into existence at a positive interest rate, while the holders of that money, due to the non-pecuniary bene?ts of its liquidity, are content to receive no or very low interest…”(p. 13). And even if this was true….why would the government monopolize the appropriation of the convenience yield, rather than allow free competition to bid for it and in the process, lower it?

Another confusing statement:“…Therefore, while part of the interest di?erence between lending rates and rates on money is due to a lending risk premium, another large part is due to the bene?ts of the liquidity services of money…“ (p. 13). I confess, this is the first time someone tells me that there is an interest rate attached to money, the medium of indirect exchange. It is clear to me that the authors cannot distinguish capital from money.

More evidence that the authors confuse credit with money “…This di?erence is privately appropriated by the small group that owns the privilege to privately create money. This is a privilege that, due to its enormous bene?ts, is often originally acquired as a result of intense rent-seeking behavior. Zarlenga (2002) documents this for multiple historical episodes…” (p. 13).

“…The second form of usury is the ability of private creators of money to manipulate the money supply to their bene?t, by creating an abundance of credit and thus money at times of economic expansion and thus high goods prices, followed by a contraction of credit and thus money at times of economic contraction and thus low goods prices…” One could easily challenge the authors, by reduction to the absurd, with this question: If private creators of money indeed have this ability to manipulate the money supply and credit…Why do we need central banks? Why do we need lenders of last resort?

But what is the origin of this confusion? The authors don’t even understand what money is. On page 10, the authors tell us that: “…It should be mentioned that both private and government-issued monies are fiat monies, because the acceptability of bank deposits for commercial and official transactions has had to first be decreed by law. As we will argue in section II, virtually all monies throughout history, including precious metals, have derived most or all of their value from government fiat rather than from their intrinsic value…”

This claim is not new. Ludwig Von Mises knew about this twisted interpretation of money and properly devoted it a complete chapter (Chapter three: “The Role of Courts and Judges”) in his book  “On Money and Inflation: A synthesis of several lectures”. It is too long for me to include here, but I strongly recommend going through this impressive chapter. Another question to the authors on this ridiculous statement should clarify my point: If money always derived its value from government fiat, rather than their intrinsic value…why did all coin (i.e. metallic) debasements in the history of mankind always end in inflationary processes?

As I finish these comments, I remember Von Mises’ claim that the history of money is identical to the history of government attempts to destroy money…


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knukles's picture

More fucking meddling, abrogation of private contracts and centralization of control by the government.

Hows about a simple gold standard?

(oh excuse me, I musta missed under which august organization said plan was promulgated....)

true brain's picture

Your children will never grow up in a free and prosperous world for two simple reasons

1)there are 7 billlons people and rising.

2)most of them are idiots.

end of discussion.

Vampyroteuthis infernalis's picture

tb, those 7 billion are not relevant. If they never grow up in a free world, it is because of their idiot leaders and nothing to do with rest of the world.

true brain's picture

Leaders are not idiotic. They may be evil, egoistical, greedy, backstabbing, psychotic bastards but they are not idiotic. Idiotc people elect these leaders. Just look at california and the US.

macholatte's picture

If they never grow up in a free world, it is because of their idiot leaders and nothing to do with rest of the world.


Thanks!  For a minute there I thought that humans were able to influence their own destiny.


Egyptian Islamists rally for Shariah law

falak pema's picture

TB your handle is the give away.

Your conclusion points towards the real sense of your avatar : You are for dictatorship of the true brain breed.

Well, you have the world you dream about today. The .01% own all the riches... 

Neo feudal meritocracy. Watch out for lamposts and angry mobs. They may have no intelligence but they do have memory.

true brain's picture

Most people's true brain, mine included, is the size of a small pea inside a large skull, surrounded by empty space.

falak pema's picture

yes but it generates pictures of reality called ideas and propogates them into actions. Your conclusion is your idea of human finality. 

Its the antithesis of human civilization. Just read history. 

Only normal that people fight for minimal rights and no return to serfdom. That sort of intelligence everybody has, its called historical experience tradition and sense of surival. Even the worm turns.

vast-dom's picture

good article. a solution to most of our issues would be much simpler than a Chicago Plan: unwind The Fed, allow interest rates to become true signals for market (ie go up to where they would be naturally) and allow the markets to price themselves (ie crash if they must) and have the SEC pause on the porn and regulate HFT's and naked short selling and other illegal abberations out. How fucking simple is that?

ebworthen's picture

"This would be achieved by the requirement that deposits be 100% backed by government-issued money."


That's all you need to know; a banker plan to maintain the hegemony.

Allow banks and corporations to fail the way we do individuals and families = problem solved.

But, of course, that makes too much sense and would obviate banker bonuses and fiat currencies.

Peter Pan's picture

The word Chicago in front of the word Plan is enough to scare me off.

Atomizer's picture

George Orwell - A Final Warning


Enjoy your future, you asked for it. Everything you dreamed for will come in the form of an illusion. Good luck & God bless.

falak pema's picture

George Orwell like his mentor Aldous Huxley, were people with anti-totalitarian regime beliefs  as their literature proved. They were also pacifists.

Now totalitarianism is not just central jacobin government. It is also despotic neo-feudal oligarchy. 

Its the latter which has won today in first world and pushed the global construct into this impossible financial conundrum.

As in the past, under FDR, the solution will have to come from strong democratically elected government action. The people have to get involved in the healing process. By voting and by learning, becoming more aware of the real issues. 

Its that or more oligarchy totalitarian concentration like exists in China for "democratic" first world; now a runaway train.

Life is a question of real choices in terms of concrete situations. Its not a game of idealistic, convoluted constructs that only exist in Any Randian type literature.

Primacy of fact; our historical thread that defines and constrains human effort. We have to chose between the lesser of evils as always. 

JR's picture

And write more letters to the editor!

And come up with more appeals to women and Hispanics!

"God isn't compatible with machinery and scientific medicine and universal happiness.  You must make your choice.  Our civilization has chosen machinery and medicine and happiness."

--Aldous Huxley

Happy Ending! ... with your "machinery" and your "happiness"!

Atomizer's picture

Well said, bravo!


Despotism has cannibalized this great country.  In less than three months, hardcore mouth breathers will figure out the gravy train will come to a sudden end. Without us producers, no money. Without money, they starve. What a fucking shock that'll be.. heehehehee

Totentänzerlied's picture

"As in the past, under FDR, the solution will have to come from strong democratically elected government action"

Oh my sweet lord, are you really that stupid!

"We have to chose between the lesser of evils as always."

Yes, moral cowards like yourself have been saying that forever, the results speak for themselves.

falak pema's picture

and so you want to rewrite history?

Moral cowardice is being a fairy that lives with Alice in Wonderland. FDR faced reality of the depression....Cuckoo, can you hear me from the other side of the mirror? 

Its easy to talk moral bravery sitting in a rocking chair. And the great generation of FDR built this world, remember?

What results are you talking about? From FDR to JFK the world was paying more taxes, building a welfare state, not involving in hubristic mayhem like Nam, or silly capitalism knee jerks like BW and then GL-St revokes etc.

The cowards are those who thought Rambo and Reagan had solved the world's problems, the easy way.


JR's picture

We have suffered your ‘advantages” that FDR gave us - welfare and warfare - including WWII, and we have tasted the “advantages” that you have given us, culminating in Obama.  

This once proud, prosperous and honest country we loved is now collapsing in the hands of a Leviathan, wealth-redistributing government, loved and cherished by the mob that is extinguishing freedom, liberty and justice every day the sun comes up.

I lost; you won. So why don’t you leave us alone and spend your time enjoying your home country, France, while cheering Netanyahu onward.

falak pema's picture

inversion of history at it best; hopeless.

FDR saved the USA and then the world, he didn't start WW2, despots did. Begin with reality, not with illusions in your head.

Whats collapsing today is the illusion of wealth, created by neo-con "free enterprise" GOP governance. 

Netty is an invention of US neo-con hegemony around oil.

I'd love to leave you alone, but it seems the US won't leave the world alone. I assume you r a US citizen. 

tony bonn's picture

the unmitigated disaster of these plans is the arrogant assumed primacy of government in the establishment of ought to be the sole province of the people who transact business....but since the government is perhaps the largest economic actor, many would defend its right to unilaterally impose legal tender and other oppressive schemes on the people with its criminal fiat, debt based money.

the government would do well to simply establish weights and measures and to adhere to the constitutional law that gold and silver serve as public money, but allow private persons to trade in whatever form of money to which they agree. and to support the lower classes, copper and other trade instruments may be permitted. nevertheless, the gold standard would be gold of course.

however, we live under a coercive regime which controls the money to the advantage of its controllers.

disabledvet's picture

GREAT post. For those wanted to know about so called "equilibrium" here you go: the fact is you DON'T want to know about "equilibrium" because it doesn't exist...and those who "go into those weeds" never come out...that's even WITH a gold standard i might add. There is NO equilibrium in prices...maybe PRICING...but not prices. Those are set by GOD. The "smart play" for Republicans is to do nothing since "there is nothing to do" GOOD that can result from doing in other words. I am not arguing of "doing nothing" with ease...for i have made a multitude of arguments for many things to be done "in the interim." not surprisingly nothing...was ACCOMPLISHED. I would argue much will be understood "come the New Year." Once the clarity of...say, "where policy is headed vis a vis Libya and Syria" with General Petraeus now "resigned to the fact of it all." This is truly a Rumsfeldian "unknown unknown"...but we will know unlike so many of the other "unknown unknowns"...not least because this is an OFFENSIVE operation. That strikes me as expensive. Event Horizon....dead ahead folks:
hmmm. "Quantam Gravity." there's an interesting idea. And to think physcists poo-pooh gravity as "weak."

toady's picture

Exactly. Do nothing. Drive right over the cliff. Cut the spending per the sequester. Expire the tax cuts on 1/1. Cut spending, raise taxes. Let the chips fall where they may.

Easy to say for me, I have no skin in the game.

Coke and Hookers's picture

Good post but it mostly focuses on the Plan itself, not the 'why'. Maybe I'm wrong but this plan sounds a bit like an attempt to purge 'the ultimate risk' from the system on behalf of the banking mob. At this point in time, the Fed/Wall Street mafia has only one fear: That the situation will spiral out of control and the entire system will crash with heads rolling on Wall Street sidewalks. So far, the mafia has been able to secure sustenance from the taxpayer through their bought and paid for political puppets but what happens if the system loses control and the chips start falling in undesirable places? The Chicago plan could be seen as an attempt to secure the banks against that kind of risk by effectively merging them with the State. Am I being too much of a conspiracy theorist here?

JR's picture

“…what is the origin of this confusion? The authors don’t even understand what money is” – Martin Sibileau

Sibileau’s scholarly treatise successfully debunks this monetary confusion, i.e., the deliberate use of monetary doublespeak to deceive, confuse and lull the sheeple back to sleep while looting their pockets continues.

The Fed, the IMF, and the World Bank, are one.

The thirst for power did not stop at the border by the international bankers. It was always to be the world. This entire power scheme, established in 1913 with the Fed, was extended by the IMF in 1944 to envelop the rest of the world; how else to move toward world government?

The IMF/Fed-extension was designed at the ’44 Bretton Woods (NH) Conference primarily by British Fabian Socialist John Maynard Keynes and card-carrying Communist, Assistant Secretary of the U.S. Treasury Harry Dexter White.

Globalization is all about money manipulation, getting the nations addicted and dependent on debt and fiat money and then managing them for the benefit of the looters.

Fabian Socialist, Lord Bertrand Russell:
"Education should aim at destroying free will so that after pupils are thus schooled they will be incapable throughout the rest of their lives of thinking or acting otherwise than as their school masters would have wished ...

The social psychologist of the future will have a number of classes of school children on whom they will try different methods of producing an unshakable conviction that snow is black. When the technique has been perfected, every government that has been in charge of education for more than one generation will be able to control its subjects securely without the need of armies or policemen." ----- Russell quoting Johann Gottlieb Fichte, the head of philosophy & psychology who influenced Hegel and others – Prussian University in Berlin, 1810 – in his (Russell’s) book "The Impact of Science on Society" (New York: Simon & Schuster, 1951 and 1953).

As Ronald Reagon told us: "Freedom is never more than one generation away from extinction."

richard in norway's picture

keynes was not a socialist, he was an english liberal. which is not the same as what you americans know as liberals

JR's picture

Keynesianism, like Marxism, eats the seed corn.

Keynes was a Fabian Socialist, a collectivist, an internationalist in the business of molding public opinion in support of globalism and internationalism, away from nationalism—away from the principles that produced the American miracle. In itself, that tells us the direction of the road down which the Pied Pipers of globalism are leading us.

The three most prominent leaders in the early days of Fabian Socialism were Sidney and Beatrice Webb and George Bernard Shaw. A stained-glass window in the Beatrice Webb House in Surrey, England is especially enlightening”

The mural depicts Shaw and Webb striking the earth with hammers. Across the bottom the masses kneel in worship of a stack of books advocating the theories of socialism.  Thumbing his nose at the docile masses is H.G. Wells (who after quitting the Fabians denounced them as ‘the new Machiavellians’). The most revealing component, however, is the Fabian crest which appears between Shaw and Webb is a wolf in sheep’s clothing.

THE DORK OF CORK's picture

Maybe its time to divorce bank credit and goverment taxable fiat.


Banks creating credit in the goverments unit of account is a no  no in my opinion.................


1. The King issues interest free fiat for public works projects etc  (the commons)  .............its has value because you must pay tax in that unit of account

 2. The banks create credit for whatever scheme they have planned but you don't pay tax in their banking unit of account , you pay back their debt if you engage in a contract with them or else you lose the asset


This system would have worked in Ireland as the banks were acting as free 19th century like banks anyway but using the goverments unit of account for their dubious credit operations.

Anglo or AIB deposits & assets would have been greatly devalued making it easy for people to pay back their unproductive debt so long as the goverment did not also decrease its fiat supply.


Goverments and banks must divorce themselves from each other.


Winston Churchill's picture


Don't think they're married.

More a owner/slave relationship now.The banks have the politicos by the

short and curlies.everywhere.Too bad they weren't killed off in 08, when we

had the chance.

falak pema's picture

oh the catholic kings divorce and the jews can stay in Grenada! and not move to Wall street, via Constantinople and Venise!

wow, history rewritten.

THE DORK OF CORK's picture




Whatever do you mean...............................


This divine right of the King has been replaced by the banks divine right to speak gobbledygook to the masses......the entire 1648 thingy has turned in on itself.

Its a absurdity


In Ireland the new banking Kings persuaded the executive that the banks assets were worth what they said on the books and the debt on these dead assets must be paid back.

But these asset prices were a mere artifact of the credit creation process and nothing more  - their previous value was a result of external productive capacity elsewhere that has dived as net capital was extracted to make these absurd house assets.

These "assets" should have been given direct to the mortgage holders with no questions asked and the depositers claims on these now dead bank assets should have become a claim on the countries remaining rump productive capacity.


The chief exec. Bank of Ireland (not the Irish CB) was recently grilled in a Parliamentary Committee.

He repeated that it was all about the CASH FLOW of the customers and not the value of the present assets and he was right in the present context of banking units of account mixed up with goverments units of money account.


The banks are farming the Goverments unit of account  , - he effectively admitted that the assets were of no consequence - they are a mere conduit for banking operations.


The credit banks serve no useful purpose in a energy / credit starved world.


Riche B. is correct within this current monetary framework

"this is not a pawnbroking business"


They are messing up the FIAT money supply to preserve their credit Kingdoms.


If I had a choice I would now choose a real King over these fiefdoms hiding behind these false republics.

R_J's picture

MY Opinion: GREAT piece! -and id like to mention how quickly Mr Sibileau debunked the "Sneaky Attempt" by the Internatinal Troika Drug laundering corp...ehm...solly solly and oops, "The IMF´s" little scam to look like they are trying to fix anything...  -I, Me and Myself has followed the articles on this topic since it broke, but hey...Its a lot to take in, and some-times the consentration on the a bit much...coz lotsa other shite is going




WhiteNight123129's picture

The Bank of England came out with a plan to separate the Bank of Issues function from the deposit bank back in 1844. Utter disaster. Thomas Tooke was spot on, noone listens to him (maybe except Ray Dalio).


WhiteNight123129's picture

Guys great post, really great post, instead of ranting you are technical and argumented, Zero Hedge at its best. This plan from IMF is to confiscate bank loans against newly printed assignat with different rights than monetary base dollars. Fucked up. THIS WOULD BE DE FACTO INTRODUCTION OF A NEW CURRENCY, SINCE TEH OTHER ONE WOULD GO GRESHAM. IMF IS PLANNING A NEW CURRENCY IN THE US!!!!





tradewithdave's picture

Two currencies.  One for the double coincidence of wants that will have zero fractional reserve and will be high velocity money.  Second currency will be the "wealth" half of the divorced currency with a fractional reserve of gold and will be low velocity, near impossible to withdraw  money with severe penalties, etc. 

To quote the below link:

"Well, if Dave’s latest conjecture is correct, the velocity of the convenience half (double coincindence of needs portion) of the divorced currency will no longer be an unknown because in a triple-entry accounting system based entirely on electronic money (i.e. Bitcoin or emergency debit cards or modern mortgage jubilees with Timmah’s signature on them) not only have you resolved the double-spend issue but you have created the first global measurement for velocity in the third column of the triple-entry accounting system also known as momentum accounting."


Irving Fischer could not measure velocity... now we can.


Dozens of articles on the divorced currency system as proposed by Mervyn King BOE:


Dave Harrison


Itinerant's picture

Everything in the article is simply a repetition of the idea that credit follows cash as an intrinsically valuable intermediate commodity which alleviates the need for barter. History does not bear this out. Credit is ubiquitous, cash is an instrument of government decree and does not bear any clear relationship to its intrinsic worth. Barter only pops up intermittenly where the monetary system breaks down. The article does not seem to appreciate what it means that money has to be borrowed into existence and that this affords a government decreed exorbitant private privelege. Getting rid of the conjuring trick known as fractional reserve banking is not confiscation of assets -- banks could try and get to 100% reserves without "government credit" -- best of luck to them. Confiscation  on the contrary is the result of the factional-reserve credit-money conjuring cabal.

The whole argument is restating the misunderstanding that representative money must be backed by something. This is the confusion that leads to the idea that we are out of money and must asfyxiate production (manufacturing and services) to keep from running out altogether. Why do you think people in Greek villages have started up co-op type exchanges and issuing "illegal" municipal money? It's because running out of money is no reason to stop everything and turn everything over to the money conjurors who claim they now own everything.

Confundido's picture

Nobody says that money has to be backed by something...Where in the article do you find it?

Nobody is in favour of below 100% reserve backing. Sibileau makes it clear that the authors are correct in this sense. But what the authors of the IMF pretend to sell the public is that government credit that is not as liquid as the money stock -because it can only be used to repay loans- can be sold as money. 


History is certainly NOT on your side, with your claim on money requiring the government decree. You HAVE to explain us, if you think you are right, why the debasement of coins led to inflation. If you explain that, then I will take you seriously.

Itinerant's picture


Nobody says that the money has to be backed by something

The article talks about Australes backed by US$, and the word backing occurs about 15x. The whole article hinges on whether the government credit is on par with the omitted money stocks, the first not truly being reserves like the second which actually circulate (and are true reserves), even though this circulating stock is negligible and you can carry on economically for weeks without touching any of it, and current fictional reserve balances outstanding at the Fed dwarf this money stock. It comes down to whether that govt credit/reserves is 'backed by' money stocks, i.e., can you redeem your govt credit for money stock.

Nobody is in favour of below 100% reserve backing.

Of course people are in favour of it, otherwise it wouldn't be the current system

History is certainly NOT on your side

All coins bear the images of kings and queens who issued them and decreed people pay with them (that was Croessus secret). There are whole periods where money made of iron exchanged hands (for far more than their iron content). Coins will only circulate if their value is higher than the metal, otherwise the metal will be confiscated. We trade for green pieces of paper. People rarely traded for gold/silver (caravans and the like). They even used peices of clay and papyrus representing amounts of barley. And of course fractional reserve circulation (legalized counterfeiting) could lead to collapse. Read Innis or Del Mar or authors cited in the working paper. Debasement is not a function of the material the money is made of (backing) but the credibility of who issues and controls it.


spooz's picture

Okay, I'm with Evans-Prichard in that I need to think about this one some more. I have often thought we would be better off cutting the private banking industry out of the money creation business, but figured there is no way the banksters would allow it. 

Since your argument against it hasn't convinced me, I will read the IMF paper and be looking at what others have to say, including the 1259 comments to E-P's critique in the Telegraph. Oddly enough, Naked Capitalism, one place I look for economic analysis, ignored this.


steve from virginia's picture




Mr Sibeleau's article contradicts itself: instead of depositors lending (by way of their banks) to the private sector (bank assets from direct deposits), the depositors are lending to the Treasury (forced lending to the government). Bad enough-red flag! However, Sibeleau says this:


They will say that “Govt credit”, an asset of the banks, should be shown as “reserves” as they did. Indeed, not only do they show it so, but also show the banks still liable to the government. This is because they really believe that by coercing banks to borrow from the government and apply that borrowing to assets with less liquidity than the money stock (i.e. assets “…that can only be used for the purpose of repaying outstanding bank loans…”) they will have created money, pari passu with the money stock ...


Huh? Either borrower or lender be, which one is it? When the Treasury issues (think Greenbacks) it issues ... it doesn't borrow. It doesn't need to. 


The central bank is 'lending illiquid reserves' right NOW that guarantee deposits currently. The Fed's latest QE is an implicit blanket guarantee of ALL (time and demand) deposits. Why, Bennie? Are you worried about something I should know about?


BTW: there is no dollar-bank run because there is no place to 'run' to (unlike Europe). Arbitrage does not exist (I DO like seeing inflation/arb arguments by others, BTW!) There is no inflation risk: any funds created by the Treasury would be canceled within the economy by deleveraging: Sibeleau misses that.


Here is the real point of the Benes-Kumhof plan which is also missed by Sibeleau:


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 (which is an awkward way to describe 'Greenbacks' or demand notes). 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. This is standard Modern Monetary Theory (Galbraith).


Tragically, Treasury fiat won't be redeemable for gold or silver! Fiat IS applicable against outstanding debt which must otherwise be retired with circulating money ... something that is not mentioned by Sibeleau (or the banks which use debt as a scheme to vacuum the world of currency regardless of cost to society).


The proposition is an implementation scheme, not the main argument which is for government currency issue - rather than private sector credit as SOME of the money supply. Had this 'Greenbacking' been done by the Greek government starting 2 years ago there would not be a crisis in that country (there would be a naked fuel crisis in Europe but that is another matter).


The Greeks must beg for the Germans to borrow in their place from Wall Street. By doing so the Greeks -- and the Germans -- dig deeper into the debt hole.


Implementation of MMT regime is difficult because of the effect on banks. Banks offer ledger loans while demanding repayment + interest in circulating money. Here, the government offers 'money' that is indistinguishable from circulating money but is not. Finance would not lend to an entity that creates money by simply issuing it. From the banks' standpoint, Treasury issue is debt repudiation (it is). This presents a dilemma to a nation that is conservatively $55 trillion in debt.


Lincoln solved the problem by giving his Demand Notes to his combat-hardened 2 million-man army w/ ironclads and Gatling guns and declaring to the Philadelphia and New York banksters, "Whaddya gonna do about it, thou suckers of cock?" Nothing was done until a cabal demonetized silver and shrank the money supply .. ten years after Lincoln's death.


Sibeleau is another liquidationist sanctifying money which is an industrial good like napalm that a) has no intrinsic value, and b) destroys value of everything exchanged for it. Economists believe that there is too little credit creation ... This is the perceived hardship afflicting the world: Sibeleau walks a foolish path waving the Mises translation of the Bible while sprinkling the blood of Christ on Holy Money ...



Confundido's picture

Steve from Virginia: Here's how your house of cards goes Baumgartner: When the central bank lends reserves, the reserves are part of the money stock. When Benes & Kaumhof say that the government lends to the banks, they say that what they lend is NOT money stock. It can only be used to repay outstanding loans. And of course, banks stop earning the carry on the loans that they previously had. Explain how this is not fucked up...

steve from virginia's picture




Confinedido ... when the central bank lends reserves they are making a ledger entry there is no real money (or real credit). Sibeleau's liquidity argument is best made against the Fed. Reserves ARE illiquid (can only be accessed if there is a bank run during which other ledger entries in much greater amounts are extinguished).


Benes-Kumhof proposed debts to be 'repaid' with Treasury issue not circulating money (as banks demand). It's not fucked up (the banks' loans are retired 'in kind': fiat repayment for fiat loans) ... the consequences are fucked up. Nobody has done anything like this before! There is a US$ 1 quadrillion in debt our there: retirement is repudiation.


Sibeleau paints this process as having an effect on demand depositors but the effect he proposes is incorrect. The real effect would be on the banks' equity.


Fiat-repayment is the same-in-effect as the government canceling debts outright ... with a gloss on it. The real problem is the industrial world needs debt to operate. Repudiation is a bad word.


: )

Confundido's picture

Reserves are iliquid??? They are not money? They are not part of the money stock?? Steve...I rest my case. Your confesion on your understanding of monetary matters is enough. I will let readers of our exchange form their own opinions.

How the fuck can you suggest that replacing an asset of the banks (i.e mortgages) with a net debt position vs. the government is in kind? And don't even dare to say that there is no net debt position, because it's written all over the IMF working paper! 


spooz's picture

One could argue that reserves are illiquid now as a result of the fed's paying interest on them, which inhibits interbank lending and creates a silent liquidity squeeze.  Local lenders rely on the fed funds market and are reluctant to use the discount window.

Confundido's picture

By reduction to the absurd...if they are iliquid, why not just replace them with stocks? Or with real estate? How did we ever come to conclude that we needed reserves to begin with?

spooz's picture

Is that the extent of your critique of the Chicago Plan?

Confundido's picture

No, I am simply being ironic, in case you didn't notice.

steve from virginia's picture



There is a liquidity squeeze because the reserves do not circulate but are simply bookkeeping entries. What circulates is currency that is not held (hoarded) in private sector and excess credit that IS held (credit cannot be hoarded for long because of interest cost ... except by tycoons).


Commercial banks don't use the Fed for ordinary balance sheet purposes only to settle interbank accounts. Depository banks transact with corresponding banks (usually the money-center institutions such as JP Morgan-Chase or BofA). That is, if the banks need overnight liabilities to balance their books, they borrow from the TBTFs and pay the overnight interbank rate.


If a bank borrows liabilities from the Fed discount window, it is having problems.


The government would be wary of borrowing from depositors because it suggests the government cannot borrow elsewhere. This is where I agree with the article's author.


I get tired of saying this, the Fed does not create money or credit in excess of collateral, it cannot do so and remain a central bank.


This isn't a 'weird little rule' but a condition like gravity: if a central bank leverages against collateral it becomes instantly insolvent (CBs have no capital, if CBs have capital structure they cease to be reserve banks). This is a matter of perception on the part of system participants not the CBs or their managers.


Why do you think there is an ongoing systemic bank run in Europe? Because the ECB is perceived to be making leveraged/unsecured loans ... just like all the other busted banks in the Eurozone. As 'commercial bank 2.0' the ECB cannot effectively guarantee any deposits: there is no lender of last resort which leads to exit from exposed banks (all of them).


Only commercial banks/finance can create new funds by offering unsecured loans. The liabilities here tend to be non-monetary (goods and services). We have a crisis because of the intrinsic worthlessness of the goods or by virtue of having them rendered worthless immediately after their purchase. The debt per-se is no problem, rather there is nothing of value left from the exchange.


Inflation in debt-money systems comes from the private sector. Inflation is trivial ... because of the parallel expansion of the amount of (worthless) goods or dimunition of goods' nominal worth ... which is arbitrary and is not indicative of anything ...


Inflation/hyperinflation occurs within currency systems (not debt systems) when there is insufficient system debt to offset the currency issue upon the national ledger ... something that is NEVER going to occur in the US with its current level of debt.


When the Fed takes performing assets onto its balance sheet it is parking them. When the Fed takes non-performing assets it cannot offer spending money ... otherwise it is making an unsecured loan.


The only way 'reserves' or excess reserves go into circulation is during a bank run ... when greater amounts of circulating money are deleveraged out of existence elsewhere.


Look @ the Federal Reserve's balance sheet. It has expanded (assets = liabilities) US$4 trillion. OUTRAGEOUS! Right? No, the private sector balance sheet has contracted: the loss of residential real estate worth (on the books) is over US$11 trillion. The Fed's efforts are underwater ... just like the real estate owners and for the same reason.


During the 1930s there was currency arbitrage ... which worked 'backwards' (real interest rates were high which was the cause of- the result of deflation). During that time currency expanded 2x but there was still a dollar shortage b/c arbitrage against gold and the desire of the working stiffs to screw over the capitalists (which they did).



Confundido's picture



Listen (or read? ) to yourself:


Steve’s Proposition #1

“…There is a liquidity squeeze because the reserves do not circulate but are simply bookkeeping entries…”


Reduction to the absurd:

If banks held zero reserves, there would be no illiquidity issues.


Steve’s Proposition #2

“…What circulates is currency that is not held (hoarded) in private sector…”

Answer: What about the bills I have in my pocket?


Steve’s Proposition #3

“…Why do you think there is an ongoing systemic bank run in Europe? Because the ECB is perceived to be making leveraged/unsecured loans…”

Answer: The bank run is only inter jurisdictional. From the periphery to the core. Not against the Euro itself. If there was a fiscal union and the ECB lent against bonds issued by that fiscal union, the Euro would be much, much stronger.


Steve’s Proposition #4:


“…I get tired of saying this, the Fed does not create money or credit in excess of collateral, it cannot do so and remain a central bank…”

Answer: What collateral does the Fed get when they establish currency swaps with the ECB??? The whole f… yankee bond market is hanging from the assumption that should USD funding shortages pop up, the Fed will be there to extend swaps to the ECB…But you are right, when the market finds out, the Fed will not remain a central bank. At least not in its current shape.


Steve’s Proposition #5:


“…Inflation in debt-money systems comes from the private sector…”

Do you think the private banks could have below 100% reserve requirement if there was no central banks backing their Ponzi scheme? And I do not mean this or that bank in a period of time. I mean, on aggregate, indefinitely. Look at the dynamics. I didn’t think so, which is why the world still has central banks.


Two last things…because I really have, after all, an interest in understanding how you can say what you say…


Please, define:



currency vs. debt systems


performing vs. non-performing assets.


You are right about the currency arbitrage in the ‘30s. But you are wrong on one thing. And pay attention, Steve: It’s true, we (the market) cannot arbitrage the US dollar, but we can repudiate what backs it: The US sovereign debt. And eventually, we will. And when we do that, the repo and futures markets will collapse and a clearinghouse will go bankrupt and some idiot will demand that US sov debt be considered like currency for repayments of counterparties. And when that happens, you will remember me…

Confundido's picture

Steve from Virginia...The treasury issues greenbacks??? I thought it was the Fed...I thought greenbacks are a liability of the Fed...Thanks for enlightening us all!