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  • 30+ questions from the chat are answered very preliminary here. Feel free to clarify questions, add new questions and comment upon the answers, and this can become a living document that is updated and improved.  


Kumhof’s Main Points Explained 

Michael Kumhof’s central message is simple but radical: the way we create money today forces society to create debt at the same time. Most people think banks lend out money that someone else has saved. Kumhof notes that this is not how the banking system works. When a bank gives someone a loan, it also creates a new deposit in that person’s bank account. In everyday language: the bank creates new digital money when it lends.

This matters because private bank deposits are the main form of money we use. Notes and coins are in most countries public money, but they are only a small part of the total money supply. Most of the money ordinary people, companies, and governments use is digital private bank money. And that money comes into existence when someone borrows.

So today’s money system has a built-in problem: if society needs more money in bank accounts, society must normally take on more debt.

A useful way to say this is:

We cannot save our way to more bank deposits for society as a whole. However much we save, we cannot increase the total amount of money in everyone’s bank accounts just by saving.

One person can save more money in their bank account. But then they spend less, then someone else receives less income. For the total amount of bank deposits to remain steady or grow, new money has to be created — and in today’s system that happens through new bank lending.

1. The problem: money and debt are tied together

Kumhof says that the current system has two big consequences.

First, money creation loads the economy with debt. If households, firms, and governments need more money, the system supplies it through more borrowing. Over time, this creates a mountain of private and public debt.

Second, the system is unstable. Because banks create deposits when they lend, they can expand credit quickly when they are optimistic. That can create lending booms: more loans, more deposits, more spending, higher asset prices, and a sense that everything is going well. But if banks suddenly become afraid, they can stop lending or call in loans. Then the process can reverse and the money supply shrinks. Credit tightens, money disappears, spending falls, and the economy can crash.

Furthermore, money itself is also a debt — a promise to pay you in cash if, for example, you go to an ATM to take out banknotes. Digital money is simply the banks’ debt to their customers; we use these promises of cash as digital means of payment today. If everyone were to go to the bank at the same time to withdraw their money, or if the banks were to face other financial problems, they might have difficulty repaying their debts. This means that, in the worst-case scenario, the entire digital money supply could vanish into thin air.

Kumhof’s point is not that banks are useless. Banks do valuable work when they assess whether a borrower can repay a loan, whether a business project is sound, and whether credit is going to productive uses. The problem is that, in today’s system, banks also have the privilege of creating the money used by the whole economy when they issue loans and the money itself consist of a debt.

2. The Chicago Plan: separating money from debt (credit)

The Chicago Plan was first discussed during the 1930s, after the Great Depression. It was supported by major economists such as Henry Simons, Irving Fisher, and members of the original Chicago School. Eventually over 400 economists supported the idea. Kumhof presents it as a proposal to separate two things that are joined together today: money and credit.

Under the Chicago Plan, there would be two kinds of banks:

  1. Money banks would provide safe bank accounts and payment services. Your account money would be backed 100 percent by public money. This means that the numbers you see when you log in to your account would represent the corresponding amount of public money that the money bank keeps safe for you at an account on the central bank. If you want to pay someone else or withdraw the money as cash, the money bank can now always fulfil this promise. [1]
  2. Credit banks would lend to households and businesses. But they can no longer create new money by making loans. They have to lend money that already exists. To receive new money, credit banks have to take investments from for example shareholders, long-term investors or take a loan from the government (treasury credit). These investments would always bear a risk and not be covered by any public deposit insurance schemes.

This is the key reform: banks would still give loans to the public and to businesses, but they would lose the privilege of creating money. Under the Chicago Plan, a credit bank would first need to obtain funds, and only then lend them. That means lending becomes true intermediation again: moving existing money from those willing to invest it to those who want to borrow it. The money supply itself would no longer depend on private debt creation.

[1] Note that the idea of “private bank money 100 % backed by public money” was designed before the digital era. In a modern digital context, an alternative could be to instead fully substitute private bank money with public money. This means that the money banks would just be “front-end interfaces” that offer the customer access to direct payments with public money. The full money system could then run on only one kind of money (public money) instead of two kinds of money (private bank money and public money).

3. The transition: how debt could fall

Kumhof explains the transition through balance sheets. The details are technical, but the basic idea is understandable.

Today, we use bank deposits as money. Under the Chicago Plan, those deposits must be backed by public money. Since that public money does not yet exist in sufficient quantity, the public sector creates it and supplies it to the banks, so that deposits become fully backed.

But the banks do not simply receive this public money as a gift. In Kumhof’s model, they receive it as a loan (treasury credit). Part of this loan is cancelled out against government debt. (Explanation: the government had previously borrowed money from the banks, and now the banks borrow from the government: these debts can be cancelled out against each other). This means that the government debt shrinks as a result.

In his plan, the public also creates a huge lump sum of public money corresponding to exactly the size of all short-term and mortgage loans. All this money is returned to citizens as a citizens’ dividend, and in his simulation the money is in average used to repay private debts. (However, people that don't have loans will in practice just keep that extra money). Banks use the payments from the citizens to repay their loans to the government. This is why Kumhof describes the Chicago Plan as a way to replace much private and public debt with public money.

The only significant debt that remains in Kumhof’s proposal is investment loans taken by businesses. Businesses don’t receive a citizen’s dividend to repay their loans. And banks still have to cover these loans to 100 %, and therefore have to borrow this money from the government. However, this is just a minor part of the previous debts; overall, all debts decrease dramatically.

But he is careful: this is not magic, and it is not “Christmas”. A monetary reform does not create unlimited real resources. It changes balance sheets and removes unnecessary debt burdens, but society still faces real choices. The benefits can be used for debt reduction, lower taxes, public spending, or some combination of these. The reform creates room for manoeuvre; it does not abolish economic trade-offs.

4. Why bank runs would become much less dangerous

One of the strongest arguments for the Chicago Plan is financial stability.

Today, the payment system and the credit system are tied together. If a bank’s loans go bad, people can start doubting whether deposits are safe. That can trigger bank runs. Because deposits are also our means of payment, a banking crisis can quickly become a crisis for the whole economy. Firms may struggle to pay wages. People may struggle to pay bills. The payments system itself becomes fragile.

Under the Chicago Plan, ordinary bank deposits would be backed by public money. That means that the existence of money in our transaction accounts would not depend on whether private loans perform well or badly. A credit bank could still make bad loans. Investors in that credit bank could still lose money. But the payment system would remain safe.

5. Better control of credit booms and crashes

Kumhof also argues that the Chicago Plan would make it easier to control credit cycles.

Today, central banks mainly influence the economy through one major tool: the policy interest rate. But this is a blunt instrument. If a lending boom happens in one part of the economy, raising interest rates affects everyone: households, firms, productive investment, public budgets, and often employment.

Under the Chicago Plan, policymakers would have more tools. For instance, the interest rate on public money, and the interest rate charged on public credit to credit banks.

The important new tool is the public credit interest rate. If credit banks want to expand lending too quickly, the public sector can make their funding more expensive by raising the interest rate. That can cool a credit boom more directly than today’s system. It does not eliminate all economic cycles, but it can make them smaller and less dangerous.

6. Justice, Growth and Freedom to Choose Degrowth

Kumhof’s model finds large output gains from the Chicago Plan; this means “Higher Economic Growth”. The reasons are conceptually clear. If debt levels fall, borrowing becomes less risky. Lower risk can mean lower interest rates. If the government pays less interest on debt and receives income from money creation, public finances improve. That can allow lower taxes or more public spending. More liquidity can also make the economy function more smoothly.

For Kumhof, as an economist, the natural interpretation is: this reform can create higher growth, higher output, more investment, and higher consumption. That means not just growth of the financial sector, but productive growth that could be used to create a more just economy benefiting everyone.

But this is not the only possibility.

The model assumes that when people and governments are freed from some debt and interest burdens, they will use that freedom mainly to consume, invest, and produce more. But we want to comment and complement Michael's picture a bit and say that another political choice is also possible.

A society with less debt pressure could decide to work less, consume less, and produce less, while still maintaining stability and welfare and have more time to flourish. If people no longer need to service such expensive loans, they may not need the same level of constant income growth. If governments and private companies face less pressure from debt service, they may not need to chase growth.

Debt-free money can be a road toward higher growth. But it can also be a road toward less dependence on growth. For green movements, this may be one of the most important benefits. The point is not that debt-free money automatically creates a greener economy. It does not. The point is that it gives society more freedom. With less debt pressure built into the monetary system, citizens and politicians can choose: more growth that creates more wealth that can be distributed among the citizens, different growth, or a deliberate path toward lower material throughput and greater ecological balance.


7. The wrong story

Kumhof warns against one argument sometimes used by monetary reformers: the claim that because banks create the principal of a loan but not the interest, there is “not enough money” to repay debts. He rejects this. Money circulates, so the problem is not that the exact money to pay interest does not exist. You can use just one dollar to repay a huge debt, if that dollar just circulates enough times.

The real problem is different: interest payments transfer resources from debtors to creditors. If loans fund productive investment and money circulates through the society, that may be manageable. But if credit mainly fuels asset speculation — higher house prices, stock buybacks, financial gains — then debts can grow faster than the real economy’s ability to pay. That creates fragility and inequality.

To understand the wrong story more in depth, watch this explanatory video.

8. Why has this not happened already — and why CBDC matters

Kumhof is realistic about politics. Monetary reform usually becomes thinkable during or after major financial crises. After the Great Depression, economists debated the Chicago Plan. After the 2008 crisis, interest in monetary reform rose again. But when crises fade, political pressure weakens.

There are also powerful vested interests in the current system. Banks and financial institutions extract extreme wealth from the privilege of creating money and from the rents connected to that privilege. Asset owners can also benefit from credit-driven increases in housing and financial asset prices. That makes reform politically difficult.

Still, Kumhof sees some reason for optimism. The debate about central bank digital currency, or CBDC, has made public digital money much more familiar. A CBDC is digital money issued by the central bank. It could allow people and firms to hold public digital money directly, or through institutions fully backed by central bank money. The digital euro is nearing its release.

CBDC is not the full Chicago Plan. Banks could still create ordinary bank deposits through lending. But CBDC could introduce something similar to the “money bank” part of the Chicago Plan: safe digital public money used for payments. In that sense, it could be a first step toward separating safe public money from risky private credit. If we scale up CBDC to fully replace bank money, that would essentially be a modern implementation of the Chicago Plan.

Conclusion

Kumhof’s main point is that the current monetary system is not a law of nature. It is a design choice. Today, most money is created by private banks when they create debt. That makes society dependent on debt growth to expand the money supply, and it can generate instability, inequality, bank runs, asset-price inflation and financial crises.

The Chicago Plan offers a different design: public money for payments, and separate credit institutions for lending. Money would no longer have to be created as and through debt. Bank accounts would be safer. Credit booms could be better controlled. Public and private debt could fall.

The political meaning of debt-free money is therefore broader than higher growth. It can create space for growth, but also space for societies less dependent on growth and more prone to justice and peace. Which path to choose is not a technical question. It is a democratic and political choice.


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