<html><body><div style="color:#000; background-color:#fff; font-family:times new roman, new york, times, serif;font-size:12pt"><div><span></span></div><div><br></div> <div style="font-family: 'times new roman', 'new york', times, serif; font-size: 12pt; "> <div style="font-family: 'times new roman', 'new york', times, serif; font-size: 12pt; "> <div dir="ltr"> <font size="2" face="Arial"> ----- Forwarded Message -----<br> <b><span style="font-weight:bold;">From:</span></b> Gunnar Tomasson <gunnar.tomasson@verizon.net><br> <b><span style="font-weight: bold;">To:</span></b> gang8@yahoogroups.com <br> <b><span style="font-weight: bold;">Sent:</span></b> Thursday, 16 August 2012, 3:33<br> <b><span style="font-weight: bold;">Subject:</span></b> [gang8] The Chicago Plan Revisited<br> </font> </div> <br><div id="yiv1250485760">
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<div></div><div class="yiv1250485760WordSection1"><div class="yiv1250485760MsoNormal">Dear Gang.</div><div class="yiv1250485760MsoNormal"> </div><div class="yiv1250485760MsoNormal">I just posted the following message to Facebook.</div><div class="yiv1250485760MsoNormal"> </div><div class="yiv1250485760MsoNormal">Gunnar</div><div class="yiv1250485760MsoNormal"> </div><div class="yiv1250485760MsoNormal"> </div><div class="yiv1250485760MsoNormal">The Chicago Plan Revisited</div><div class="yiv1250485760MsoNormal"> </div><div class="yiv1250485760MsoNormal">In a recent Working Paper entitled "The Chicago Plan Revisited" (WP/12/202), IMF staff members Jaromir Benes and Michael Kumhof spoil an otherwise interesting paper by giving an account of the monetary ideas of Adam Smith and Jeremy Bentham which conflict directly with Bentham's own writings on the subject matter. </div><div class="yiv1250485760MsoNormal">
</div><div class="yiv1250485760MsoNormal">In my view, the point at issue is of fundamental importance as the world community searches for answers to the monetary chaos that has evolved in the post-Bretton Woods era of the past forty years:</div><div class="yiv1250485760MsoNormal"> </div><div class="yiv1250485760MsoNormal">Do we seek answers in resurgent STATISM in monetary matters, as in the United States (Federal Reserve Board) and the European Union (European Central Bank) at present, or should we first seek to UNDERSTAND the flaws in post-Bretton Woods world monetary arrangements for which STATE and PRIVATE sector agencies are jointly responsible?</div><div class="yiv1250485760MsoNormal"> </div><div class="yiv1250485760MsoNormal">If Alan Greenspan was correct - as I think he was - when he stated in October 2008 that "the whole intellectual edifice [of mainstream monetary economics] collapsed last summer [in 2007]", it remains for
the technical reasons for the collapse to be understood.</div><div class="yiv1250485760MsoNormal"> </div><div class="yiv1250485760MsoNormal">In this respect, the differences in economic, social and technical circumstances between the 1930s and now are so vast that it is more likely than not that the shape of robust monetary reform in the months and years ahead may be one that the best economics minds of the 1930s could not begin to imagine. </div><div class="yiv1250485760MsoNormal"> </div><div class="yiv1250485760MsoNormal">Below is an extract from the Benes/Kumhof paper followed by extracts from my own Working Paper prepared at the IMF in the 1980s.</div><div class="yiv1250485760MsoNormal"> </div><div class="yiv1250485760MsoNormal">*** </div><div class="yiv1250485760MsoNormal"> </div><div class="yiv1250485760MsoNormal">It was the English Free Coinage Act of 1666, which placed control of the money supply into private hands, and
the founding of the privately controlled Bank of England in 1694, that first saw a major sovereign relinquishing monetary control, not only to the central bank but also to the private banking interests behind it. The following centuries would provide ample opportunities to compare the results of government and private control over money issuance. The results for the United Kingdom are quite clear. Shaw (1896) examined the record of monarchs throughout English history, and found that, with one exception (Henry VIII), the king had used his monetary prerogative responsibly for the benefit of the nation, with no major financial crises. On the other hand, Del Mar (1895) finds that the Free Coinage Act inaugurated a series of commercial panics and disasters which to that time were completely unknown, and that between 1694 and 1890 twenty-five years never passed</div><div class="yiv1250485760MsoNormal">without a financial crisis in England.</div><div
class="yiv1250485760MsoNormal"> </div><div class="yiv1250485760MsoNormal">The principal advocates of this system of private money issuance were Adam Smith (1776) and Jeremy Bentham (1818), wwhose arguments were based on a fallacious notion of commodity money. (pp. 15-16)</div><div class="yiv1250485760MsoNormal"> </div><div class="yiv1250485760MsoNormal">Comment.</div><div class="yiv1250485760MsoNormal"> </div><div class="yiv1250485760MsoNormal">The authors have not done their homework on the monetary ideas of Adam Smith as presented in his Wealth of Nations in embryonic form for they have nothing to do with "the fallacious notion of commodity money". </div><div class="yiv1250485760MsoNormal"> </div><div class="yiv1250485760MsoNormal">In mature form, these ideas were set forth by Jeremy Bentham, who in 1787 wrote to Adam Smith on related issues as follows:</div><div class="yiv1250485760MsoNormal"> </div><div
class="yiv1250485760MsoNormal">"Instead therefore of pretending to owe you nothing, I shall begin with acknowledging, that, as far as your track coincides with mine, I shall come much nearer the truth, were I to say I owed you everything." </div><div class="yiv1250485760MsoNormal"> </div><div class="yiv1250485760MsoNormal">In a working paper prepared at the IMF in the 1980s, I outlined Bentham´s ideas in part as follows:</div><div class="yiv1250485760MsoNormal"> </div><div class="yiv1250485760MsoNormal">Bentham's essay entitled "Institute of Political Economy" contains a formal definition of its subject matter similar in essence to Keynes' concept of the "Theory of Economics" and its application in the real world: </div><div class="yiv1250485760MsoNormal"> </div><div class="yiv1250485760MsoNormal">"Political economy," Bentham wrote, "is at once a science and an art. The value of the science has for its efficient cause and
measure the subserving the art." </div><div class="yiv1250485760MsoNormal"> </div><div class="yiv1250485760MsoNormal"> Or, less formally, economic science must be rigorous in its analytical aspects, or it is not deserving of that name. Economic science must be applied with imagination in the real world, or it is a waste of time and money.</div><div class="yiv1250485760MsoNormal"> </div><div class="yiv1250485760MsoNormal"> In "The Institute of Political Economy," Bentham also outlined in summary form the essence of the ideas on the analytical links between "fresh" money, employment, output, and prices, whose "propriety" James Mill had questioned:</div><div class="yiv1250485760MsoNormal"> </div><div
class="yiv1250485760MsoNormal">I. "If the fresh money, on the occasion of the first employment or expenditure made of it, is employed in purchases, the immediate effect of which is to make an immediate addition to the mass of really productive capital, it then makes by the amount of such purchase a clear addition to the growing mass of real wealth, beyond what would have existed otherwise." </div><div class="yiv1250485760MsoNormal"> </div><div class="yiv1250485760MsoNormal">II. "If the fresh money, on the occasion of the first employment or expenditure made of it, is employed in purchases, the immediate effect of which is not to make any immediate addition to the mass of really productive capital, it then makes no addition to the growing mass of real wealth." </div><div
class="yiv1250485760MsoNormal"> </div><div class="yiv1250485760MsoNormal">III. "No sooner, however, does it ["fresh money"] pass on from this its primary destination (that of adding to real capital) to the other, viz. that of adding to unproductive consumption, than its power of producing an addition to the mass of the matter of real wealth is at an end: thenceforward and for ever it keeps on contributing by its whole amount to the encrease of prices, in the same manner as if from the mines it had come in the first instance into an unproductive hand without passing through any productive one." </div><div class="yiv1250485760MsoNormal"> </div><div class="yiv1250485760MsoNormal">The "simple basic ideas" of the Keynesian vision of the General Theory having been stated, Bentham briefly set forth the basic Monetarist doctrine later associated with Milton Friedman:</div><div
class="yiv1250485760MsoNormal"> </div><div class="yiv1250485760MsoNormal">"In respect of the ratio of money to things vendible, of the aggregate of the one to the aggregate of the other, the state of things most desirable is - that it should continue the same at all times: no encrease at any one time, no decrease at any other." </div><div class="yiv1250485760MsoNormal"> </div></div>
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