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.
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?
Meet Anthony Mirhaydari at the MoneyShow Las Vegas
MSN Money columnist Anthony Mirhaydari will be one of dozens of financial experts on hand at the MoneyShow Las Vegas, May 13-16, at Caesar's Palace in Las Vegas. And admission is free for MSN Money readers. Just click here to register, and click here to see what Mirhaydari plans to talk about.
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.
