Economic Reform: The Chicago Plan (?)

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For the first time, I’ve come across mention of The Chicago Plan, a financial reform plan from the Great Depression era. Developed by Henry Simons and many others (from what I believe is commonly known the The Chicago School), it gained the support of Milton Friedman – one reason it gained my attention.

Here’s my problem: I’m very much an economics ignoramous (though I try to pick up knowledge where I can). When attempting to read three articles – End Oligarchy Economics, Dust off the Chicago Plan (from 2008), and The 1930s Chicago Plan and the American Monetary Act (from 2005) – it quickly became apparent to me that I was in over my head. I know there are quite a few posters that are economics savvy and who are willing to go to quite some depth in explanation.

There are a bunch of buzzwords/phrases/ideas in there that are common enough these days: abolishing the Fed, nationalizing the banks, fractional reserve banking, the gold standard, etc. (Note that I don’t mention whether positions expressed are for or against – if it wasn’t a mixture, I might simply write this off as whackjobbery.) What made a particular impression on me, however, was the following (from the second link):

…the Chicago Plan calls for a full monopoly for the government in the issuance of currency and forbids banks from creating any money or near money by establishing 100% reserves against checking deposits…As stated by Irving Fisher: “The essence of the 100% plan is to make money independent of loans; that is to divorce the process of creating and destroying money from the business of banking…”

In at least one article, this is referred to as “nationalizing the financial system” – the antithesis of what I associate with Friedman. I know I’m ill-informed, and so have little doubt that I misunderstand. So, first question: what is it that I don’t know or understand?

Then, the first link above says the following about the Chicago Plan:

This proposal was the shift from banking industry creation of “money as debt” through loans (technically “credit” and not money because it exists only and always as increasing and unpayable debt in the macro economy), to the government creating debt-free money for the direct payment of public goods and services. This policy has several extraordinary benefits:

1. The national debt is paid rather than always increased.
2. It’s the only policy that accomplishes the goal of full employment as the government becomes the employer of last resort.
3. This policy ends the economic crisis almost instantly; and once the program is established will guarantee no further unemployment crises.
4. If the GDP value of government employment exceeds its costs (consider infrastructure that returns far more than costs), the US would have the double benefit of decreasing prices as well as full employment.
5. For an example of interest to HGSE, considering the US Department of Education reports that between 100,000 to 300,000 US public education positions are in danger of termination for the 2010-2011 school year, this policy creates money directly to rehire unemployed teachers and fill all school needs. Our current economic model will suffer the layoffs and decrease in education quality.
6. State-of-the-art infrastructure.
7. Elimination of almost all social costs of poverty.
8. If banking were nationalized rather than being “bailed out” in the present, interest rates could be non-profit (think 1% mortgages that would reduce the cost of homeownership by 50%).

Extraordinary benefits, indeed! I’m almost surprised that there’s no mention of unicorns and fairy-dust! So, second question: How would the above (seemingly near-miraculous) items come about?

Finally, a third question to move this out of GQ territory: what are the downsides and is it even possible (politically, rationally, practically, whatever) to put the Chicago Plan into effect?

I’ll put in a disclaimer that since I’m admittedly an ignoramus here, I might not have much to contribute to the thread myself, so my own participation may be close to nonexistent…