Image: Uncle Sam © Mike Kemp, Rubberball, Getty Images

Mitt Romney's pick of Paul Ryan as his vice-presidential running mate has refocused the nation's attention on the big, structural issues plaguing the union. The national debt is now larger than the economy's total output in a year; each American's share is nearly $51,000. Inflation that has averaged 4.4% since 1970 and reduced a dollar's buying power to just 17 cents over that time. An embarrassingly convoluted and inefficient tax code rewards cheats, accountants and lawyers while hurting everyone else.

These problems trouble many of us. But the differing solutions proposed by Romney and President Barack Obama amount to a false choice of pick-your-poison: tax hikes for the wealthy or benefit cuts for the vulnerable. And the timeline for Ryan's plan balances the budget three decades from now -- so it's hardly the tough medicine we need.

What if there was another way, a way that would not only solve these problems but also address the redress owed to us by Wall Street for its shenanigans -- by reclaiming a great power, the power to create money, that protected the United States during its most trying times.

There may be such a way. It's called the Chicago Plan. And it first came up during a crisis not unlike what we have right now. It's a big plan for big problems. Yes, it's something that may not seem possible given our polarized politics. But it may also be exactly what we need. Here's why.

Making money

The plan was conceived by a group of economists back in the early 1930s. Conditions then were similar to those we face today: a stagnant recovery, banks withholding credit, too much debt, consumer price volatility and the rise of political extremism as a consequence of economic turmoil.

Image: Anthony Mirhaydari - MSN Money

Anthony Mirhaydari

Although it generated much excitement within the academic community and became a more formal proposal by 1939 (.pdf file), its main tenet was never adopted:

That the government, not private banks, should control the creation of money, as it did during the Revolutionary War and the Civil War. As a result, new money would no longer require an offsetting creation of debt, as it does now. And banks should hold 100% of customer deposits in its vaults, not the 10% that is required now while the rest is lent out.

If you're like most people, the inner workings of the financial system are about as intuitive as hooking up a home stereo. But stick with me here. I'll use a simple example to illustrate all this.

Currently, the Federal Reserve (which is owned by banks but partly controlled by the government) buys $100 in currency from the U.S. Mint for the cost of printing it, thereby "creating" the money by turning it into legal tender. (It can also just electronically create money by crediting bank accounts.) That $100 gets deposited at, say, Bankof America (BAC). The bank keeps only $10 in its vault and lends out the other $90, creating an asset for itself with someone else's money.

Suddenly, the money supply has just jumped by $190: The $100 deposit and the $90 loan, which in turn gets deposited at another bank so the process can start again. The $90 deposit fuels an $81 loan. The $81 deposit fuels a $73 loan. And on and on. Soon, just a few iterations in, the money supply has swelled from the original $100 to $344. In essence, the banks have the power to print money.

The power shifts

The Chicago Plan would change all this by separating money from credit.

Bank of America would have to hold the entire $100 deposit in its vaults, acting (as banks originally did) as a safe house for wealth. Customer deposits would sit alongside it.

Loans would be funded separately -- via retained profits, equity from investors or loans of currency from the government.

The government authority that issues currency -- which could be a restructured Fed -- would directly control the money supply by changing the price and size of those loans of currency to banks versus the indirect control the Fed has now. If it wanted the money supply to grow by $344, it would lend $344 to the banks, which banks would then loan out to make a profit.

The advantages of this are easy to see. Over the past few years, the Fed has been pumping cheap money into the financial system in an effort to expand the money supply and support our recovery. But banks have often hoarded the cash -- to the tune of nearly $1.5 trillion. If that money came with an explicit cost, banks wouldn't have the choice of sitting on it. Either they would lend it to consumers or businesses, or they would loan it to other institutions that could. The Fed could more easily force that money into the economy by taking over the banks' control of the money-creation process, while banks and other institutions would focus on getting credit to those that need it.

Economists with clout

Keep in mind, this plan isn't the ramblings of anti-establishment anarchists. That's why it's so compelling.

The original Chicago Plan was backed by members of the "Chicago school" of economists at the University of Chicago, including Frank Knight (who tutored Nobel laureates Milton Friedman, George Stigler and James Buchanan) as well as Irving Fisher, whose work on interest-rate theory and the debt-deflation dynamics of depressions remains influential today.

Renewed interest in the plan was catalyzed by a recent working paper (.pdf file) by two researchers at the International Monetary Fund, Jaromir Benes and Michael Kumhof. The duo, realizing the similarities of the problems faced by the Chicago Plan authors to our current predicament, applied its solutions to an advanced "dynamic stochastic general equilibrium" model of the U.S. economy.

In plain English, DSGE models try to simulate the saving and borrowing activities of various sectors of the economy, from governments and households to manufacturers and unions. It may not be a perfect simulation, but it's as close as we can get.