Infinite Guest doesn’t drop a guest post over at Dealbreaker every day, but when he does I always learn something.
This week he dissects a new paper that takes a fresh look at the “Chicago Plan”, an idea from the post-Depression about how someday fractional-reserve lending would be put out to pasture in favor of full-reserve lending – the salutary economic effects of doing so were too obvious and the Plan’s authors believed it would be inevitable.
Only, it never happened. But should we be revisiting the idea?
Full-reserve banking is mathematically superior to fractional-reserve banking given the right initial conditions of leverage and provided that the right institutions have adequate technology and sufficient incentives to behave properly. Both papers assert that full-reserve banking would smooth out the business cycle, reduce public and private debt and consign banking panics to the dustbin of history. The more recent analysis finds, over and above the claims of its ancestor, that full-reserve banking would eliminate inflation and stimulate economic growth. While reasonable people may quibble, let’s assume for the time being that under the right circumstances they’re dead right about all that. What then?
If you’d like to learn more about how this might work, read the whole thing below: