Friday, November 9, 2012
Do Banks Create Money? The Chicago Plan Says Yes
The Chicago Plan Revisited is an IMF paper that tackles the age old question: do banks create money? Traditional economists say no - see an exchange that lays this out here.
However, this paper suggests that banks do, in fact, create money in a disguised way: through loans (which amount to more than the actual cash the bank has) and issuance of credit.
In effect, the banks create a great deal of the money supply in the world, leading to inflation and instability. What if that ability were regulated in order to mitigate the magnitude of booms and busts?
That's what this paper is about.