Marshall Auerback wrote a short piece criticizing the recent IMF study of the “Chicago Plan” first put forward by professors Henry Simons and Irving Fisher in 1936.
“Now there are some good things about a 100% reserve backed banking system. To the extent that we require all institutions to hold liquid reserves of equal value to their deposits then the fear of a bank run is eliminated.
But you would have massive credit constraints and, in the absence of a countervailing fiscal policy that promoted more job growth and higher incomes, there would be the equivalent of a gold standard imposed on private banking which could invoke harsh deflationary forces.”
What he seems to miss is that 100% reserves would be required against demand deposits (checking accounts) and not against savings or time deposits. All that an efficient capitalist system needs is financial intermediaries who can channel savings into credit. It is not essential for them to have the ability to create ‘new money’.
“Note that the current practice is that loans create deposits. Clearly, under a 100-percent reserve system, all credit granting institutions would have to acquire the funds in advance of their lending.”
That is true. And requiring 100% reserves against demand deposits would restrict banks ability to make loans without holding reciprocal savings/time deposits or share capital and reserves. In effect they would be prevented from creating new money by making loans where they don’t have deposits. That is the whole purpose of the proposal: to prevent rapid credit expansion by banks.
“The truth is that the debt explosion that has brought the World economy to its knees was not the fault of private sector credit creation per se.”
Really? What else but private sector credit fueled the housing bubble? The debt explosion was encouraged by lax regulation but the financial sector is far from blameless for its actions.