The Chicago Plan from the Lenses of Islamic Finance: Implications for Financial Stability and Indebtedness

Authors : Tarık AKIN, Muhammed Habib DOLGUN

Pages : 87-111

View : 15 | Download : 7

Publication Date : 2015-07-01

Article Type : Research Paper

Abstract :As a response to the Great Depression of 1930s, some prominent US economists came up with the “Chicago Plan”, which proposed full reserve banking backed by government-issued money and separation of the monetary and credit functions of the banking system as important pre-conditions for financial stability. The idea behind the Chicago Plan can be confidently claimed as a conventional version of the Islamic precepts of risk-sharing, deposits for safe-keeping and prohibition of debt financing. What makes the Chicago Plan relevant and important for today is that the latest Global Crisis once more underlined the simple fact that “this time is not different” so policy-making needs fresh and even radical reconsideration of the theory and policies. The Chicago Plan is indeed such a radical look into the gist of the problem. Moreover, the Chicago Plan and the discussions around it provide an invaluable benchmark to understand the great potential of the Islamic finance on financial stability. This paper examines theoretical underpinnings of the Chicago Plan; its relevance to Islamic finance and financial stability. Following the theoretical part, the modus operandi of the Chicago Plan is illustrated by using sectoral balance sheets of the main sectors
Keywords : The Chicago Plan, 100 reserve banking, Islamic finance