[R-G] [BillTottenWeblog] The 1930s Chicago Plan and The American Monetary Act

[Bill Totten]

by Stephen Zarlenga

AMI Monetary Reform Conference, Chicago (October 2005)

CP refers to the Chicago Plan, by Nichols
EP refers to Economic Policy for a Free Society by Henry Simons

Why is monetary reform so critically important? Because the money power
has more impact on citizens day to day lives than the Executive,
Legislative and Judicial branches. It's really a fourth branch of
government - or should be - and leaving it in private hands is dangerous
and unacceptable - it negates the balancing of powers principle of our
constitution and creates an aristocracy - a plutocracy - the rule by wealth.

A privately controlled money system can nullify hard-won reforms in
other areas such  as the environment, medical care, or peace initiatives
because such concentration of wealth and power will eventually overwhelm
and be used against the people to unwind whatever other gains we've
achieved. Witness the attack on Roosevelt's social security reform. You
can't secure real progress, with the private control of society's money
system behind your lines.

WHAT DOES MONETARY REFORM REALLY MEAN?

It means establishing a fair system that doesn't give special privileges
to some and disadvantage to others - that doesn't concentrate wealth and
power. It means helping the society create values for living well.

You received a draft of The American Monetary Act, Version 9. Comments
are invited in tomorrow's session and by letter. Your views may help
shape this initiative. Specialists will also be asked, and good points
will be written into Version 10 which will become public inviting
comment. Until then its not for further distribution. If you think
someone should see it, please ask me to forward a copy.

We're not seeking commitment to this now - we're writing what it would
take to legally implement the three-part reform in Chapter 24 of The
Lost Science of Money (2002).

Its vitally important to be ready with a workable plan - WHEN NOT IF -
the next financial meltdown occurs. No one knows when that will be since
there's tremendous power in the control over a money system, but warning
signs have been there for years. It could be triggered by a couple of
bad hurricanes!

This American Monetary Act is part of a long reform tradition going back
to the Chicago Plan of the Great Depression (and that plan was close to
one advanced independently by the great scientist Frederick Soddy in
Britain in 1926).

Lets start in December 1932. It's been only twenty years since the
Federal Reserve was created by Americas banking "elite" (See The Lost
Science of Money, Chapter 19). But in those brief twenty years the Fed
brought America to its knees:

* Farms were wrecked with huge debt and falling land prices;
* factories were closed;
* exchanges were destroyed;
* banks were closing;
* the economy collapsed - people couldn't find work and many were hungry.

>From 1929 to 1932:

* National income dropped 52%
* Industrial production fell 47%
* Wholesale prices fell 32%
* The real value of debt rose 140%
* Unemployment rose 329% from 3.5 million to fifteen million people,
over a quarter of our workforce was unemployed. All that destruction in
less than twenty years!

In that horrendous climate many economists were aware that the banking
system caused the problem and major changes were needed. One fear of
bankers and economists was that all the banks would simply be
nationalized, because people were angry. They feared violent revolution
might be sparked.

In this atmosphere the best economic minds in the country devised a
reform plan. Henry Simons from the University of Chicago created the
proposal and prominent economists from other universities joined him in
what became known as the "Chicago Plan". Economists like Paul Douglas of
the Univesity of Chicago; Frank Graham and Charles Whittlesley of
Princeton; Irving Fisher of Yale; Earl Hamilton of Duke; and Willford
King of New York University, to name a few.

One version was sent to all the academic economists - about a thousand
total. Of those responding, 235 from 157 universities agreed with the
proposal; another forty approved it with reservations and only 45
disapproved. So the plan had broad professional support. Variants of the
Chicago Plan usually started by condemning the banking structure as
foolish and harmful:

"If the purpose of money and credit were to discourage the exchange of
goods and services, to destroy periodically the wealth produced, to
frustrate and trip those who save, our present monetary system (does
that) most effectively!"

They dispensed with the gold standard as not a real standard, because
the value of gold had changed violently up and down against commodities.
>From 1914 to 1917 wholesale prices rose 65% and, then increased another
55% to May 1920, So gold coins lost over 75% of their value against
wholesale prices in the Fed's first six years. Then by June 1921
wholesale prices fell 56% against gold. "Hard money" advocates who
believe that gold money has been stable should study these facts.

One version of the plan quoted Roosevelt's referring to gold as an "old
fetish of so-called international bankers".

The main features of the Chicago Plan were that:

FIRST: Only the government would create money. The Federal Reserve banks
would be nationalized, but not the individual member banks. The power to
create money was to be removed from private banks by abolishing
fractional reserves - the mechanism through which the banking system
creates money. So the plan called for 100% reserves on checking accounts
which simply meant banks would be warehousing and transferring the money
and charging fees for their services.

SECOND: The Plan separated the loan-making function, which can belong in
private banks, from the money-creation function, which belongs in
government. Lending was still to be a private banking function, but
lending deposited long-term savings money, not created credits. In this
way they'd restrict an unstable practice known as borrowing short and
lending long - making long term loans with short term deposits.  Some
variations proposed this be done through mutual fund-like mechanisms, or
by chartering entirely new types of banks.

THIRD: The proposal recognized the distinction between money and credit,
which had been confused through fractional reserves and what was called
the "real bills doctrine". The confusion was seen as one of the causes
of the depression, because when businesses reduced their borrowings on
commercial bills which occurs during any downturn, parts of the money
supply had been automatically liquidated. The Chicago Plan saw the
instability of this - that it aggravates a downturn.

Simon made this grand observation which still afflicts us today:

"The mistake ... lies in fearing money and trusting debt. Money itself
is highly amenable to democratic, legislative control, for no community
wants a markedly appreciating or depreciating currency ... but money is
not easily manageable alongside a mass of private debt and private
near-moneys ... or alongside a mountain of public debt". (EP, page 199)

Some variations of the plan had the US Government lending banks all or
part of newly printed cash needed to achieve 100% reserves. This was a
crucial part of the plan, because depositors were going to the banks and
withdrawing their accounts, deflating the system.

This loaning of reserves feature also elegantly converted all the
previously monetized bank credits into real US money on which the banks
paid interest to our government. It post facto made them intermediaries,
earning some reasonable spread for their loaning work.

The best economic minds supported the Chicago Plan:

Paul Douglas wrote: "This proposal will of course be opposed by the
bankers from whom it takes the lucrative privilege of creating
purchasing power. It would however insure the safety of deposits, give
large revenues to the government, provide complete social control over
monetary matters and prevent abnormal fluctuations in the capital
market. At the same time it would permit the allocation of productive
resources ... to remain primarily in private hands. All in all it seems
the most promising program for the reform of our monetary and credit
system ... " (CP, page 141)

Frank Graham wrote it was self evident that the right of issuing money
belongs in government, and that banks seignorage profits were a kind of
tax on the community. "This privilege that the banks enjoy is in no way
essential to the lending process".

Marinner Eccles who became Fed Chairman under Roosevelt testified that
the best course would be for the government to nationalize the Federal
Reserve banks.

Congressman Jerry Voorhis made the case for 100% reserves and putting
money into circulation by paying pensions and disabled persons. As late
as 1945 Voorhis introduced legislation for a US Monetary Authority as
our sole creator of money. (CP, page 162)

James Angell who disagreed with parts of it still wrote that "it would
go far toward making economic activity reasonably stable". (CP, page 144)

Maurice Allais the great French economist backed the plan and published
a book on it in 1948.

Irving Fisher of Yale, wrote on it extensively and popularly well into
the 1940s.

[ John Hotson and COMER advocated it in 1985 (CP, page 174) ]

The young Milton Friedman was the best known advocate for the Chicago
Plan in the postwar period, writing: "Henry Simons held the view ...
which I share - that the creation of fiat currency should be a
government monopoly". Friedman testified on this before Congress as late
as 1975 and in 1985 wrote: "I have not given up advocacy of one-hundred
percent reserves". Friedman thought the transition to 100% reserves
would not be difficult - "say 25% a year from now, 50% two years from
now, et cetera" (CP pages 173, 181).

But turning the Chicago Plan into law proved elusive. When University of
Chicago's Chancellor Maynard Hutchins sent a copy of the plan to Senator
Bronson Cutting in December 1933, Cutting asked him to draft a bill.
Four months later he telegrammed Hutchins asking where it was, and
Simons went to present the essentials of the plan to Cutting, who
introduced it in the Senate on June 6th 1934 (S. 3744). Wright Patman
introduced it in the House (HR9855).

The bill required 100% reserves on checking accounts, which it separated
from savings accounts which had to keep five percent reserves. It set up
a Federal Monetary Authority to control the supply of currency and the
buying and selling of government securities.

The American Monetary Act, a three part reform to bring our money system
under proper public control agrees in its main features with the Chicago
Plan {1}:

First: It incorporates the Federal Reserve banks into the US Treasury
where money will be created by the government as money, not as private
interest-bearing debt; and will be spent into circulation to promote the
general welfare and monitored to be neither inflationary nor deflationary.

Second: It removes the banks' privilege to create purchasing media
through the fractional reserve system. Fractional reserves are elegantly
ended by the US government initially loaning banks enough money at
interest to bring reserves to 100%, converting all the past monetized
credit, into US government money. Banks then act as intermediaries
accepting deposits and loaning them out to borrowers, what people think
they do now.

Third: It spends newly created money into circulation on infrastructure,
including education and healthcare needed for a growing society,
starting with the $1.5 trillion that the American Society of Civil
Engineers estimate is needed for infrastructure repair; creating good
jobs across our nation, re-invigorating local economies and re-funding
all levels of government.

The false specter of inflation is always raised against such suggestions
that our government fulfill its responsibility to furnish the nation's
money supply. But that knee jerk reaction is the result of decades, even
centuries of propaganda against government. When one actually examines
the monetary record, as The Lost Science of Money does, it becomes clear
that government has a superior record issuing and controlling money than
the bankers have.

So both plans envision taking over the Federal Reserve System and
regional Federal Reserve banks. Both separate the money creation and
money-lending functions, placing the money creation function in
government and leaving the lending function in banks. Both set up
national monetary authorities to control the money supply.

One difference between the plans is their greater awe of the "free
market". But the empirical nourishment we've received since they wrote
calls for greater care in defining what's meant by "free market"
terminology. They strongly supported free markets, but their definition
differed from the present conception. For example Henry Simons thought
only stiff governmental regulation could create free market conditions:

"The presentation of laissez faire as a do nothing policy is misleading
... its an obvious responsibility of the state ... to maintain the legal
and institutional framework within which competition can function
effectively ... the state (must have) ... heavy responsibilities and
large control functions". (EP, pages 42-43)

Like the great 19th century reformer Henry George, Simons strongly
believed that companies like railroads and utilities should all be
government owned:

"The state should face the necessity of actually taking over, owning and
managing directly both the railroads and the utilities, and all other
industries in which it is impossible to maintain effectively competitive
conditions". (EP, pages 50-51)

Greater attention to defining "free markets" might have avoided their
current degeneration into mere forms of kleptocracy falsely promoted
under the banner of freedom. Better yet, instead of misusing the term
FREE, the word FAIR is what people really have mind.

Some groups equated free markets with no governmental regulation - just
the opposite of what's needed to have "free markets".

Another difference was their preference for an automatic system with
little discretion. We are not so worried about that.

The American Monetary Act goes beyond the Chicago plan in three
important improvements derived from the lessons of history - experience
with the Bank of England's nationalization in 1946, and our American
experience of the past fifty years:

First, the Act proposes that infrastructure expenditures, including
education and health and farming parity be used as mechanisms to get
newly created money spent into circulation to promote the general
welfare. We've observed that the privately controlled money system can't
or won't make the necessary infrastructure expenditures.

Second the Act introduces considerations of fairness, sustainability,
sound environmental practice and social cohesion as values in monetary
decision making. In other words moral considerations are explicitly
considered. I wish we were the first to do this but Article Two of the
treaty protocols establishing the European System of Central Banks and
the EURO beat us to it, and it's already operational in the EURO system.
The provision is quoted In Chapter 23 of The Lost Science of Money:

"To promote throughout the Community a Harmonious and balanced
development of economic activities, sustainable and non-inflationary
growth respecting the environment, a high level of employment and of
social protection, the raising of the standard of living and quality of
life, and economic and social cohesion and solidarity among Member States".

(However, it says this is to be done "without prejudice to the objective
of price stability", by which they mean less than 2% inflation.)

Third the American Monetary Act places more reasonable nationwide legal
limits on the charging of interest, with an eight percent cap - about
what it was in most state laws until 1980 or 1981.

It's obscene that people are being forced to pay 29% a year interest.

Friends have told us that economists and bankers will strongly object to
that and to other parts of this proposal. But we didn't expect them as
allies in this fight - a fight we didn't start, but are involuntary
participants in. Remember billionaire speculator Warren Buffet's warning
remark "If there is class war in the United States, my class is winning".

He was being facetious - Buffet would never describe the purposeful
destruction of our most vulnerable fellow citizens and their children,
by the most clever, as "winning!" He'd probably join me in calling it
cannibalism and agree that indigestion and worse is coming.

Finally let's remember that Warren Buffet's role as a speculator is
largely negative and not creative.

WHY DIDN'T THE CHICAGO PLAN PASS

First there was no understanding or support for the proposal among the
electorate. Only Irving Fisher seems to have understood the necessity
for popularizing the matter.

Simons himself got cold feet and shied away from promoting the plan,
desiring to remain on a level of professorial discussion. He even threw
a wet towel on Fisher who was promoting the reform suggesting that
Fisher avoid popularizing the idea!

Simon was demanding perfection from his own proposal and was being
overly cautious. The proper goal was not perfection, but should have
simply been substantial improvement that the Chicago Plan clearly
represented. Instead Simons became obsessed with how banks would evade
the reforms.

Second the Plan was mishandled politically.

Cutting appears to have misunderstood his own bill, and incorrectly said
in interviews that credit as well as money creation was also to be a
sole function of government.

Third,  the bill suffered a major setback when Senator Cutting died in
an airplane crash in May 1935 while being forced to defend his election
results in New Mexico by challenges from the Roosevelt Administration
which was then held responsible for his death.

The last attempt at 100% reserves was when Senator Nye of North Dakota
tried to place it in part of the Administration's 1935 banking reform
legislation, but his amendment was defeated.

The FDR administration had its own banking reform bill and remained
ambiguous on the Chicago Plan, never commenting on it even though the
political climate and professional support for the plan was sufficient
to get it passed, had they made some effort. Instead his Treasury
Secretary Morganthau was trying to make minor adjustments without
fundamentally challenging the banking system.

The brilliant economist Lauchlin Currie had taken up the fight for
hundred percent reserves from within the administration. Currie pointed
out that economists had not really agreed on the nature of money and
focused his attention to defining what is money in our system. But he
made two political errors: First he thought he could "sneak" 100%
reserves through in the administration's 1935 banking legislation with a
provision giving the Fed the power to raise reserves. He thought "we'll
just get them raised to 100%". But Senator Carter Glass representing
Banker interests easily blocked this by putting in a provision in the
conference committee limiting the reserve requirement to double what
they were at that time, which was about fifteen percent.

Curries other error was to compromise in advance writing: "An advisor in
Washington is of limited usefulness unless he acquires some sense of
what is feasible and how projects and policies should be presented to
have the best chance of being adopted". (CP, page 128)

I disagree. Promoting the reform in terms of morality rather than
mechanics and economics is the better approach. Perhaps if it had been
more clearly stated, in terms of ending that special bankers' privilege
rather than solely in terms of technical considerations, there would
have been greater public understanding and support. We have to learn
from the mistakes these fellows made.

Can we learn from what John Maynard Keynes was doing during all this? He
was squarely behind the bankers and against such real reform. Yet he
knew that he had to break out of orthodox economics or the whole system
was in danger of being overturned. Keynesianism was a way to allow banks
not government to keep control over the money-creation process, and
while the more narrow minded economists fought Roosevelt's attempts to
create money and jobs as inflationary, during the nations worst
deflation, Keynes knew better.

Keynes' approach was direct to the public: The New York Times in
December 1933, working with Felix Frankfurter (who wrote a rather poor
book called Other People's Money, and later became a Supreme Court
Justice), got Keynes to write an open letter to Roosevelt, which they
published. Keynes wisely advised Roosevelt that "Only the expenditures
of public authority" could turn the tide of depression. Well, that was
obvious enough! {2}

However, Keynes inappropriately warned Roosevelt not to create the money
for this, but only to borrow it, and wrongly advised him that there was
already enough money in circulation, and that: "increasing the quantity
of money ... is like trying to get fat by buying a larger belt".

Several times, his letter attempted to influence Roosevelt to drop his
program of necessary reforms, and to concentrate on short range actions:

" ... even wise and necessary reform may, in some respects impede
recovery ... NIRA [National Industrial Recovery Act of June 1933] which
is essentially reform and impedes recovery ... " (See The Lost Science
of Money, Chapter 20)

Keynes was therefore not "revolutionary" except in relation to the utter
backwardness of the financial establishment. He didn't come close to a
real solution, but essentially protected his class. The real question
has always been whether the nation's money should be created under law,
by government, or under the private caprice of bankers

What were the Austrian economists up to? Frederich Hayek was arguing
against national currencies - arguing for in effect an international
control over all economies through the gold system, incredibly writing:

"There is no rational basis for the separate regulation of the quantity
of money in a national area that remains part of a wider economic
system";  arguing that independent national currencies cannot insulate a
country from foreign shocks; and that fluctuating exchange rates would
be bad.

Hayek tried to twist hundred percent reserves to covering them 100% with
gold. A deflationist. This is the position supporting the creditors and
usury and plutocracy; the normal outcome of Austrian Economics. They
talk a freedom game, but promote serfdom. Psychologically they remind me
of those Middle Ages cults that used to whip their own backs with chains.

Always remember, had we followed the ideas of the Austrian School, there
would have never been a United States of America. If we follow their
ideas now, there will soon not be a United States of America.
Unfortunately the present administration has made this seem like a
worthy goal to many of the world's oppressed peoples.

Roosevelt's 1935 bank legislation, though an improvement over what had
existed, wasn't considered the final word in banking reform - additional
laws were expected. Over and over we see the better economists calling
for an end to fractional reserves - ending the bankers' privilege to
create money. Such was the effect of the horrendous experience with banking.

Most of the efforts to enact Chicago Plan reforms ended with World War
II as the country went onto a war footing.

HOW THE AMERICAN MONETARY ACT CAN GET ENACTED INTO LAW

>From the experience with the Chicago plan we learn the importance of:

First - having an informed body of people among the electorate to
promote and intelligently echo such proposals in their own cities, in
meetings, with lawmakers and with media.

Second - being ready with an intelligently thought out program.

Third - staying on message and not shying away from the politics of it.

Fourth - not being afraid of not having all the answers. Some of it
requires Aristotle's method - we learn by doing - but we learn.

Fifth - Not compromising in advance or trying to sneak through important
provisions.

The great reformer Henry George wrote in the late 1800s that there are
many ways to argue the principles of political economy, but his
preference was to examine it from a moral viewpoint. This is one reason
we are still reading and hearing about Henry George today.

This is one of the best ways to proceed today - showing the unfairness -
that is the immorality - of granting special privileges within our
society. Who is going to dare argue for special treatment in principle?
For what justification? There is none. Their position is untenable.
Their focus on mechanics and ill-defined, and therefore confusing,
concepts can be VIEWED as a diversion. They are happy to argue over
those things forever, so long as they are holding the special privilege
- the money power - in the meantime.

In terms of facts, the under funding of American infrastructure by $1.5
trillion remains an unanswerable indictment of our present money system.
It has been unable or unwilling to fulfill this crucial responsibility.
It must be cast aside. It is a danger and an insult to our country, and
to humanity - even to the planet earth.

Back in the thirties there was the thought that the Chicago plan
represented an ideal system of control and as such represented a goal
for future evolution. Well folks, the AMI is presenting the American
Monetary Act as that future evolution.   Thank you for your attention.

Links:

{1} The latest formulation of the The American Monetary Act is viewable
at http://www.monetary.org/amacolorpamphlet.pdf

{2} Totten thinks Zarlenga meant Louis D. Brandeis. See
http://en.wikipedia.org/wiki/Other_People%27s_Money_and_How_the_Bankers_Use_It.


_____

American Monetary Institute
Dedicated to the independent study of monetary history, theory, and reform
Post Office Box 601
Valatie, New York12184
ami at taconic.net
http://www.monetary.org
Stephen Zarlenga, Director

http://www.monetary.org/chicagoplan.html


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