The Chicago plan was a monetary and banking reform program suggested in the wake of the Great Depression by a group of University of Chicago economists including Henry Simons, Garfield Cox, Aaron Director, Paul Douglas, Albert G. Hart, Frank Knight, Lloyd Mints and Henry Schultz.[1][2][3] Its main provision was to require 100% reserves on deposits subject to check, so that "the creation and destruction of effective money through private lending operations would be impossible".[4] The plan, in other words, envisaged to separate the issuing from the lending of money. This, according to its authors, would prevent the money supply from cyclically varying as bank loans were expanded or contracted. In addition, the payment system would become perfectly safe. No great monetary contraction as that of 1929-1933 could ever occur again.
This idea of 100% reserves on checking deposits would be advocated by other economists in the 1930s, including Lauchlin Currie of Harvard[5] and Irving Fisher of Yale.[6] A more recent variant of this reform idea is to be found in the "narrow banking" proposal.[citation needed]
Although the Chicago Plan is often likened to other 100% reserve plans (such as Fisher's), there were some important differences between them, for example regarding bank intermediation. The Chicago Plan would not only have subjected checking deposits to 100% reserves, but further eliminated fractional-reserve banking per se: banks could no longer make loans out of savings deposits, and would be replaced in their lending function by equity-financed investment trusts.[7][8] Other proponents of 100% reserves, however, such as Currie and Fisher, would still have allowed commercial banks to make loans out of savings deposits, as long as these could not be made transferable by check.[9] As Fisher put it in 1936, the banks would be free to lend money “provided we now no longer allow them to manufacture the money that they lend”.[10]
An important motivation of the Chicago Plan was to prevent the nationalization of the banking sector, which, in the context of the Great Depression, was considered by some as a real possibility.[11] This concern was shared by Fisher: "In short: nationalize money, but do not nationalize banking”.[12]
- ^ Phillips, R.J. (1995), The Chicago Plan and New Deal Banking Reform, Armonk, NY, M.E. Sharpe, pp. 45, 63, 191
- ^ Simons, H.C. et al. Banking and Currency Reform, Memorandum dated November 1933, reprinted in Samuels, W. (ed.), 1994, Research in the History of Economic Thought and Methodology, Archival Supplement 4, JAI Press Inc., 31–40
- ^ Simons, Henry C. 1934. A Positive Program for Laissez Faire. The University of Chicago Press
- ^ Simons, H.C. et al. Banking and Currency Reform, Memorandum dated November 1933, reprinted in Samuels, W. (ed.), 1994, Research in the History of Economic Thought and Methodology, Archival Supplement 4, JAI Press Inc., 31–40 (p. 35)
- ^ Currie, L.B. (1934), The Supply and Control of Money in the United States, New York, NY, Russell & Russell, pp. 151-156
- ^ Fisher, I. (1935), 100% Money, 2nd ed., 1936, New York, NY: Adelphi
- ^ Simons, H.C. et al. Banking and Currency Reform, Memorandum dated November 1933, reprinted in Samuels, W. (ed.), 1994, Research in the History of Economic Thought and Methodology, Archival Supplement 4, JAI Press Inc., 31–40 (pp. 34-35)
- ^ Simons, Henry C. 1934. A Positive Program for Laissez Faire. The University of Chicago Press, p. 25
- ^ Demeulemeester, S. (2018). The 100% Money Proposal and its Implications for Banking: The Currie–Fisher approach versus the Chicago Plan Approach, The European Journal of the History of Economic Thought, vol. 25, no. 2, 357–87
- ^ Quoted in M King, The End of Alchemy (London 2017) p. 263
- ^ Phillips, R.J. (1995), The Chicago Plan and New Deal Banking Reform, Armonk, NY, M.E. Sharpe, p. 53
- ^ Fisher, I., [1936] 2009, “100% Money and the Public Debt”, p. 15