At 06:01 28/10/2012, you wrote:
Steve is still with us.
REH
And this is what I originally wrote to Steve:
<<<<
Benes and Kumhof are a couple of jokers who don't
know their history of money. Private (not
government) money goes back two centuries before
Solon (see below) to the time when gold tokens
were devised as a convenient barter good for use
by the Greek merchants around the Mediterranean.
Keith
>>>>
From: Steve Kurtz [mailto:[email protected]]
Sent: Saturday, October 27, 2012 6:35 AM
Subject: International Monetary Fund on non-credit money
I missed this 6 days ago as I was driving up to
Canada and around Ontario and QC that week-end.
I recall reading about the study last August.
The interest by A E-P is welcome, and keeps the (not new) ideas alive.
Steve
Some readers may already have seen the IMF
study, by Jaromir Benes and Michael Kumhof,
which came out in August and has begun to
acquire a cult following around the world.
Entitled "The Chicago Plan Revisited", it
revives the scheme first put forward by
professors Henry Simons and Irving Fisher in
1936 during the ferment of creative thinking in the late Depression.
IMF's epic plan to conjure away debt and dethrone bankers
by Ambrose Evans-Pritchard
The Telegraph
<http://www.telegraph.co.uk/finance/comment/9623863/IMFs-epic-plan-to-conjure-away-debt-and-dethrone-bankers.html>http://www.telegraph.co.uk/finance/comment/9623863/IMFs-epic-plan-to-conjure-away-debt-and-dethrone-bankers.html
October 21, 2012
So there is a magic wand after all. A
revolutionary paper by the International
Monetary Fund claims that one could eliminate
the net public debt of the US at a stroke, and
by implication do the same for Britain, Germany, Italy, or Japan.
One could slash private debt by 100pc of GDP,
boost growth, stabilize prices, and dethrone
bankers all at the same time. It could be done
cleanly and painlessly, by legislative command,
far more quickly than anybody imagined.
The conjuring trick is to replace our system of
private bank-created money -- roughly 97pc of
the money supply -- with state-created money. We
return to the historical norm, before Charles II
placed control of the money supply in private
hands with the English Free Coinage Act of 1666.
Specifically, it means an assault on "fractional
reserve banking". If lenders are forced to put
up 100pc reserve backing for deposits, they lose
the exorbitant privilege of creating money out of thin air.
The nation regains sovereign control over the
money supply. There are no more banks runs, and
fewer boom-bust credit cycles. Accounting
legerdemain will do the rest. That at least is the argument.
Some readers may already have seen the IMF
study, by Jaromir Benes and Michael Kumhof,
which came out in August and has begun to
acquire a cult following around the world.
Entitled "The Chicago Plan Revisited", it
revives the scheme first put forward by
professors Henry Simons and Irving Fisher in
1936 during the ferment of creative thinking in the late Depression.
Irving Fisher thought credit cycles led to an
unhealthy concentration of wealth. He saw it
with his own eyes in the early 1930s as
creditors foreclosed on destitute farmers,
seizing their land or buying it for a pittance at the bottom of the cycle.
The farmers found a way of defending themselves
in the end. They muscled together at "one dollar
auctions", buying each other's property back for
almost nothing. Any carpet-bagger who tried to bid higher was beaten to a pulp.
Benes and Kumhof argue that credit-cycle trauma
- caused by private money creation - dates deep
into history and lies at the root of debt
jubilees in the ancient religions of Mesopotian and the Middle East.
Harvest cycles led to systemic defaults
thousands of years ago, with forfeiture of
collateral, and concentration of wealth in the
hands of lenders. These episodes were not just
caused by weather, as long thought. They were
amplified by the effects of credit.
The Athenian leader Solon implemented the first
known Chicago Plan/New Deal in 599 BC to relieve
farmers in hock to oligarchs enjoying private
coinage. He cancelled debts, restituted lands
seized by creditors, set floor-prices for
commodities (much like Franklin Roosevelt), and
consciously flooded the money supply with state-issued "debt-free" coinage.
The Romans sent a delegation to study Solon's
reforms 150 years later and copied the ideas,
setting up their own fiat money system under Lex Aternia in 454 BC.
It is a myth - innocently propagated by the
great Adam Smith - that money developed as a
commodity-based or gold-linked means of
exchange. Gold was always highly valued, but
that is another story. Metal-lovers often conflate the two issues.
Anthropological studies show that social fiat
currencies began with the dawn of time. The
Spartans banned gold coins, replacing them with
iron disks of little intrinsic value. The early
Romans used bronze tablets. Their worth was
entirely determined by law - a doctrine made
explicit by Aristotle in his Ethics - like the
dollar, the euro, or sterling today.
Some argue that Rome began to lose its
solidarity spirit when it allowed an oligarchy
to develop a private silver-based coinage during
the Punic Wars. Money slipped control of the
Senate. You could call it Rome's shadow banking
system. Evidence suggests that it became a
machine for elite wealth accumulation.
Unchallenged sovereign or Papal control over
currencies persisted through the Middle Ages
until England broke the mould in 1666. Benes and
Kumhof say this was the start of the boom-bust era.
One might equally say that this opened the way
to England's agricultural revolution in the
early 18th Century, the industrial revolution
soon after, and the greatest economic and
technological leap ever seen. But let us not quibble.
The original authors of the Chicago Plan were
responding to the Great Depression. They
believed it was possible to prevent the social
havoc caused by wild swings from boom to bust,
and to do so without crimping economic dynamism.
The benign side-effect of their proposals would
be a switch from national debt to national
surplus, as if by magic. "Because under the
Chicago Plan banks have to borrow reserves from
the treasury to fully back liabilities, the
government acquires a very large asset vis-à-vis
banks. Our analysis finds that the government is
left with a much lower, in fact negative, net debt burden."
The IMF paper says total liabilities of the US
financial system - including shadow banking -
are about 200pc of GDP. The new reserve rule
would create a windfall. This would be used for
a "potentially a very large, buy-back of private debt", perhaps 100pc of GDP.
While Washington would issue much more fiat
money, this would not be redeemable. It would be
an equity of the commonwealth, not debt.
The key of the Chicago Plan was to separate the
"monetary and credit functions" of the banking
system. "The quantity of money and the quantity
of credit would become completely independent of each other."
Private lenders would no longer be able to
create new deposits "ex nihilo". New bank credit
would have to be financed by retained earnings.
"The control of credit growth would become much
more straightforward because banks would no
longer be able, as they are today, to generate
their own funding, deposits, in the act of
lending, an extraordinary privilege that is not
enjoyed by any other type of business," says the IMF paper.
"Rather, banks would become what many
erroneously believe them to be today, pure
intermediaries that depend on obtaining outside
funding before being able to lend."
The US Federal Reserve would take real control
over the money supply for the first time, making
it easier to manage inflation. It was precisely
for this reason that Milton Friedman called for
100pc reserve backing in 1967. Even the great
free marketeer implicitly favoured a clamp-down on private money.
The switch would engender a 10pc boost to
long-arm economic output. "None of these
benefits come at the expense of diminishing the
core useful functions of a private financial system."
Simons and Fisher were flying blind in the
1930s. They lacked the modern instruments needed
to crunch the numbers, so the IMF team has now
done it for them -- using the `DSGE' stochastic
model now de rigueur in high economics, loved and hated in equal measure.
The finding is startling. Simons and Fisher
understated their claims. It is perhaps possible
to confront the banking plutocracy head without endangering the economy.
Benes and Kumhof make large claims. They leave
me baffled, to be honest. Readers who want the
technical details can make their own judgement
by studying the text at
<http://www.imf.org/external/pubs/ft/wp/2012/wp12202.pdf>http://www.imf.org/external/pubs/ft/wp/2012/wp12202.pdf.
The IMF duo have supporters. Professor Richard
Werner from Southampton University - who coined
the term quantitative easing (QE) in the 1990s
-- testified to Britain's Vickers Commission
that a switch to state-money would have major
welfare gains. He was backed by the campaign
group Positive Money and the New Economics Foundation.
The theory also has strong critics. Tim Congdon
from International Monetary Research says banks
are in a sense already being forced to increase
reserves by EU rules, Basel III rules, and
gold-plated variants in the UK. The effect has
been to choke lending to the private sector.
He argues that is the chief reason why the world
economy remains stuck in near-slump, and why
central banks are having to cushion the shock with QE.
"If you enacted this plan, it would devastate
bank profits and cause a massive deflationary
disaster. There would have to do `QE squared' to offset it," he said.
The result would be a huge shift in bank balance
sheets from private lending to government
securities. This happened during World War Two,
but that was the anomalous cost of defeating Fascism.
To do this on a permanent basis in peace-time
would be to change in the nature of western
capitalism. "People wouldn't be able to get
money from banks. There would be huge damage to
the efficiency of the economy," he said.
Arguably, it would smother freedom and enthrone
a Leviathan state. It might be even more irksome
in the long run than rule by bankers.
Personally, I am a long way from reaching an
conclusion in this extraordinary debate. Let it
run, and let us all fight until we flush out the arguments.
One thing is sure. The City of London will have
great trouble earning its keep if any variant of
the Chicago Plan ever gains wide support.
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