An Unorthodox Solution To The World's Economic Problems

Tyler Durden's picture

Submitted by Frank Hollenbeck via Mises.ca,

We 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.

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FinMin's picture

All good and doable, but not without consulting the Munich School for how you compel banks to simply surrender their assets.

Squid-puppets a-go-go's picture

theres prolly a few good solutions. But try getting the consensus amongst the 1%er psychos drag racing their respective stolen cars towards the cliff

philipat's picture

Most of the Bank "assets" are worthless anyway so I'm guessing they would jump at the possibility?

J S Bach's picture

"The Chicago Plan vs. The City Of London Plan".  Hmmm... sounds like a spy thriller.

Actually, the international usurers will never allow this usurpation of their gravy-train of interest from the plebs. After all, it is the fount of all their satanic power on this earth.  The Chicago Plan would possibly work, but it would require the extermination of the kosher banking class which lords over us today.  They would sooner bring about a nuclear third world war than cede this power and all those ill-gotten "assets" of theirs.  It's us (99.9%) or them (.1%) folks.  Not a hard choice.

OverTheHedge's picture

I concur - it's a lovely idea, all pink butterflies and unicorns, but it will never be allowed to happen. First of all, how would any western government exist without a deficit? Mass unemployment and rioting by previously smug, job-for-life useless eaters who would be without any value, and therefore unemployable. All those lovely benefits with impossible to finance future liabilities? All gone. No more pensions for civil servants et al. Possibly no more unemployment benefits an/or food stamps or whatever. Government having to live within its means?

I don't think so.

Nice idea though.

Better to have another 20 -30 million war dead, and start again, with the 1% even wealthier after the event.

Manthong's picture

If I had one wish, it would be for a whacked out F to be the governor of my state.

It I had another wish, it would be for a muslim biased and advocating president of the united states.

beemasters's picture

Wiping all debts/loans? Please let me know a month before this so-called Chicago Plan is going to be implemented. I will have to catch up by making a $10 Billion loans before they are all pardoned and "the slate is wiped clean". Why should only the insiders benefit as usual, and the 1% will remain 1%???

I like the idea of having no central banks, however.

Lonesome Crow's picture

There is only one lasting solution to the problem.

What mis-education broke, only education can fix.

That the seemingly greatest adversaries of the mis-education use the same language that is detached from the facts is their sanction of the wrong actions by poliferating the contradictions which cause problem.

The problem has little to do with economics, politics, or even human action but has everything to do with the Turning of Names.

(for example, what is a bank? Are they banks if they are counterfeiting or are banks companies that vest in others from already existing money?)

CRM114's picture

Agreed. The teaching of economics, finance, media and politics - how it really works (or not) as well as the theory, needs to be taught in schools.

When I was at school, we got that. The Head and senior masters were WWII vets. One German master had escaped from East Berlin whilst they were build The Wall. We were left in no doubt about the good and bad points of all political systems, and allowed to choose our own philosophy. My classes in economics have enabled me to correctly predict every major recession.

Dental Floss Tycoon's picture

 

 

Another Jewish invention the Jubilee!  When Jews were living together they found it necessary to cancel all debts every 50 years to level the playing field.  It worked!  They quit doing it ofcourse when they had goys to exploit.

 

 

Is-Be's picture

Only a Steve Keen jubilee would work and be fair.

Everyone gets a lump sum to pay off whatever debts they had.

Everyone else gets to keep their money. If you had no debt you would be rich and could put your money in the bank, they would lend it out, and industry would fire up.

 

Herd Redirection Committee's picture

I don't think you understand the full implications.  Say I am a billionaire bankster and have $2 billion in debt, but I also have $3 billion in Receivables (or Treasuries, or corporate bonds or...), that is, loans I have made to the peasants.  My receivables AND my debt will be wiped out! 

Who owes who, in our society, and how much?  I'm sure you will find it is the 0.5% who are owed by the bottom 95%.  So how is that 'not fair', to have their illgotten gains wiped out, the chains of debt slavery removed over the vast majority of the population, AND the mechanism (Central banks, fractional reserve banking, and usury) by which they gained complete control exposed for all to see (to prevent it being reinstated) and abolished?

MrMorden's picture

What stops people from taking their jubilee money and just racking up more debts?  Would the payoff of debt be compulsory?  Who would audit the balance sheet of every person in America (or the world) to make sure they were actually debt free before banking or spending their Jubilee bux?  

tricorn teacup's picture

When you knew that the debt would be canceled at a certain time it would have to influence lending.  The debt structure currently existing is based on different assumptions.  Then again, inflation is a kind of Jubilee on the installment plan.

smartmil's picture

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.

Dien Bien Poo's picture

And now you work for Gartman?

 

Stuck on Zero's picture

The only assets a bank owns are loan papers.  By exchanging public money for the paper the government would own almost everything.  It sounds like socialism to me.

bigkahuna's picture

This is all a bunch of unicorn skittleshit.

MEAN BUSINESS's picture

When I saw the movie poster, which came out in advance of the release, and I saw the music credits I thought "Nah, must be some new-age thing I've never heard of". Of course later that year, along came #OWS. Nah. And last night I had a dream that I met Steve Howe in an airport. WTF???

Bush Baby's picture

I've been pushing my "Everybody just drops 3 zeros" Plan for a long time

HenryHall's picture

>> All good and doable, but not without consulting the Munich School for how you compel banks to simply surrender their assets.

Lenin knew how to solve that problem.

Oldwood's picture

Sure...I promise, it'll be ONLY this one time......and I promise to pull out...really!

This is no different that the IMF was speculating about bank bail-ins being a once only deal, Cyprus was only practice.

The perfect solution is typically on perfect for a relative few.

Singelguy's picture

Never is a very long time. I would suggest that you look at the alternative. If all the central banks continue on the current path, the entire financial system will eventually implode and then the same result occurs only in a chaotic and uncontrollable manner. Financial discipline WILL be restored, one way or another. Pick your poison.

Oldwood's picture

It would seem foolhardy to expect those who created this disaster to be the ones to fix it...especially at their cost.

PT's picture

You are either trampled by the stampede or herded over the cliff.

Some idiot lends a million bucks to another idiot who only has one hundred bucks.  Either the first idiot admits that the million bucks will never be paid back or he hyperinflates until the second idiot has a million bucks to pay back.  Is there a third solution?  What solution do you think the first idiot will choose?  Actually, the first idiot did choose a third solution.  He chose to be bailed out while still claiming that he is owed a million bucks from the second idiot.  Is there a fourth solution?

The other problem is that there is not just one or two idiots.  There is a whole herd of them.  The question is how to extract yourself from the herd as it all goes over the cliff.  The herd doesn't fall off the cliff until it runs out of bodies to trample on.

photonsoflight's picture

Find a quiet place in the country and sit back and watch the show.

Bumpo's picture

For those of us that stay out of debt, and buy what we can with cash, I suck fuck those who get to keep their house free and clear for merely paying out a few mortgage payments.

Nexus789's picture

Try three or four billion dead and perhaps more.

photonsoflight's picture

I have heard that the elite believe there are too many people on the planet. 2+2=4.

Kayman's picture

Conjuring money comes to an end anyway.  335 million riders and 1 horse ?  

Jeesh- They have fucked up money so bad, they have had to balance their thievery with negative interest rates.  

Keep on smoking the old crack pipe.

THE DORK OF CORK's picture

Give that man a cigar.

The Chicago plan: the hint is in the name. 

Only social credit can match income with prices.

If the Mises mafia endorse something you just know it stinks to high heaven.

 

GreatUncle's picture

Social credit is the government borrowing ...

It's like the snake trying to eat itself, does it become massively big as it eats more and more of itself ... bit like te debt.

THE DORK OF CORK's picture

How is the production of more company tokens borrowing? 

 

I am mystified by this.

Enough tokens are produced to close the gap between prices and income,  no more no less.

THE DORK OF CORK's picture

How is the production of more company tokens borrowing? 

 

I am mystified by this.

Enough tokens are produced to close the gap between prices and income,  no more no less.

Mr Poopra's picture

You compel them with an angry mob rushing their headquarters and clubbing those responsible in the streets until their bodies stop twitching. Same as 500 years ago.

CRM114's picture

agreed...then you enforce 100% reserve banking, etc.

 

This proposed plan has the same problem as all the others, the bankers get off scot-free. This is unacceptable, and not just because I hold stock in piano wire and lamp-post manufacturers ;).

photonsoflight's picture

Piano wire sucks for hanging. Now three ply hemp rope works wonders. Its green and reusable.

reallyseriousstuffnews's picture

I don't know if the "angry mob" has taken it in the ass hard enough to be called the "angry mob". Kinda like a battered spouse, it takes the bitch a little while to figure out she needs to do something about her situation.

CRM114's picture

No need for the bitch word, the same is true of battered spouses of either gender, and any sexuality.

photonsoflight's picture

My ex was an abusive drunk. She packed up the kid and dog and left one day while I was at work. I sure miss that dog.

HenryKissingerChurchill's picture

You compel them with an angry mob rushing their headquarters and clubbing those responsible in the streets until their bodies stop twitching. Same as 500 years ago.

there are helicopters, yatchs and floating military hospitals exactly for that reason

photonsoflight's picture

Helicopters can be shot down. Boats can be sunk.

reallyseriousstuffnews's picture

It is called fiat for a reason, the same rule of "law/extortion" would be effective. The issue is WHO is in control of aforementioned "law/extortion

Infocat's picture

LOL, never gonna happen. Leftoids will never give up power so easily. http://www.truthjustice.net/politics/the-wall-just-got-ten-memes-higher/

RafterManFMJ's picture

Yeah but - how would we enslave the people in perpetuity under this plan? - The banksters

HenryKissingerChurchill's picture

Yeah but - how would we enslave the people in perpetuity under this plan? - The banksters

what is the Jew bankers ROI ?

GUS100CORRINA's picture

To make this work, need to get control away from the elites and 'demonic' shadow government.

This would be a 'spiritual battle' of epic proportions. 

Maybe this can work with a TRUMP/PENCE win. I think this team would be open to it to save the system and save face at the same time.

A CRISIS OF EPIC PROPORTIONS IS COMING ... TIMING DIFFICULT TO ESTIMATE. I AM FAIRLY CERTAIN THAT NO ONE WANTS TO BE THE NEXT HERBERT HOOVER.

 

photonsoflight's picture

Timing is not difficult. It will always happen at the worst time imaginable. I am a big fan of Murphy's Law.

THE SOLUTION IS DEBT FREE MONEY CREATION's picture
THE SOLUTION IS DEBT FREE MONEY CREATION (not verified) FinMin Sep 20, 2016 5:34 AM

THIS!!!