Comments on Michael Kumhof’s Discussion on May 27, 2026

Like Michael, I worked in banking and saw the problem that Irving Fischer described as debt deflation: Debts had grown faster than the economy’s ability to pay. So the demand that they be paid left less and less income available to be paid on the goods and services that labor and industry produced.

How were economies to escape from this financialization.

Why HASN’T the Chicago Plan been adopted?

The problem is not simply that banks create credit-money.

            The problem is what they create this credit-money FOR:

            Banks lend against assets – for asset-price inflation.

This API involves rising asset prices, mainly for real estate.

            Because prices for real estate, stocks and bonds is determined by whatever banks will lend against them.

            These debts grow at compound interest. Banks and bondholders recycle this interest into yet more lending – that is, new debt creation. This growth is larger than the economy as a whole is able to pay.  

And there is a vested interest in doing this. Banks are rent seekers, as are all creditors. It is the interest of the financial sector, not the industrial sector, and certainly not that of wage earners and the population as a whole.

            Banks do not create credit for industrial capital formation or other creation of profits out of which to pay debts.

            In fact, interest charges and fees – and even repayment of the principal – siphons off more and more corporate business income, consumer income and tax revenues so as to leave no room left for industrialists to earn profits. The cost of debt-inflated cost of living and of doing business make industrial and other productive economic activities uncompetitive – and hence unprofitable.

            That has happened to the U.S. and Western European economies. Financialization has led to their de-industrialization.

            Two centuries ago David Ricardo believed that land rent would stifle profitable investment, by landlords opposing free trade to increase their land rents. That would raise food prices, and hence the cost of living. That wo uld prevent Britain from becoming the workshop of the world.

            The rest of the 19th century saw classical political economy refine value, price and rent theory so as to free economies FROM economic rent – the excess of market prices over the actual costs of production.

            By the end of the 19th century it became obvious that the major form of economic rent was financial in character: interest and financial fees.

            The solution should have been to industrialize banking. That began to be done in Germany, whose banks used their interest revenue to lend for new industrial capital formation.

            But World War I led to British-Dutch non-industrial banking – lending against assets already in existence: real estate and stocks and bonds already issued.

            The only politically feasible way of creating credit for productive instead of unproductive purposes is to make money creation and bank credit creation in the hands of government.

That is what has made the Chinese government so successful in following the classical economic aim of minimizing financial rentier income.

            The Chicago Plan of 100% reserves was a way to cope with the unwillingness of Western economies to permit this socialization of credit.

            It is a radical solution to the fact that commercial bank credit has turned the U.S. and Western economies into a Ponzi scheme: banks lend debtors the money to pay their interest and other debt service to avoid defaults.

            And central banks create credit to supply to the commercial banks to do this. The result was the Obama Administration’s Zero Interest-Rate Policy (ZIRP) from 2009 onward. It bailed out the banks that had had made bad loans – that is, loans that had gone bad by being extended without the debtors being able to pay.

            That was most obviously the case with the U.S. banking system’s fraudulent junk-mortgage loans. The loans from the outset were in excess of the valuation of real estate based ultimately on the land rent. Instead of being taxed as classical economists argued, land rent and monopoly rent were privatized and paid to the banks as interest.

            This debt pyramiding is what the Chicago Plan was designed to prevent.

            There are only two alternatives. The first is to leave the present status quo as it is: to enable banks to avoid insolvency by creating more and more credit to lend to borrowers to bid up prices for real estate, stocks and bonds so as to raise the price of the bank assets.

            Ultimately, creditor assets are owned by the wealthiest 1% to 10% of the population. That holds the bottom 90% to 99% of the population inn debt. Financial wealth means debt – and debt deflation – for the economy at large.

            And most wealth in today’s financialized economies is financial in character. That is, it is a burden for the population as a whole.

            That is why the Chicago Plan is opposed, and also why a China-style policy of making money and credit creation a public function.

            It is claimed that there is no alternative to today’s status quo –without writing down financial debts in line with the indebted economy’s ability to pay.

            The problem is that this status quo polarizes the economy increasingly between creditors and debtors.

            Instead of commercial banks being turned into savings banks – financial intermediaries, not new credit creators – savings banks and S&Ls were cannibalized and turned over to commercial bank raiders in the 1980s and ‘90s.