<p><a href="https://scholar.princeton.edu/sites/default/files/markus/files/equivalenceprivatepublicmoney.01jan2019.pdf" rel="nofollow noreferrer">On the Equivalence of Private and Public Money</a> is a 2019 working paper by Brunnermeier and Niepelt that addresses this issue:</p>

<blockquote>
  <p>We propose a generic model of money and liquidity.  We provide
  sufficient conditions under which a swap of private (inside) against
  public (outside) money leaves the equilibrium allocation and price
  system unchanged. We apply the results to Central Bank Digital
  Currency,  the “Chicago Plan,”  and the Indian de-monetization
  experiment.</p>
</blockquote>

<p>This is their exercise:</p>

<blockquote>
  <p>As a result of these developments, debates about the “right” monetary
  architecture resurface and classic questions about the nature of money
  return to the fore.  A key point of contention concerns the optimal
  balance between public and private money. Proponents of a strong
  government role fear that private money creation breeds instability
  and shifts seignorage rents from taxpayers to shareholders.  In the
  “Chicago Plan” of the 1930s and the  recently  rejected  Swiss 
  constitutional  referendum  on  “Vollgeld”  (sovereign  money), they
  propose to severely restrict or even ban money creation by anyone
  except the central bank.  Less drastic proposals aim at electronic
  Central Bank Digital Currency (CBDC) for use by non-banks.  Monetary
  authorities in countries such as Canada, Singapore, and Sweden
  currently evaluate the introduction of such “Reserves for All;” the
  Banco Central del Uruguay has successfully tested the model; and other
  central banks consider it.</p>
  
  <p>Skeptics, on the other hand, warn of severe macroeconomic risks due to
  the replace- ment of private by public means of payment.  In their
  view, a reduction of bank issued inside money will hamper credit
  extension by banks to firms and households, with negative
  implications for growth;  and the introduction of CBDC will provide a
  safe haven asset for depositors to run into at the slightest hint of a
  crisis, rendering bank runs more likely and thereby threatening
  financial stability.</p>
  
  <p>To assess these arguments, we develop a generic model of money and
  liquidity.  Within this framework, we establish sufficient conditions
  under which it is irrelevant whether the public  or  the  private 
  sector  issues  means  of  payment.</p>
</blockquote>

<p>They summarize their results as follows:</p>

<blockquote>
  <p>We  apply  our  results  to  two  proposals  for  monetary  reform: 
  CBDC,  and  the  more drastic “Chicago Plan.”  We find that the
  introduction of CBDC need not change macroeconomic outcomes,
  independently of whether deposits are subject to bank runs or not.  If
  bank runs are a feature of the current system then the equivalent
  monetary regime with CBDC has state contingent transfers from the
  private sector to the central bank; if it does not, for instance due
  to a generous deposit insurance scheme, then no such transfers are
  needed.</p>
  
  <p>Contrary to the prevailing view that CBDC would make bank runs more
  likely, our analysis concludes that it might well make them less
  likely.  With pass-through funding, the central bank becomes a large
  depositor that internalizes run externalities, unlike small
  depositors.  This makes the financial system less fragile. Regarding
  the Chicago Plan, we also find that the conditions for equivalence are
  met provided that banks receive appropriate compensation for lost
  seignorage rents, or that the  ownership  structure  of  banks  is 
  aligned  with  the  distributions  of  tax  burdens.   An important
  motivation for the “Vollgeld” proposal to outlaw banks from creating
  liquid assets  was  that  banks  should  be  forced  to  relinquish 
  these  rents.   This  would  transfer seignorage from bank
  shareholders to taxpayers, undermining wealth-neutrality.</p>
  
  <p>We also apply our results to the recent Indian de-monetization
  experiment.  We find that it could not have been neutral because
  cash-based transactions at black-market prices could not have been
  replaced by deposit-based transactions.</p>
</blockquote>

<p>In contrast, there is a Bank of England working paper that strongly disagrees.<a href="https://www.bankofengland.co.uk/working-paper/2016/the-macroeconomics-of-central-bank-issued-digital-currencies" rel="nofollow noreferrer">The macroeconomics of central bank issued digital currencies</a> by Barrdear and Kumhof (2016):</p>

<blockquote>
  <p>We study the macroeconomic consequences of issuing central bank
  digital currency (CBDC) -- a universally accessible and
  interest-bearing central bank liability, implemented via distributed
  ledgers, that competes with bank deposits as medium of exchange.  In a
  DSGE model calibrated to match the pre-crisis United States, we find
  that CBDC issuance of 30% of GDP, against government bonds, could
  permanently raise GDP by as much as 3%, due to reductions in real
  interest rates, distortionary taxes, and monetary transaction costs. 
  Countercyclical CBDC price or quantity rules, as a second monetary
  policy instrument, could substantially improve the central bank’s
  ability to stabilise the business cycle.</p>
</blockquote>

CC BY-SA 4.0
2019-06-05T15:23:11.793Z
2019-06-05T15:23:11.793Z
BKay
<p>A 2012 IMF Working paper by Benes and Kumhof <a href="https://www.imf.org/external/pubs/ft/wp/2012/wp12202.pdf" rel="nofollow noreferrer">"The Chicago Plan Revisited 
"</a> has this abstract, finding in favor of the Chicago Plan an all counts basically:</p>

<blockquote>
  <p>At the height of the Great Depression a number of leading U.S. economists advanced a
  proposal for monetary reform that became known as the Chicago Plan. It envisaged the
  separation of the monetary and credit functions of the banking system, by requiring 100%
  reserve backing for deposits. Irving Fisher (1936) claimed the following advantages for this
  plan: (1) Much better control of a major source of business cycle fluctuations, sudden
  increases and contractions of bank credit and of the supply of bank-created money.
  (2) Complete elimination of bank runs. (3) Dramatic reduction of the (net) public debt.
  (4) Dramatic reduction of private debt, as money creation no longer requires simultaneous
  debt creation. We study these claims by embedding a comprehensive and carefully calibrated
  model of the banking system in a DSGE model of the U.S. economy. We find support for all
  four of Fisher's claims. Furthermore, output gains approach 10 percent, and steady state
  inflation can drop to zero without posing problems for the conduct of monetary policy. </p>
</blockquote>

<p>Interestingly, that paper even has <a href="https://en.wikipedia.org/wiki/The_Chicago_Plan_Revisited" rel="nofollow noreferrer">a Wikipedia article</a> but the only criticism mentioned there is from Austrians. I suspect however that the Chicago Plan couldn't be all that uncontroversial with mainstream either, as it would pretty much eliminate the fractional reserve etc. Has this DSGE model of Benes and Kumhof, validating the Chicago Plan with such rosy outlooks (10% improvement in output etc.) received any critical commentary in mainstream/orthodox sources?</p>

<hr>

<p>I also found <a href="https://www.researchgate.net/profile/Kristofer_Dittmer/publication/268210566_100_percent_reserve_banking_A_critical_review_of_green_perspectives/links/5b8ce550299bf1d5a73a1124/100-percent-reserve-banking-A-critical-review-of-green-perspectives.pdf" rel="nofollow noreferrer">a paper</a> by Dittmer (2015) about the topic (of full reserve banking) in <em>Ecological Economics</em>, but this journal is also rather heterodox. And another <a href="http://eprints.whiterose.ac.uk/103348/3/FontanaFull%20Reserve%20Banking.pdf" rel="nofollow noreferrer">Sawyer and Fontana (2016)</a> in the leading journal of heterodox economics...  (N.B.: the article in <em>Ecological Economics</em> is probably in part motivated by the fact that the Green Party of England and Wales has incorporated this full-reserve banking proposal in their platform; strangely enough, the former paper doesn't mention this fact, but the latter one does.)</p>

<macroeconomics><reference-request><economic-growth><banking><dsge>
Is there any mainstream criticism of the Benes-Kumhof conclusion that the Chicago Plan would improve the US economy nowadays?
fantastic peace and prosperity
# Is there any mainstream criticism of the Benes-Kumhof conclusion that the Chicago Plan would improve the US economy nowadays?

(Asked by: username_0 on 2019-06-04)

A 2012 IMF Working paper by Benes and Kumhof ["The Chicago Plan Revisited
"](https://www.imf.org/external/pubs/ft/wp/2012/wp12202.pdf) has this abstract, finding in favor of the Chicago Plan an all counts basically:

> At the height of the Great Depression a number of leading U.S. economists advanced a
> proposal for monetary reform that became known as the Chicago Plan. It envisaged the
> separation of the monetary and credit functions of the banking system, by requiring 100%
> reserve backing for deposits. Irving Fisher (1936) claimed the following advantages for this
> plan: (1) Much better control of a major source of business cycle fluctuations, sudden
> increases and contractions of bank credit and of the supply of bank-created money.
> (2) Complete elimination of bank runs. (3) Dramatic reduction of the (net) public debt.
> (4) Dramatic reduction of private debt, as money creation no longer requires simultaneous
> debt creation. We study these claims by embedding a comprehensive and carefully calibrated
> model of the banking system in a DSGE model of the U.S. economy. We find support for all
> four of Fisher's claims. Furthermore, output gains approach 10 percent, and steady state
> inflation can drop to zero without posing problems for the conduct of monetary policy.

Interestingly, that paper even has [a Wikipedia article](https://en.wikipedia.org/wiki/The_Chicago_Plan_Revisited) but the only criticism mentioned there is from Austrians. I suspect however that the Chicago Plan couldn't be all that uncontroversial with mainstream either, as it would pretty much eliminate the fractional reserve etc. Has this DSGE model of Benes and Kumhof, validating the Chicago Plan with such rosy outlooks (10% improvement in output etc.) received any critical commentary in mainstream/orthodox sources?

---

I also found [a paper](https://www.researchgate.net/profile/Kristofer_Dittmer/publication/268210566_100_percent_reserve_banking_A_critical_review_of_green_perspectives/links/5b8ce550299bf1d5a73a1124/100-percent-reserve-banking-A-critical-review-of-green-perspectives.pdf) by Dittmer (2015) about the topic (of full reserve banking) in *Ecological Economics*, but this journal is also rather heterodox. And another [Sawyer and Fontana (2016)](http://eprints.whiterose.ac.uk/103348/3/FontanaFull%20Reserve%20Banking.pdf) in the leading journal of heterodox economics... (N.B.: the article in *Ecological Economics* is probably in part motivated by the fact that the Green Party of England and Wales has incorporated this full-reserve banking proposal in their platform; strangely enough, the former paper doesn't mention this fact, but the latter one does.)

**Tags:** macroeconomics, reference-request, economic-growth, banking, dsge

---

## 1 answers

### Answer by username_1 on 2019-06-05. Score: 1

[On the Equivalence of Private and Public Money](https://scholar.princeton.edu/sites/default/files/markus/files/equivalenceprivatepublicmoney.01jan2019.pdf) is a 2019 working paper by Brunnermeier and Niepelt that addresses this issue:

> We propose a generic model of money and liquidity. We provide
> sufficient conditions under which a swap of private (inside) against
> public (outside) money leaves the equilibrium allocation and price
> system unchanged. We apply the results to Central Bank Digital
> Currency, the “Chicago Plan,” and the Indian de-monetization
> experiment.

This is their exercise:

> As a result of these developments, debates about the “right” monetary
> architecture resurface and classic questions about the nature of money
> return to the fore. A key point of contention concerns the optimal
> balance between public and private money. Proponents of a strong
> government role fear that private money creation breeds instability
> and shifts seignorage rents from taxpayers to shareholders. In the
> “Chicago Plan” of the 1930s and the recently rejected Swiss
> constitutional referendum on “Vollgeld” (sovereign money), they
> propose to severely restrict or even ban money creation by anyone
> except the central bank. Less drastic proposals aim at electronic
> Central Bank Digital Currency (CBDC) for use by non-banks. Monetary
> authorities in countries such as Canada, Singapore, and Sweden
> currently evaluate the introduction of such “Reserves for All;” the
> Banco Central del Uruguay has successfully tested the model; and other
> central banks consider it.
>
> Skeptics, on the other hand, warn of severe macroeconomic risks due to
> the replace- ment of private by public means of payment. In their
> view, a reduction of bank issued inside money will hamper credit
> extension by banks to firms and households, with negative
> implications for growth; and the introduction of CBDC will provide a
> safe haven asset for depositors to run into at the slightest hint of a
> crisis, rendering bank runs more likely and thereby threatening
> financial stability.
>
> To assess these arguments, we develop a generic model of money and
> liquidity. Within this framework, we establish sufficient conditions
> under which it is irrelevant whether the public or the private
> sector issues means of payment.

They summarize their results as follows:

> We apply our results to two proposals for monetary reform:
> CBDC, and the more drastic “Chicago Plan.” We find that the
> introduction of CBDC need not change macroeconomic outcomes,
> independently of whether deposits are subject to bank runs or not. If
> bank runs are a feature of the current system then the equivalent
> monetary regime with CBDC has state contingent transfers from the
> private sector to the central bank; if it does not, for instance due
> to a generous deposit insurance scheme, then no such transfers are
> needed.
>
> Contrary to the prevailing view that CBDC would make bank runs more
> likely, our analysis concludes that it might well make them less
> likely. With pass-through funding, the central bank becomes a large
> depositor that internalizes run externalities, unlike small
> depositors. This makes the financial system less fragile. Regarding
> the Chicago Plan, we also find that the conditions for equivalence are
> met provided that banks receive appropriate compensation for lost
> seignorage rents, or that the ownership structure of banks is
> aligned with the distributions of tax burdens. An important
> motivation for the “Vollgeld” proposal to outlaw banks from creating
> liquid assets was that banks should be forced to relinquish
> these rents. This would transfer seignorage from bank
> shareholders to taxpayers, undermining wealth-neutrality.
>
> We also apply our results to the recent Indian de-monetization
> experiment. We find that it could not have been neutral because
> cash-based transactions at black-market prices could not have been
> replaced by deposit-based transactions.

In contrast, there is a Bank of England working paper that strongly disagrees.[The macroeconomics of central bank issued digital currencies](https://www.bankofengland.co.uk/working-paper/2016/the-macroeconomics-of-central-bank-issued-digital-currencies) by Barrdear and Kumhof (2016):

> We study the macroeconomic consequences of issuing central bank
> digital currency (CBDC) -- a universally accessible and
> interest-bearing central bank liability, implemented via distributed
> ledgers, that competes with bank deposits as medium of exchange. In a
> DSGE model calibrated to match the pre-crisis United States, we find
> that CBDC issuance of 30% of GDP, against government bonds, could
> permanently raise GDP by as much as 3%, due to reductions in real
> interest rates, distortionary taxes, and monetary transaction costs.
> Countercyclical CBDC price or quantity rules, as a second monetary
> policy instrument, could substantially improve the central bank’s
> ability to stabilise the business cycle.


---

