IMF working paper: The Chicago Plan revisited

[Mike Hearn]

The Bitcoin FAQ entry on deflation I feel could be a lot better. In essentially claims that nobody knows what will happen with a "deflationary model" (which Bitcoin doesn't really have, IMHO, it's designed to be stable). I think I'm going to propose a rewrite of it soon to be less passive.

Two months ago a couple of economists working for the IMF published this draft paper:

http://www.imf.org/external/pubs/ft/wp/2012/wp12202.pdf

It does not represent the official views of the IMF. However the abstract is quite clear:

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

This dovetails nicely with the findings of some economists working at the Minneapolis Fed, who studied the question of deflation in 2004:

http://minneapolisfed.org/research/sr/sr331.pdf

Are deflation and depression empirically linked? No, concludes a broad historical study of inflation and real
output growth rates. Deflation and depression do seem to have been linked during the 1930s. But in the rest
of the data for 17 countries and more than 100 years, there is virtually no evidence of such a link.

Bitcoin implements a steady-state model that is essentially "full reserve banking" or the Chicago Plan, but implemented by eliminating banks and having a global consensus on inflation rather than laws that require 100% reserve ratios.

I haven't read the full IMF paper yet. I hope to get a chance to do so soon. If anyone wants to beat me to it and provide your opinions, go right ahead.

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[CIYAM]

If the FAQ doesn't already mention it then it should also perhaps have something like the following question "Why would you upgrade your computer now rather than in another year?".

Every year computers get more powerful yet cheaper - so if someone's computer today is fast enough to do all the things they do (and CPU's have not got any faster for some time now due to cooling limitations) then wouldn't you simply wait as long as possible to "upgrade"?

Despite this obviously deflationary scenario (i.e. the dollars become worth more compared to the computers the longer you hold off purchasing even if the dollars themselves are getting worth less) computers (and of course mobile phones, etc.) are selling at a huge rate.

I think this argument in itself could be a pretty good response to the "deflationary death spiral" one.

[Wekkel]

The IMF paper clearly is in favour of the Chicago Plan. The end result would be a banking system operating on a full reserve, mitigating the risk of 'bank runs'. Unfortunately, it stops there. Full control of money is still placed in the hands of a few without contraints on printing. Nevertheless, at least the printer would be under 'government control' if you still consider your vote to have an actual influence.

One step in the right direction is better than no step.

[Etlase2]

I think this argument in itself could be a pretty good response to the "deflationary death spiral" one.

I think it's an awful one considering it has absolutely nothing to do with the currency and everything to do with productivity.

In essentially claims that nobody knows what will happen with a "deflationary model" (which Bitcoin doesn't really have, IMHO, it's designed to be stable).

So are we using some heterodox definition of deflation then? Because that isn't confusing or misleading at all.

Bitcoin implements a steady-state model that is essentially "full reserve banking" or the Chicago Plan, but implemented by eliminating banks and having a global consensus on inflation rather than laws that require 100% reserve ratios.

Eliminating banks? So loans just don't exist under this "model"? Or do loans come from Vinny in the back alley? Where is there a model at all for how bitcoin banking (or lack thereof) will work? I don't believe one is written into the protocol.

[Mike Hearn]

People tend to use deflation to mean both "size of the monetary base is falling" and "prices are falling". Bitcoin is obviously not intended to have its monetary base shrink and people have financial incentives to not lose their wallets, obviously.

Prices in a country that used Bitcoin would only fall if the economy is growing. They would rise if the economy shrank. So it's not meaningful to say Bitcoin has a "deflationary model". It is not designed to shrink at any point. In that way, it's like full reserve banking without money printing.

Loans don't have to come from banks. You may wish to watch this talk I gave in London:

http://www.youtube.com/watch?v=mD4L7xDNCmA

or read these:

https://en.bitcoin.it/wiki/Smart_Property
https://bitcointalk.org/index.php?topic=92421.0

[mobile4ever]

Every year computers get more powerful yet cheaper

They will be getting in the way, not just cheaper, but cheaper than a bar code.

Seeing the future means you can prepare for it.

[Serith]

There is a market for fractional reserve in Bitcoin world, e.g. an e-wallet that pays small dividends on deposits would have competitive advantage, but people have a choice to risk or not to risk, and could use an e-wallet that doesn't use their money for investments.

In real world economy the situation is different, inflationary economic model creates an unhealthy incentive to invest, and there is also no way to manage your money without bank account. Those two factors make fractional reserve unavoidable and create a constant risk of collapse.

[Dalkore]

I am in favor of full reserve or 50% reserve banking. The fact that 90%+ of our money is created as credit from private institutions does not sit well with me.  It removes accountability in monetary policy.  Growth is not this end all, be all, unless it is connected with real production that puts people to work or increases income.   Much of our growth is just debt growth and companies completing with each other too rent seek.

[mobile4ever]

  Much of our growth is just debt growth and companies completing with each other too rent seek.

Its amazing to me that people have been so programmed to think that money = debt.

Money is not debt. Keep repeating it until you believe it.


Think of money this way: A tool to set you free, not to enslave you.



==========================
If this was true: Money is debt:


If ↑that ↑ was true, every penny, every piece of paper becomes a loan that needs to be repaid with interest. That is how debts/loans work.  Who is going to pay? Who is going to get that interest payment?

[Adrian-x]

Think of money this way: A tool to set you free, not to enslave you.

+ 1

A commodity money will never be debt it will resort to its utility value, a money substitute like a Bitcoin can resort to a value of nothing if there is no economy to support it (Neither are dept). Only Fiat in our centrally controlled system is quantifiable as dept.