Chicago plan

The Chicago plan was a collection of banking reforms suggested by University of Chicago economists (notably Irvin Fischer) in the wake of the Great Depression. The proposal envisaged the separation of the monetary and credit functions of the banking system, under a scheme that is often referred to as "narrow banking" or "full-reserve banking system".

The core of the Chicago plan was to replace the fractional reserve system by insisting that banks always hold enough liquid assets to cover 100% of their loans, thus eliminating any danger of bank runs.[1] Banks would not be able to create money, and affect the money supply themselves: as Irving 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... In short: nationalize money, but do not nationalize banking”.[2]

History

Origins (1933)

A six-page memorandum on banking reform was given limited and confidential distribution to about forty individuals on 16 March 1933.[3] The plan was supported by such notable economists as Frank H. Knight, Paul H. Douglas, and Henry C. Simons,[4] as well as by Lloyd W. Mints, Henry Schultz, Garfield V. Cox, Aaron Director, and Albert G. Hart.

Between March and November 1933, the Chicago economists received comments from a number of individuals on their proposal, and in November 1933, another memorandum was prepared. The memorandum was expanded to thirteen pages; there was a supplementary memorandum on "Long-time Objectives of Monetary Management" (seven pages) and an appendix titled "Banking and Business Cycles" (six pages).

These memoranda generated much interest and discussion among lawmakers. However, the suggested reforms, such as the imposition of 100% reserves on demand deposits, were shelved and replaced by less drastic measures. The Banking Act of 1935 institutionalized federal deposit insurance and the separation of commercial and investment banking. It successfully restored the public's confidence in the banking system and ended discussion of banking reform.[5][6]

A Program for Monetary Reform (1939)

As America entered the Recession of 1937-1938, this caused renewed discussion of the key elements of the Chicago plan, and in July 1939 a new proposal was drafted, titled A Program for Monetary Reform.[7] The draft paper was attributed on its cover page to six American economists: Paul H. Douglas, Irving Fisher, Frank D. Graham, Earl J. Hamilton, Wilford I. King, and Charles R. Whittlesey. It claimed that 235 economists from 157 universities and colleges had expressed approval of the draft with 40 more had "approved it with reservations" and "43 have expressed disapproval."

The proposal was never published. A copy of the paper was apparently preserved in a college library. Copies of the paper, stamped on the bottom of the first and last pages, “LIBRARY – COLORADO STATE COLLEGE OF A. & M. A. – FORT COLLINS COLORADO” were circulated at the 5th Annual American Monetary Institute Monetary Reform Conference (2009) and the images were scanned for display on the internet.[8]

The Chicago plan, and was submitted to the Government, but did not result in any new legislation.[9]

IMF's Chicago plan revisited (2012)

In August 2012, the proposal was given renewed attention after the International Monetary Fund (IMF) published a working paper by Jaromir Benes and Michael Kumhof.[10] In the paper, the authors have updated the original Chicago plan proposal to fit into today's economy. They conclude that the advantages of such a system, according to the authors, are a more balanced economy without the booms and busts of the current system,[11] the elimination of bank runs, and a drastic reduction of both public and private debt. The authors rely on economic theory and historical examples, and state that inflation, according to their calculations, would be very low.[12]

Asked about the paper in 2019, Christine Lagarde, (Managing director of the IMF when the paper was published), said she was not convinced "that eliminating the role of private banks in the supply of ‘broad’ money is a good idea".[13]

References
  1. M King, The End of Alchemy (London 2017) p. 261-2
  2. Quoted in M King, The End of Alchemy (London 2017) p. 263
  3. M King, The End of Alchemy (London 2017) p. 388
  4. M King, The End of Alchemy (London 2017) p. 262
  5. Phillips, Ronnie J. (June 1992), The 'Chicago Plan' and New Deal Banking Reform,Working Paper No. 76 (PDF), The Levy Economics Institute.
  6. Huerta de Soto, Jesús (2006), Money, Bank Credit, and Economic Cycles (PDF), Ludwig von Mises Institute, pp. 731–735
  7. Douglas, Paul H.; Hamilton, Earl J.; Fisher, Irving; King, Willford I.; Graham, Frank D.; Whittlesey, Charles R. (July 1939), A Program for Monetary Reform (original scanned PDF), (transcript text here), archived from the original (PDF) on 26 July 2011
  8. Douglas, Paul H.; Hamilton, Earl J.; Fisher, Irving; King, Willford I.; Graham, Frank D.; Whittlesey, Charles R. (July 1939), A Program for Monetary Reform (original scanned PDF), (transcript text here), archived from the original (PDF) on 26 July 2011
  9. R Phillips, The Chicago Plan and New Deal Banking Reform (1992) p. 158
  10. "IMF's epic plan to conjure away debt and dethrone bankers". The Telegraph. Retrieved 30 November 2020.
  11. Presentation by Michael Kumhof , 12. September 2012
  12. "On Kumhof The Chicago Plan Revisited". sovereign money. Retrieved 30 November 2020.
  13. "I am not convinced that eliminating the role of private banks in the supply of ‘broad’ money is a good idea, as there is no guarantee that governments would, on the whole, do a better job at providing financing for the real economy. Furthermore, if banks face such severe restrictions on their ability to lend, one can expect that private credit would quickly migrate to unregulated parts of the financial system, with unknown consequences." Answers by Christine Lagarde to the questionnaire by the European Parliament, September 2019

Bibliography
  • Douglas, Paul H.; Hamilton, Earl J.; Fisher, Irving; King, Willford I.; Graham, Frank D.; Whittlesey, Charles R. (July 1939), A Program for Monetary Reform (original scanned PDF), (transcript text here), archived from the original (PDF) on 26 July 2011
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