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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.

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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.

The findings were impressive. A modern implementation of the Chicago Plan resulted in:

  • A reduction in business cycle fluctuations -- and therefore more prosperity -- as the boom-bust cycle of lending was diminished and the ups and downs in bank credit and bank-created money were reduced. Banks would concentrate on making loans, not on whether they should expand the money supply. Tighter control would allow monetary authorities to reduce the inflation rate to near 0% while keeping economic growth high.
  • Elimination of bank runs, since deposits would be 100% backed by the holdings in the banks' vaults.
  • A dramatic reduction in the government's net debt, because the currency authority would have net assets (loans to banks) worth 100% of the deposits in the financial system. According to Kumhof, this is estimated to be around 180% of gross domestic product, or nearly $30 trillion. The government could, in turn, use part of the windfall to buy back its debt (from, say China) and cancel it.
  • The creation of another source of government revenue as banks pay interest on their currency loans from the government. If, the interest rate was, say, 1%, the government would gain $300 billion annually. Paired with a strong economy, we could fix our problems without big tax hikes.

Poking holes

I know what you're thinking: This is too good to be true.

So let's address the two obvious hang-ups. One, that all this will cause high inflation, since the government will be tempted to create too much money. And two, that there is no historical precedent for this.

In order for all this to work, the government's monetary authority would need to be given a simple mandate (say, 0% inflation) and then turned loose with budgetary independence. Only if policymakers violated their mandate could they be fired.

It's worth noting that the government issued money to defeat King George and win our independence, and to defeat the Rebel South less than a century later. The British, in an early example of economic warfare, counterfeited colonial currency and created a wave of inflation that soured the memory of our young republic's experiment with sovereign money. After the Civil War, a misguided attempt to restore convertibility into silver and gold -- the ability to exchange currency for metals -- threw the nation into a malaise known as the Long Depression and again soured the memory of government-issued money.

What of restoring the gold standard, an idea kicking around again these days, and simply making dollars convertible into precious metals? That would subject the economy to bouts of inflation (if gold flooded into the country) and deflation (as the gold left) and would restrict the ability to reduce the boom-and-bust cycle of economic volatility.

Benes and Kumhof took a long, hard look at the history of money and found that it's a government's declaration that something is legal tender that makes it valuable. Indeed, the price of silver collapsed in this country following the demonization of silver in the 1870s in what was known as the "Crime of '73," an event that eventually inspired "The Wizard of Oz" and William Jennings Bryan's famous "Cross of Gold" speech.

Ancient history also provides plenty of evidence that government-issued money tends to bring more prosperity and stability than privately issued money.

The Founding Fathers were remarkably well read in monetary theory --- no doubt familiar with England's chaotic history following the Free Coinage Act of 1666 that took the power of coin away from the monarch and gave it to the privately controlled Bank of England. Benjamin Franklin, Thomas Jefferson and Thomas Paine all argued in favor of government-backed money, as did John Locke, the influential British philosopher who inspired the revolutionaries.

The biggest obstacle

So that's the case for reclaiming the power to print money and control the money supply from the bankers. We could limit Wall Street and use the power to get the economy back on track, fund our promises to seniors and address our deficient infrastructure, health care and education systems. And we could do it without crushing the dreams of young workers by creating a new source of revenue that lets us slash the national debt.

Could anything this dramatic happen? The increasing attention won by Republican rebel Rep. Ron Paul of Texas suggests so, and by picking Wisconsin's Ryan, Romney is signaling that the major parties are at least willing to talk about overhauls to programs as popular Medicare. Whatever you think of their proposals -- that's another column -- there is an appetite for serious structural change out there.

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I'm even hearing chatter that New York hedge funds are preparing for a "reset" of the financial system in the near future, since the current system and the excesses that have accumulated are simply not sustainable.

We just need to find a national leader brave enough to think imaginatively about how money is created, take advantage of the global demand for U.S. dollars as the reserve currency of choice, and take on the Wall Street interests that helped create this mess in the first place. Any takers?

Be sure to check out Anthony's new money management service, Mirhaydari Capital Management, and his investment newsletter, the Edge. A free, two-week trial subscription to the newsletter has been extended to MSN Money readers. Click here to sign up. Mirhaydari can be contacted at anthony@edgeletter.com and followed on Twitter at @EdgeLetter. You can view his current stock picks here. Feel free to comment below.