The “Chicago Plan” to Save the World

Congratulations — of a sort — go out to dear Uncle Samuel…

The old coot notched a record this August. As Daily Reckoning contributor Simon Black notes, the federal government took on an additional $151.5 billion of debt last month — the “single biggest expansion of U.S. debt ever.”

And this year’s $1.36 trillion debt orgy is on track to be the third-biggest annual increase in U.S. history, adds Black. The only two years that tallied higher debt growth were the crisis years of 2009 and 2010:

“Federal debt is expanding at its fastest rate since the financial crisis, and one of the fastest rates in all of U.S. history.”

And if the idea is to borrow the place into prosperity, it’s come up snake eyes. Just today, the Organization for Economic Cooperation and Development (OECD) downgraded its U.S. economic growth forecast to a limping 1.4% for this year and only 2.1% for the next.

Meanwhile, federal debt has topped $19.5 trillion and is growing at a clip. That puts Janet Yellen and the rest of the bunch in a real spot…

“We currently face a monumental dilemma,” moans economist Frank Hollenbeck before posing the $64,000 question: “How do we extract ourselves from all this excessive debt without crashing the world economy?”

Jim Rickards has said desperate elites will resort to a wild brew of “helicopter money,” deeper negative interest rates and/or dramatically higher gold prices to animate the corpse.

But Hollenbeck prescribes an entirely different medicine, one the vested interests won’t guzzle easily…

He summarizes it a “giant reset button on the world economy.” He says it would cancel all government debt held by banks… and over $15 trillion of private debt. And cause real GDP to surge 10% into the bargain — a claim supported by the IMF.

It’s called the Chicago Plan

Originally whipped up at the University of Chicago in the 1930s, Hollenbeck says the Chicago Plan is the answer to the “monumental dilemma” we face.

The government would exchange cash for almost all the banks’ private and public debt. Most credit card debt, mortgage debt, student loan debt and auto debt would vanish at a stroke.

Swap out the debt, in other words. Wipe the slate clean. Start from scratch. And most importantly… never let it happen again:

“With a stroke of a pen, money would be substituted for debt, without the negative consequences of printing money. Banking would be restructured so that it never again leads to boom and bust cycles, and most debt, public and private, could be canceled. It’s basically a ‘one time’ get-out-of-jail card for the world economy.”

The crucial part of the plan would require banks to hold 100% reserves against deposits. Today, banks are only required to maintain less than 10% of deposits on hand. Loans are, therefore, created on foundations of sand. And the sand gives way on occasion, like in 1929. And 2008.

The Chicago Plan would shift lending to concrete footing. No more fractional reserve banking. Bank deposits would be separated from loans under the Chicago Plan, so banks would finally act as the true financial intermediaries they were meant to be, says Hollenbeck. Not the “fraudsters they are today.”

Irving Fisher, big Yale economist of the day, continues Hollenbeck, “said that the plan would greatly reduce the severity of business cycles, probably eliminating booms and busts. Bank runs would be impossible, making deposit insurance unnecessary, and it would greatly reduce the amount of public and private debt.”

Hollenbeck says the plan, if structured correctly, “would finally set the world economy on a stable path.” Perhaps it would, and it sure sounds swell.

But at this point, Hollenbeck begins chasing rainbows…

He says central banks should be abolished (with a straight face, no less!). The plan would “finally stop governments from fiddling with the economy’s most important price: the interest rate.”

And Hollenbeck says a gold standard should be implemented to put handcuffs on governments, because they’ll never constrain spending without one. True, but we’ve never seen the government voluntarily slap handcuffs on itself. It’s a sight we’d happily crawl under a curtain to see.

The fantasy deepens. Under the Chicago Plan, governments would be forced to depend entirely on direct taxation to fund spending: “The government would have to explain to the taxpayer why he must forgo his flat-screen television at Christmas to pay for soldiers in Afghanistan or planes over Libya. The average citizen would finally realize there is no free lunch, and that government services require real sacrifices.”

But Hollenbeck forgets his Bastiat: “Government is the great fiction through which everybody endeavors to live at the expense of everybody else.” And to expect the government to scissor its credit card is to expect the devil in church.

The Chicago Plan never saw day in the ’30s because the banks didn’t want it to. Question: Why would it be any different today? The big banks are even bigger than they were before 2008, after all.

We have our suspicions about the Chicago Plan, of course, as we do about all “plans.” And we prefer to taste ideas on the tongue before swallowing the entire dish. This Chicago Plan surely has its sour bits that would require some sugaring.

But is more of the same the way to go? No. Not according to Hollenbeck:

Inaction is not an option. Today, we are between a rock and a hard place with no good choices. We are left with the increasing likelihood of severe depressions and hyperinflations… It is essential that we start a banking revolution before it is too late. The Chicago Plan would restructure the banking system, leaving a world for our children that is stable without the booms and busts that have created so much hardship for so many.

Wake us when it happens, please. But that doesn’t mean radical changes aren’t in the offing.


Brian Maher
Managing editor, The Daily Reckoning

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