A Chicago plan for reforming banks

This week I came across a couple of articles about the Chicago  Plan for reforming banks and I like it because it proposes changing the way in which we create money and gets rid of the evils of fractional reserve money.

This plan was proposed in the 1930s by some economists from  Chicago and suggests banks be reorganized into two separate identities.  One type of bank would only accept deposits which would be kept 100 per cent with a central bank.  This type of bank would probably have to charge fees for looking after the deposits but they would be safe (except from inflation which would probably be less of a problem – or haircuts.)  No more fear of bank runs.

bankThe second type of bank would be a financial intermediary in that it would make loans based on 100 per cent equity deposits of its customers.  As all deposits would be equity, customers would know there are risks of a loan not being repaid.

As most, if not all,  bankers would see immediately, this would be the end of outrageous Wall Street profits.  Under the current system bankers make huge profits by taking for themselves  the premiums from risky loans but when the risk becomes reality somebody else takes the losses because the money creation feature of banks makes them too important to fail.  People putting money into a loan making business would know the risks and expect the returns to compensate.  The end of fractional reserve money creation would also do away with the leverage which allows bankers the profits from creating money on which they charge interest.

According to the Chicago Plan governments would create the money supply at zero interest.  This would be good in that interest charges would not be built into money creation thereby  reducing the potential for inflation.       My concern is that governments make decisions for political rather than economic reasons.  To me a national LETS (local exchange trading system)  would be preferable way to create money because the amount of money in use would depend upon the collective decisions of individuals.  For the sake of price  stability it is essential that the money supply should be flexible up and down.

When I wrote my essay “LETS go to market: Dealing with the economic crisis” I didn’t put a lot of thought into how to organize banking with a national LETS money system.  I didn’t know it then but the creators of the Chicago plan had already done that.

Why stimulus spending is a bad idea

Sadly, stimulus spending as an economic cure may make things even worse than they are.   It probably will not provide the results its promoters want although it will likely lead to a more egalitarian but poorer economy because there is a possibility it would lead to some heavy-duty inflation.

The ideal way to deal with the economic crisis requires  a major change in economic thinking and values starting with the way in which money is created.  Some ideas are in my essay “LETS go to market: dealing with the economic crisis.”  Of course this is not a realistic proposal. Its implementation would require a dictator with a strong and loyal military and this is contrary to my belief that decision-making should be made by individuals.

chovynz_Money_Bag_IconThat leaves austerity or stimulus.

The basic problem is that we have used up a big chunk of the easily accessible resource base.  There may be lots of energy and minerals left in  the surface  of the planet but they are so difficult and expensive to extract we cannot expect continued economic growth.

If this is a correct analysis then austerity will be forced upon us regardless of what we do.  The real challenge is to cope with austerity with a minimum of human suffering.   The problem with austerity as it is being promoted is the selfishness and meanness of those promoting it on the backs of people who are less fortunate.

But what about stimulus?  At least since Keynes, many economists have and continue to believe the way to get economic growth going is via government stimulus.

There is some evidence the depression of the 1930s was made worse because the banking authorities restricted the amount of money in the economy.   Once governments started spending (works and war) and the money supply was allowed to increase the depression came to an end.  This time  central  banks have been trying to stimulate the economy by creating more money to facilitate more economic activity.  It isn’t working  because the resource base won’t support more economic growth  although only a few people see that as the reason.

So what is likely to happen if the Keynesians get a turn at trying to solve the crisis.

There are two difficulties.

The first is that stimulus will be a transfer of purchasing power from those who now have it to others because the debts incurred will eventually be written off either by default or by inflation.  Cyprus isn’t the only country whose savers are likely to be hit.

The puzzle is why with all the quantitative easing and no matching growth in output we haven’t had inflation.  The answer:  there is anecdotal evidence that the banks and corporations are sitting on piles of cash presumably because they don’t  see profit opportunities.

Governments don’t worry about profits so if the money goes instead to governments for stimulus, it will be spent.  There will be more money chasing the same quantities of goods and services and prices are bound to go up.    Inflation provides an indiscriminate haircut to everyone with monetary savings or investments.  If it gets out of control a lot of people will lose their pensions or their fortunes.  It will solve the inequality about which many people have been worrying.  It would also be a neat revenge against those people who want austerity on the backs of poor people although a lot of innocent people would be hurt.

The second problem with stimulus is that if it succeeds in increasing the output of goods and services it will also use up more of the remaining mineral and energy resources and bring forward the timing of a major crash of civilization.  I would like the goal of economic policy to be to minimize overall  human suffering rather than to increase it.

I am not worried about an economic collapse for my own sake, but I do have six young grandchildren.   Perhaps we should post a job opening for a benevolent dictator.

Fiddlers, venues and copyright

Last night we went to a concert by two Canadian fiddlers –  J.J. Guy from Saskatoon and Gordon Stobe of Nova Scotia.

The unique feature of this concert was that it was for 25 to 30 people in the living and dining rooms of a private home. Not only were the performers mingling with the audience during the intermission but there was also terrific interaction between both groups during the show.

johnny_automatic_3_fiddlers_in_silhouetteAfterwards I asked Gordon  about the difference between this venue and a larger auditorium.  His reply was that he made more money playing to a larger crowd but this was much more enjoyable for him because of the interaction.

Another thing is that these two musicians were making a living out of their music without having to go on the cruise ships.  Even so they do a lot of teaching and they are away from home a lot.  They are making it by being very good and going for a niche in the music industry.  They are probably a lot smarter than those who try to make it in the pop sector.

I also asked about copyright and the music industry.  There have been so many recent changes in the music industry that copyright legislation is mostly irrelevant.  It may be that the future of the music industry is in small venue concerts such as last night.  I hope so and I encourage other people to seek out such concerts.

Health care greed

This post was inspired by a rather long article on why health care in the United States is so expensive.

As I read the first section I was thinking that when it comes to greed some health care people make Wall Street bankers look like amateurs.  By my values the bankers are higher on the ethical ladder than some medical people because the bankers are conning people who are just as greedy.  Medical people are exploiting people when they are sick and at their most vulnerable.

metalmarious_Medicine_and_a_StethoscopeOne of the more interesting university courses I took was sociology of work in which the professor talked about the professional encounter.  We go to a professional when we are in a crisis situation and because the professional has specialized knowledge which can be used to get us out of the crisis.

This gives the professional a great deal of power over us and according to the article it appears some in the he medical profession take full advantage of it.

How do we protect ourselves from medical exploitation?  Normally I would say increase competition.  But one probably doesn’t want to take time to compare prices when having a heart attack.


To some extent we can choose a family doctor.  More competition would make this easier.  We might get a little more competition if health people were to be certified by associations rather than licensed by governments in that associations could certify more practitioners and more different types of practitioner.

Maybe the best way to protect ourselves is to live a healthy lifestyle – exercise, eat mostly healthy foods and practice defensive driving.  Even so it is hard to imagine anyone getting through life without interacting with the medical profession.

%d bloggers like this: