What if there was a financial system that would eliminate the need for the central government to issue government of India bonds through RBI to fund the fiscal deficit or that would end the practice of fractional reserve banking through a CRR of 4.25%?
A surprising new IMF research paper entitled ‘The Chicago Plan Revisited’ by Jaromir Benes and Michael Kumhof is making waves in economic circles, especially with monetarists. The paper suggests that the world would be much better off if we adopted a system where the banks did not create our money. So, instead of a system where more money is only created when more debt is created through the money-multiplier effect, we would have a system of debt-free money that is created directly by the central government. There have been others that have suggested such a system before, but to have an IMF research paper actually recommend that such a system be adopted is a big deal.
One of the fundamental problems with our current financial system is that it is based on debt. Just take a look at the Indian monetary system. The way our system works today, the vast majority of all money is created either when we borrow money from a bank or the central government borrows money. Therefore, the creation of more money creates more debt. Under such a system, it should not be surprising that the total amount of debt of the Indian government has increased more than 3.5 times in the last decade.
The IMF economists argue in the paper that we don’t have to do things this way and that there is a better alternative. The central government can directly issue debt-free currency into circulation. For instance, if the central government spent debt-free money into circulation, it could conceivably never need to borrow a single rupee ever again. If the government wanted to spend more money than it brought in, it would simply print it up and spend it. In a way, the IMF model corroborates the Quantitative Easing programmes that the US government has carried post-crisis. While it is interesting to read