2023-03-21 17:15:34 ET
Summary
- The banking system of the United States is in disarray right now and needs changing, but at the moment, its leaders seem to be confused as to where to go.
- Not only do the authorities need to be cognizant about the current financial crisis, but they need to be aware of how technology is changing the whole system.
- The Chicago Plan is a plan to separate the monetary function of banks from the credit function, especially focusing a lot on the payments system of money exchange.
- This plan is perfectly consistent with the transformation taking place in the financial world, where more and more emphasis is being placed on the digital structure of the payments system.
- Digital is the future, and so the banking system is going to change radically, but right now, the financial system needs to see the leadership that will help us define the future.
The search is on for the next generation of bank structure.
After all the revisions of the banking structure and its regulation coming out of the Great Recession, which ended in 2009, the world is still looking for something that will really work.
Well, some analysts are coming up with something that would really work to resolve the recurrent problem of banking crises.
Their solution...the Chicago Plan.
Why is the Chicago Plan getting so much attention?
Well, the Chicago Plan is getting so much attention these days because the banking world is facing the evolution of finance into the digital world.
The Chicago Plan has faced difficulties in the past because it required that members of the public would hold central bank money directly.
This possibility faced great problems in the past because the banking system was set up in a branch network where it would be impossible for everyone to hold central bank money.
The payment system would be clumsy and inefficient.
Now, however, the banking system is evolving toward a structure that is based on Central Bank Digital Currency ((CBDC)).
The central bank in such a world would become a monopoly supplier of money. The money would circulate through a digital payments system that could be organized through technology companies.
Risk-intermediation could be achieved by other types of organizations that would bridge different markets.
In essence, the Chicago plan separates the monetary and credit functions of banking.
The financing of new bank credit could only take place through banks retaining earnings or borrowing funds in the form of government-issued money.
In essence, the government would have full control over money issuance.
Bank deposits cease to be private loans and become government-issued money.
The payments system allows these deposits to be transferred throughout the system.
This plan originated in 1933, and the list of well-known economists that supported the idea is lengthy.
In the evolving system, the payments system would all become digital.
100 percent reserve backing would eliminate all fear of "bank runs" and allow the financial system to focus upon lending as an intermediary function that could just focus upon the economics of lending.
The Digital World
The world is evolving. I am a strong believer that the emergence of a digital world cannot be stopped.
The world is going to become digital. There is nothing that can stop it.
So more and more people are bringing up the idea of digital banking during this time of financial uncertainty.
Martin Wolf, in the Financial Times , takes a look at four possible banking systems that could replace the current one, the Chicago Plan being the fourth of the possibilities.
These ideas are also becoming more numerous around the world. I highly recommend you take a look at this article put out by the London School of Economics.
The problem is that we are really not ready for three of the four choices that Mr. Wolf discusses, especially the Chicago Plan.
But, Mr. Wolf argues that our efforts must be aimed at the "new" future.
To me, we have to look seriously at the coming world and take account of the technology that is arising around us.
"Ideally," Mr. Wolf states, "it would be radically transformed."
The Movement Happening
My argument, up to now, is that the transformation is already underway.
As stated above, the financial world is becoming digital.
Even more importantly for the banking system, the world is concentrating, more and more, on the payments system as the crucial foundation for all the changes that will take place.
It seems to me that this is the perfect time to move to something like the Chicago Plan, something that ultimately will be driven by the future of the payments system.
The future of the payments system is the crux of what the future will look like.
I believe that this evolution has already begun in the Chinese system. I have written many posts on this over the past several years.
The Chinese are looking to have the leading currency in the world. They are betting their whole future on the digital construction of the world. They have stopped the development of cryptocurrencies in China in order to not be distracted from their efforts to build the digital future.
The United States (and many others) need to take this into account.
The future is digital.
A central bank digital currency is what such a future will be built upon.
The Chicago Plan is a good model to construct such a world around.
The United States (and its banking system) must be a part of this future.
The United States (and its banking system) must get its act together and get going.
The disruptions taking place currently within the banking system are only a warning of what must be done going forward.
The banking system must become digital. The payments system must be at the top of the list for change.
It is imperative that the Federal Reserve and the U.S. government get their focus right. This period of time may be the "tipping point."
The financial system and its regulation cannot stay the same!
For further details see:
The Answer To The Banking Problem: The Chicago Plan