STAFF NEWS & ANALYSIS
Rediscovering IMF Working Papers
By Staff News & Analysis - October 22, 2012

IMF's epic plan to conjure away debt and dethrone bankers … So there is a magic wand after all. A revolutionary paper by the International Monetary Fund claims that one could eliminate the net public debt of the US at a stroke, and by implication do the same for Britain, Germany, Italy, or Japan. The IMF report says the conjuring trick is to replace our system of private bank-created money. – Ambrose Evans-Pritchard/UK Telegraph

Dominant Social Theme: Government should be in charge of money not the market.

Free-Market Analysis: The Telegraph's Ambrose Evans-Pritchard has caught up to a working paper entitled "The Chicago Plan Revisited" issued by IMF staff members Jaromir Benes and Michael Kumhof.

His summary: "Personally, I am a long way from reaching a conclusion in this extraordinary debate. Let it run, and let us all fight until we flush out the arguments."

We're not so sure that it is necessary to straddle the proverbial fence. In early September we wrote about this paper as follows:

"Government" money is a default position of the powers-that-be. If "they" cannot control the money supply directly through facilities like the quasi-public/quasi-private Federal Reserve, they will control it through public facilities and make arguments via their surrogates for this sort of remedy.

We see this trend building once again with "The Chicago Plan Revisited." These two authors, IMF staffers, have rediscovered a plan by Irving Fisher, a monetarist, to strip banks of lending power.

Basically, Fisher's plan has similarities with Stephen Zarlenga's plan that calls for full reserve banking and for the government to spend money into existence via huge public works programs.

This is pretty much a step back from monetary crank Major Douglas of social credit fame – who at least wanted government to give people currency directly. But neither Douglas nor anyone else has a convincing argument for how much money is enough – and how much is too much.

In truth, ONLY the private market can do this via monetary competition and the free circulation of gold and silver. Only the market can set the price for money. Anything else is price-fixing and causes great booms and busts.

See the full article here: "Black Is White, Up Is Down … If We Want to be Free, Let Government Run Money."

We call Douglas a crank because we don't see how his plan for social credit could be enforced without violence. What Douglas wanted was for society to redistribute "excess income" every year. Presumably this was to be done by government bureaucrats.

Douglas, an engineer by training, claimed there was excess income in society because when he collected data from over a hundred large British businesses, "he found that in every case, except that of companies heading for bankruptcy, the sums paid out in salaries, wages and dividends were always less than the total costs of goods and services produced each week: consumers did not have enough income to buy back what they had made."

The major flaw with this is, of course, that Douglas could not have taken into account gray and black markets that always thrive in economies. In any event, it is impossible to quantify something so complex as a large-scale economy. Sweeping generalizations are impossible. Marx was good at them, too.

Douglas did not especially like another monetary reformer of note, Silvio Gesell, who believed that money ought to be issued by the state in depreciating quantities. Everyone would need to get money stamped at the end of every month to renew it. Douglas believed this concept constituted the most terrible tax ever invented.

Both Douglas and Gesell, though at odds with each other, are said to have published extensively in Fabian journals. One can surmise that the Fabians were interested in them because of their celebration of state power (by default if not rhetorically).

All of this seems to pass Evans-Pritchard by to a certain extent. Or to put it another way, it appeals to the famous journo's more authoritarian instincts. He writes:

One could slash private debt by 100pc of GDP, boost growth, stabilize prices, and dethrone bankers all at the same time. It could be done cleanly and painlessly, by legislative command, far more quickly than anybody imagined.

Indeed, "legislative commands" do operate "cleanly" – at least to begin with. But Stalin was also a fan of such sterility. "No man, no problem," he famously suggested.

Evans-Pritchard makes some other questionable statements in this article, if we understand him correctly …

Benes and Kumhof argue that credit-cycle trauma – caused by private money creation – dates deep into history and lies at the root of debt jubilees in the ancient religions of Mesopotian and the Middle East.

Harvest cycles led to systemic defaults thousands of years ago, with forfeiture of collateral, and concentration of wealth in the hands of lenders. These episodes were not just caused by weather, as long thought. They were amplified by the effects of credit …

It is a myth – innocently propagated by the great Adam Smith – that money developed as a commodity-based or gold-linked means of exchange. Gold was always highly valued, but that is another story. Metal-lovers often conflate the two issues.

Anthropological studies show that social fiat currencies began with the dawn of time. The Spartans banned gold coins, replacing them with iron disks of little intrinsic value. The early Romans used bronze tablets. Their worth was entirely determined by law – a doctrine made explicit by Aristotle in his Ethics – like the dollar, the euro, or sterling today.

Some argue that Rome began to lose its solidarity spirit when it allowed an oligarchy to develop a private silver-based coinage during the Punic Wars. Money slipped control of the Senate. You could call it Rome's shadow banking system. Evidence suggests that it became a machine for elite wealth accumulation.

There are a number of "issues" with these statements, if one examines them logically. Perhaps the most important is that to simply state that lenders helped create systematic defaults is to ignore fundamental points about how economies work.

In fact, the same difficulties affecting debtors would logically have to affect lenders. If one investigates these societies one will certainly find that lenders had created advantages via government power – passed laws, in other words, to facilitate the benefits of mercantilism.

Another statement made by Evans-Pritchard is, "Rome began to lose its solidarity spirit when it allowed an oligarchy to develop a private silver-based coinage during the Punic Wars. Money slipped control of the Senate."

Roman government coinage began around 300 BC but Rome was founded out of seven separate hillside communities around 800 BC. What does Evans-Pritchard believe was used before 300 BC – pure barter?

Of course not. There were surely competing private and public mints. Monopoly government minting was a step toward authoritarianism … inevitably leading to oligarchy. Evans-Pritchard has confused the cause with the effect.

And then there is this:

The original authors of the Chicago Plan were responding to the Great Depression. They believed it was possible to prevent the social havoc caused by wild swings from boom to bust, and to do so without crimping economic dynamism.

The benign side-effect of their proposals would be a switch from national debt to national surplus, as if by magic. "Because under the Chicago Plan banks have to borrow reserves from the treasury to fully back liabilities, the government acquires a very large asset vis-à-vis banks. Our analysis finds that the government is left with a much lower, in fact negative, net debt burden."

The IMF paper says total liabilities of the US financial system – including shadow banking – are about 200pc of GDP. The new reserve rule would create a windfall. This would be used for a "potentially a very large, buy-back of private debt", perhaps 100pc of GDP …

"The control of credit growth would become much more straightforward because banks would no longer be able, as they are today, to generate their own funding, deposits, in the act of lending, an extraordinary privilege that is not enjoyed by any other type of business," says the IMF paper.

"Rather, banks would become what many erroneously believe them to be today, pure intermediaries that depend on obtaining outside funding before being able to lend."

The US Federal Reserve would take real control over the money supply for the first time, making it easier to manage inflation. It was precisely for this reason that Milton Friedman called for 100pc reserve backing in 1967. Even the great free marketeer implicitly favoured a clamp-down on private money.

Do people advocating these sorts of ideas really believe the United States would do better if Congress fully administered money as opposed to the current diffuse private/public monopoly money system?

To ask the question is to answer it. We are sure the current misery would only be compounded … if that were possible. We've watched this movement building for a long time and we still have the same question now that we had long ago: Who really benefits?

If one accepts that the goals of the current power elite are to build world government using central banking Money Power, then one should next examine how such power retains its force when challenged by what we call the Internet Reformation.

The best way to retain power is to create various kinds of false flags that seem to oppose one's own self interest but that really do not. Would it really crush Money Power were currency administered fully by the state instead of the public/private system we've got now?

Would it really be any better? We think the problem is too MUCH government, not too little. We think money would benefit by a fuller privatization (and competition) rather than the installation of yet an even larger monetary bureaucracy.

After Thoughts

It is interesting that the IMF has chosen to reissue this paper now. The IMF, of course, has an interest in government fiat, after all. Its top officials no doubt fervently hope they will be put in charge of administering it on behalf of "the people."

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