UNISONActive is an unofficial blog produced by UNISON activists for UNISON activists. Bringing news, briefings and events from a progressive left perspective.

Friday, 17 August 2012

IMF Releases A Discussion Paper On Banking and Monetary Reform - A Revolutionary Act!

We’ve been in a state of mild shock since last Saturday. We discovered one of the strongest advocates of monetary reform and full reserve banking in the institution where we would least expect it. The international Monetary Fund (IMF)has released a discussion paper “The Chicago Plan Revisited” that supports the proposals of US economist Irving Fisher – using state of the art economic modelling.

We urge all readers to download and read the paper, as it makes the clearest case against the privatisation of our money supply to profit making banks...."private issuance of money has repeatedly led to major societal problems throughout recorded history"  http://www.imf.org/external/pubs/ft/wp/2012/wp12202.pdf

In their summary the authors Jaromir Benes and Michael Kumhof write:
At the height of the Great Depression. the 1930's version, 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.

Essetntially this means that for every £1 out on loan from the banks must be backed up by a £1 held in the bank. Furthermore the government would become responsible for issuing any new money into the economy.

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. (Remember Northern Rock?)
(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.

Here are few extracts from the paper:

We therefore conclude that Fisher’s (1936) claims regarding the Chicago Plan, as listed in the abstract of this paper, are validated by our model.

The effectiveness of countercyclical policy would be further enhanced under the Chicago Plan relative to present monetary arrangements. [B]ank runs can obviously be completely eliminated… It would lead to an instantaneous and large reduction in the levels of both government and private debt, because money creation no longer requires simultaneous debt creation…

By validating these claims in a rigorous, microfounded model, we were able to establish that the advantages of the Chicago Plan go even beyond those identified by Fisher (1936) One additional advantage is large steady state output gains due to the removal or reduction of multiple distortions, including interest rate risk spreads, distortionary taxes, and costly monitoring of macroeconomically unnecessary credit risks, ie the dreaded rating agencies.

Another advantage is the ability to drive steady state inflation to zero in an environment where liquidity traps do not exist. This ability to generate and live with zero steady state inflation is an important result, because it answers the somewhat confused claim of opponents of an exclusive government monopoly on money issuance, namely that such a monetary system would be highly inflationary. There is nothing in our theoretical framework to support this claim. And as discussed in Section II, there is very little in the monetary history of ancient societies and Western nations to support it either.

The History of Monetary Thought in Section II is very interesting and certainly worth reading is the analysis of Government versus Private Control over Money Issuance (p 12).

On the other hand, the historically and anthropologically correct state/institutional story for the origins of money is one of the arguments supporting the government issuance and control of money under the rule of law. In practice this has mainly taken the form of interest-free issuance of notes or coins, although it could equally take the form of electronic deposits.

The historical debate concerning the nature and control of money is the subject of Zarlenga (2002), a masterful work that traces this debate back to ancient Mesopotamia, Greece and Rome. Like Graeber (2011), he shows that private issuance of money has repeatedly led to major societal problems throughout recorded history, due to usury associated with private debts. Zarlenga does not adopt the common but simplistic definition of usury as the charging of “excessive interest”, but rather as “taking something for nothing” through the calculated misuse of a nation’s money system for private gain.

To summarize, the Great Depression was just the latest historical episode to suggest that privately controlled money creation has much more problematic consequences than government money creation. Many leading economists of the time were aware of this historical fact. They also clearly understood the specific problems of bank-based money creation, including the fact that high and potentially destabilizing debt levels become necessary just to create a sufficient money supply, and the fact that banks and their fickle optimism about business conditions effectively control broad monetary aggregates. The formulation of the Chicago Plan was the logical consequence of these insights.

UNISONActive believes that the root cause of many of our current social, economic and environmental problems lies in the way that we allow money to be created. We need to campaign for fundamental reform of a system that is fueling debt, privatisation, poverty and our economic and environmental crises.

When money drives most of the economic activity in our society it is essentiail to undertsand it. The radicals at the IMF have paved the way for us to do that now we must help them and help our movement. Please read! The paper supports those issues which are the basis for Positive Money’s proposals.