The Chicago Plan Revisited: An Austrian critique

2021 ◽  
pp. 253-271
Author(s):  
Marius Kleinheyer
Keyword(s):  
Banking System ◽  
Central Banking ◽  
Fractional Reserve Banking ◽  
Complete Control ◽  
Economic Discourse ◽  
Working Paper ◽  
Fractional Reserve ◽  
Original Plan ◽  
Fundamental Reflection ◽  
Reserve Banking

Within the context of the economic crisis since 2007 a space for fundamental reflection on the institutional structure of the finan-cial system has been opened, allowing for the introduction of sig-nificant reform proposals in the economic discourse. The IMF economists Jaromir Benes and Michael Kumhof published a work-ing paper in August 2012, reintroducing the Chicago Plan as such a proposal.2 Following up the work of Irving Fisher (1935)3 the au-thors propose the separation of the monetary and the credit func-tions of the banking system, by requiring 100% reserve backing for deposits. This plan is designed to eliminate the possibilities for private banks to create money through fractional reserve banking and is supposed to give governments the complete control over money issuance. The central bank, upgraded as a powerful mone-tary commission, is seen as the best candidate to serve as a state’s monetary authority in the exercise of its monetary prerogative (monopoly of currency, money issuance, and seigniorage). The purpose of this paper is to provide an overview of the ele-ments of this reform proposal, contrast it with a recapitulatory display of the Austrian analysis and evaluate the plan based on its political desirability. In the first step, the original plan from 1935 by Irving Fisher is presented. Second, the newest version and the key findings of Ben-es and Kumhof are summarized. Third the Austrian critique of fractional reserve banking and central banking is laid out. In the fourth step, a response to a peculiarity of the working paper about the origin of money is offered. In conclusion a brief discussion on the likelihood of political implementation and the evaluation from the Austrian perspective close the argumentation.

scholarly journals A Digital Currency Architecture for Privacy and Owner-Custodianship

2021 ◽  
Vol 13 (5) ◽  
pp. 130
Author(s):  
Geoffrey Goodell ◽  
Hazem Danny Al-Nakib ◽  
Paolo Tasca
Keyword(s):  
Systemic Risk ◽  
Banking System ◽  
Developed Countries ◽  
Fractional Reserve Banking ◽  
Point Of Sale ◽  
Digital Currency ◽  
Fractional Reserve ◽  
Banking Relationships ◽  
Reserve Banking ◽  
Payment Mechanisms

In recent years, electronic retail payment mechanisms, especially e-commerce and card payments at the point of sale, have increasingly replaced cash in many developed countries. As a result, societies are losing a critical public retail payment option, and retail consumers are losing important rights associated with using cash. To address this concern, we propose an approach to digital currency that would allow people without banking relationships to transact electronically and privately, including both e-commerce purchases and point-of-sale purchases that are required to be cashless. Our proposal introduces a government-backed, privately-operated digital currency infrastructure to ensure that every transaction is registered by a bank or money services business, and it relies upon non-custodial wallets backed by privacy-enhancing technology, such as blind signatures or zero-knowledge proofs, to ensure that transaction counterparties are not revealed. Our approach to digital currency can also facilitate more efficient and transparent clearing, settlement, and management of systemic risk. We argue that our system can restore and preserve the salient features of cash, including privacy, owner-custodianship, fungibility, and accessibility, while also preserving fractional reserve banking and the existing two-tiered banking system. We also show that it is possible to introduce regulation of digital currency transactions involving non-custodial wallets that unconditionally protect the privacy of end-users.

Fiat money: from the current Islamic finance scholars’ perspective

Humanomics ◽  
2017 ◽  
Vol 33 (3) ◽  
pp. 274-299 ◽  
Author(s):  
Syammon Jaffar ◽  
Adam Abdullah ◽  
Ahamed Kameel Mydin Meera
Keyword(s):  
Design Methodology ◽  
Banking System ◽  
Commercial Banking ◽  
Quantitative Investigation ◽  
Fractional Reserve Banking ◽  
Content Type ◽  
Fiat Money ◽  
Fractional Reserve ◽  
Level Of Knowledge ◽  
Reserve Banking

Purpose This paper aims to discuss the opinions of current Shariah scholars on the concept of debt money in the present-day fiat money system. Design/methodology/approach Research design of this paper is a quantitative investigation of Shariah experts by distributing a questionnaire to them. As majority of Shariah scholars are also Shariah advisory of the current banking system, it is important to find out their level of knowledge on the issue of debt money created by the commercial banking system through the fractional-reserve banking (FRB) system. Findings Based on this investigation, most Shariah scholars are unaware of and confused about the mechanics underpinning the creation of money, especially with respect to FRB as it is practiced by the conventional and Islamic banking systems. Originality/value Based on this research, it is recommended that these scholars should improve their understanding of the operation of the fiat money system and its consequences. It is recommended that, in future, Shariah scholars should think “outside of the box” by creating Islamic financial instruments that do not resemble those of the conventional system.

Full reserve system and the Maqasid Shariah

2017 ◽  
Vol 5 (2) ◽  
pp. 58 ◽  
Author(s):  
Zuriyati Ahmad ◽  
Abdul Ghafar Ismail
Keyword(s):  
System Analysis ◽  
Banking System ◽  
Fractional Reserve Banking ◽  
Monetary System ◽  
Fractional Reserve ◽  
Reserve Banking ◽  
Reserve System ◽  
System Today

The essence of the monetary system today is in using the fractional reserve banking system. Nonetheless, this system is not free of critics such as the fraud of making loans and creating deposits out of nothing which are argued to create distortion to the economy. Since 1930s, many economic scholars have debated the use of full reserve system as an alternative tool of monetary system.Islamic scholars also argue and reject the working of fractional reserve banking system and propose the idea of full reserve system. From the view of Islamic scholars, the full reserve system should be applied to avoid the riba’ in the monetary system. Hence, this study tries to assess whether the use of full reserve system can attain the Maqasid Shariah to support the alternative banking system. Using the argument on fractional reserve system, discussion on the concept of full reserve system, analysis of the impacts of full reserve system and the support from Quran and Hadith, this study concludes that the injustice and riba’ can be avoided under thefull reserve system, hence,attaining the Maqasid Shariah.

scholarly journals The Future of Money and the Central Bank Digital Currency Dilemma

2020 ◽  
Vol 12 (22) ◽  
pp. 9697
Author(s):  
Carlos Viñuela ◽  
Juan Sapena ◽  
Gonzalo Wandosell
Keyword(s):  
Central Bank ◽  
Balance Sheet ◽  
Banking System ◽  
Fractional Reserve Banking ◽  
Trade Off ◽  
Bank Deposits ◽  
Fractional Reserve ◽  
Financial Framework ◽  
Low Levels ◽  
Reserve Banking

In this paper we set out a three-pillar monetary-financial framework to (i) analyze, categorize and compare past, current and emerging means of payment; to (ii) capture their creation and destruction processes through sectoral balance sheet dynamics; and to (iii) identify the inherent risks to the current monetary-financial system, also known as the fractional reserve banking system. These risks, which stem from sudden shifts in money demand and supply, are as follows: (I) risk of a cashless society; (II) risk of structural bank disintermediation; (III) risk of systemic bank runs; (IV) risk of currency substitution; and (V) risk of economic and financial bubbles. This framework will guide the assessment of the central bank digital currencies (CBDC), which are considered as the next step in monetary evolution. We will analyze two large groups of CBDC proposals: (i) proposals aimed at complementing cash and bank deposits; and (ii) proposals aimed at replacing all bank deposits with CBDCs. We find that once CBDCs are issued in both sets of proposals, there is always a trade-off between low levels of (I), (IV), (V), risks and high levels of (II) risk. This trade-off could also be defined as the CBDC dilemma, which states that in most CBDC proposals it is impossible to have both of the following at the same time: (1) low levels of (I), (IV) and (V) risks; and (2) low levels of (II) risk. Finally, we suggest that further research on CBDCs should focus on the second group of proposals on a phase-in basis in order to also mitigate the structural bank disintermediation risk and hence to overcome the CBDC dilemma.

scholarly journals ISLAMIC ENDOGENOUS MONEY: EVIDENCE FROM ISLAMIC BANKING SYSTEM IN INDONESIA AND MALAYSIA

2021 ◽  
Vol 7 (3) ◽  
Author(s):  
Khoirul Umam ◽  
Abdul Ghafar Ismail ◽  
Achmad Tohirin ◽  
Jaka Sriyana
Keyword(s):  
Empirical Studies ◽  
Banking System ◽  
Financial System ◽  
Empirical Method ◽  
Islamic Banking ◽  
Fractional Reserve Banking ◽  
Monetary System ◽  
Fractional Reserve ◽  
Endogenous Money ◽  
Reserve Banking

This research is conducted due to the un-ware contemporary Muslim economists on the feature of money whether exogenous or endogenous. Arguing that money in Islam should be endogenous, Choudhury (1997) asserts that fiat and fractional reserve systems makes money exogenous. If it is true, this condition leads to the un-oriented development of Islamic monetary and financial systems that are basically is fiat and fractional reserve systems. Accordingly, the empirical studies on Islamic monetary policy in Islamic financial system that is based on exogenous money concept cannot reveal the true money supply for the economy. This paper aims to propose the theoretical model of endogenous Islamic money and conduct an empirical study of the model on Islamic banking that is based on fiat and fractional reserve systems. The empirical method used is based on the ARDL and ECM. The result of the research gives evidence that the profit and loss sharing system is a core feature of the Islamic endogenous money system in the fractional reserve requirement system. Other evidence reveals that the development of the Islamic financial system can minimize the existence of exogenous money in a fiat monetary system. By these results, this study argues that Islamic endogenous money system can be developed in fiat and fractional reserve banking systems through the profit and loss sharing systems.

scholarly journals THE BROAD CONSEQUENCES OF NARROW BANKING

2019 ◽  
Vol 22 (01) ◽  
pp. 1950007
Author(s):  
MATHEUS R. GRASSELLI ◽  
ALEXANDER LIPTON
Keyword(s):  
Banking Sector ◽  
Asymptotic Properties ◽  
Banking System ◽  
Fractional Reserve Banking ◽  
Fractional Reserve ◽  
Time Deposits ◽  
Demand Deposits ◽  
Bank Reserves ◽  
Reserve Banking ◽  
Stock Flow

We investigate the macroeconomic consequences of narrow banking in the context of stock-flow consistent models. We begin with an extension of the Goodwin–Keen model incorporating time deposits, government bills, cash, and central bank reserves to the base model with loans and demand deposits, and use it to describe a fractional reserve banking system. We then characterize narrow banking by a full reserve requirement on demand deposits and describe the resulting separation between the payment system and lending functions of the resulting banking sector. By way of numerical examples, we explore the properties of fractional and full reserve versions of the model and compare their asymptotic properties. We find that narrow banking does not lead to any loss in economic growth when both versions of the model converge to a finite equilibrium, while allowing for more direct monitoring and prevention of financial breakdowns in the case of explosive asymptotic behavior.

scholarly journals DOES FRACTIONAL RESERVE BANKING SYSTEM EXIST IN INDONESIAN ISLAMIC BANKING?

2019 ◽  
Vol 4 (2) ◽  
pp. 369-400
Author(s):  
Yaser Taufik Syamlan ◽  
Nur Istiana
Keyword(s):  
Banking System ◽  
Secondary Data ◽  
Third Party ◽  
Islamic Banking ◽  
Business Unit ◽  
Fractional Reserve Banking ◽  
Fractional Reserve ◽  
The World ◽  
Reserve Banking ◽  
The Impact

Fractional Reserve Banking is the banking and financial system that have been applied in most countries around the world.  This research aims to look at the impact empirically and at the contributions given from the components of fractional reserve banking against inflation that occurs in Sharia Commercial Banks and Sharia Business Unit.  The fractional reserve banking components covered in these studies are statutory reserve requirement, total deposit, total financing, Mismatch Ratio, and Total non-performing financing.  This research is using VAR VECM and ECM as analysis tools and also collecting secondary data from OJK that spanned from June 2014 to September 2018.  The results of this research have found that Indonesian Islamic bank is doing the fractional reserve banking system (FRBS). Furthermore, the largest contributor of FRBS in Sharia Commercial Bank (BUS) is the Statutory Reserve Requirment while in sharia Business Unit the results showed that Third Party Fund and Mismatch ratio gives the greatest contributions against inflation. Interestingly, the UUS has greater contribution and shock to the inflation if we compare to the BUS.  To prevent the effect of it in the future, controlling mismatch and introducing the irrevocable investment account might be the solutions.

scholarly journals Considerations on Fractional Reserve Banking and Free-Banking

2021 ◽  
pp. 203-215
Author(s):  
Rafael Hotz
Keyword(s):  
Money Supply ◽  
Current Account ◽  
Banking System ◽  
Fractional Reserve Banking ◽  
Fractional Reserve ◽  
Time Deposits ◽  
Reserve Banking ◽  
Monetary Supply ◽  
Current Account Balances ◽  
Bank Notes

In this article, our goal is to examine a controversy very dear to Austrian economists: that of the legitimacy of the fractional reserve banking system, defined as a system in which the bankers keep in their vaults a quantity of money (narrowly defined) lower than the quantity of cash deposits granted to their clients. In the Austrian vision, the monetary supply, broadly defined (Mises, 1971), consists of money properly said, plus monetary substitutes (bank notes, cash deposits), plus credit-money, this one corresponding to any future right to a monetary sum (time deposits, promissory notes, pre-fixed derivatives). In a narrow sense, money supply consists in money properly said (fiat-money or commodity money). We must, however, clarify some aspects of the money supply. Monetary substitutes have their origin in the monetary certificates. Monetary certificates, in their turn, are tools utilized to confer information about the medium of exchange. For instance, precious metal coins mintage confers information about the metal’s purity and about the weight of the coin; bank notes and current account balances confer information about the amount, overseer and proprietor of the deposited money. So, money certificates can change the agents’ valuations concerning the particular good in question, even being able of independent valuation. Monetary certificates can be physically connected to the medium of exchange or separated from it. In the case of physically connected monetary certificates, we have what we normally call monetary substitutes. Monetary substitutes can, due to their nature, work as property titles to the very medium of exchange. Contemporaneously, monetary substitutes usually can be identified with cash deposits (current account balances) and paper checks, provided that the use of bank notes is increasingly rare. Having made those clarifications concerning monetary substitutes, we will, following Mises (1971, p. 135), call fiduciary media the quantity of monetary substitutes that exceeds the quantity of money properly said. However, before proceeding with our Investigation about the consequences of the legalization of the production of fake monetary substitutes (fiduciary media), we must explain what would be a fake monetary substitute and the nature of this counterfeiting. We must, therefore, start our argumentation establishing some differences about the nature of loan and deposit contracts [x].

The fractional reserve Banking diagram

2021 ◽  
pp. 81-104
Author(s):  
Edward W. Fuller
Keyword(s):  
Default Risk ◽  
Liquidity Risk ◽  
Central Banking ◽  
Free Banking ◽  
Fractional Reserve Banking ◽  
Banking Systems ◽  
Fractional Reserve ◽  
Rate Risk ◽  
El Sistema ◽  
Reserve Banking

Fractional reserve banking systems are inherently unstable. Fractional reserve banks create three types of risks when they make loans: liquidity risk, interest rate risk, and default risk. These risks interact to make fractional reserve banking systems unstable and prone to failure. This paper derives the Fraction­ al Reserve Banking Diagram. The diagram is used to illustrate liquidity risk, in­ terest rate risk, and default risk. Finally, the diagram is used to compare central banking, free banking, and 100 percent reserve banking. Keywords: Fractional Reserve Banking, Central Banking, Free Banking, 100% Reserve Banking, Banking Panics JEL Codes: E32, E43, E50, E52, E58, G21 Resumen: El sistema bancario de reserva fraccionaria es inherentemente ines­ table. Los bancos de reserva fraccionaria crean tres tipos de riesgos cuando conceden préstamos: riesgo de liquidez, riesgo de tipo de interés y riesgo de impago. Estos riesgos interactúan para hacer de la banca de reserva fraccio­ naria inestable y propensa a la quiebra. Este trabajo deriva el Diagrama de Banca de Reserva Fracciona. Este diagrama se utiliza para ilustrar el riesgo de liquidez, el riesgo de tipo de interés y riesgo de impago. Finalmente, se utiliza para comparar la banca central, el sistema de banca libre y la banca con co­ eficiente de reserva del 100%. Palabras clave: Banca de reserva fraccionaria, Banca Central, banca libre, banca con coeficiente de reserva del 100%, pánicos bancarios. Clasificación JEL: E32, E43, E50, E52, E58, G21

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