Chicago plan#A Program for Monetary Reform

The Roaring Twenties, a period of economic growth in the United States, was marked by speculation and excessive lending.{{cite book |last1=Moffit |first1=Michael |title=World's Money |date=22 June 1984 |publisher=Simon and Schuster |isbn=978-0-671-50596-7 |url=https://books.google.com/books?id=9vB9R8w8ek4C&dq=%22excessive+lending%22+great+depression&pg=PA96 |language=en}} Under laissez-faire economic policies, loose lending practices fueled a bubble.{{cite book |last1=Congress |first1=United States |title=Congressional Record: Proceedings and Debates of the ... Congress |date=1965 |publisher=U.S. Government Printing Office |url=https://books.google.com/books?id=UaoOixeH60kC&dq=laissez-faire+minimal+regulation+bubble+great+depression&pg=PA5556 |language=en}}

In this environment, stock market speculators used leverage to buy stocks on margin.{{cite book |last1=Coby |first1=Ron |title=Discover the Upside of Down: Investment Strategies for Volatile Times |date=26 January 2009 |publisher=John Wiley & Sons |isbn=978-0-470-44297-5 |url=https://books.google.com/books?id=9KMKNOb1mcoC&dq=1929+stock+leverage+margin&pg=PT30 |language=en}} Consumers had easy access to credit through installment plans and consumer loans, further fueling the growth of consumption and production.{{cite book |last1=Knowlton |first1=Christopher |title=Bubble in the Sun: The Florida Boom of the 1920s and How It Brought on the Great Depression |date=12 January 2021 |publisher=Simon and Schuster |isbn=978-1-9821-2838-8 |url=https://books.google.com/books?id=BAoPEAAAQBAJ&dq=installment+loans+fueling+consumption+great+depression&pg=PA83 |language=en}}

Rapid economic expansion led to an oversupply of goods and services.{{cite book |last1=Magliano |first1=Roberto Pasca di |title=Growth Economics and Governance |date=30 November 2017 |publisher=Edizioni Nuova Cultura |isbn=978-88-6812-946-0 |url=https://books.google.com/books?id=LQVDDwAAQBAJ&dq=1920s++rapid+economic+expansion+oversupply+of+goods+and+services&pg=PA15 |language=en}}

With the Wall Street crash of 1929, the Great Depression began. Federal Reserve Board monetary control was indirect since all twelve Federal Reserve banks could perform open market operations without Board consent.{{cite book |last1=Toma |first1=E. Froedge |last2=Toma |first2=M. |title=Central Bankers, Bureaucratic Incentives, and Monetary Policy |date=6 December 2012 |publisher=Springer Science & Business Media |isbn=978-94-009-4432-9 |url=https://books.google.com/books?id=dcr3CAAAQBAJ&dq=%22open+market+operations%22+before+1933&pg=PA247 |language=en}} Banks with inadequate capital reserves found themselves unable to absorb potential losses from loan defaults or market fluctuations. Widespread bank runs culminated in a national banking holiday.{{cite book |last1=Alter |first1=Jonathan |title=The Defining Moment: FDR's Hundred Days and the Triumph of Hope |date=8 May 2007 |publisher=Simon and Schuster |isbn=978-0-7432-4601-9 |url=https://books.google.com/books?id=ASmlaOHQNawC&q=1933+bank+runs+%22bank+holiday%22 |language=en}}

The Emergency Banking Act was enacted on March 9, 1933 to set reopening standards. Public demand for deposit insurance grew.{{cite book |last1=Corporation |first1=Federal Deposit Insurance |title=Annual Report - Federal Deposit Insurance Corporation |date=1983 |url=https://books.google.com/books?id=ZQnMGSmuHNUC&dq=Emergency+Banking+Act+insure+deposits+for+reopened+banks&pg=PA44 |language=en}}

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".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). 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.

Other proponents of full 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.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, p. 357–387. 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".Quoted in M. King, The End of Alchemy (London 2017) p. 263.

Although the Chicago Plan is often likened to other full-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 full reserves, but further eliminated fractional-reserve banking itself: banks could no longer make loans out of savings deposits and would be replaced in their lending function by equity-financed investment trusts.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. [https://desmarais-tremblay.com/Resources/Simons%20Henry%20C.%201934%20A%20Positive%20Program%20for%20Laissez%20Faire.pdf A Positive Program for Laissez Faire]. The University of Chicago Press, p. 25.

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.Phillips, R. J. (1995), The Chicago Plan and New Deal Banking Reform, Armonk, NY, M. E. Sharpe, p. 53. This concern was shared by Fisher: "In short: nationalize money, but do not nationalize banking."Fisher, I., [1936] 2009, "[http://realmoneyecon.org/lev2/images/pdfs/100percent_money.pdf 100% Money and the Public Debt]", p. 15.

Frederick Soddy proposed 100% reserves for transaction deposits in his 1926 book. Frank Knight, a laissez-faire proponent at the University of Chicago, wrote in his review{{cite book |last1=Tavlas |first1=George S. |title=The Monetarists: The Making of the Chicago Monetary Tradition, 1927–1960 |date=1 June 2023 |publisher=University of Chicago Press |isbn=978-0-226-82319-5 |url=https://books.google.com/books?id=QPy6EAAAQBAJ&dq=The+practical+thesis+of+the+book+is+distinctly+unorthodox,+but+is+in+our+opinion+both+highly+significant+and+theoretically+correct.&pg=PA163 |language=en}}

{{blockquote|text= "The practical thesis of the book is distinctly unorthodox, but is in our opinion both highly significant and theoretically correct. In the abstract, it is absurd and monstrous for society to pay the commercial banking system “interest” for multiplying several fold the quantity of medium of exchange when (a) a public agency could do it at negligible cost, (b) there is no sense in having it done at all, since the effect is simply to raise the price level, and (c) important evils result, notably the frightful instability of the whole economic system and its periodical collapse in crises, which are in large measure bound up with the variability and uncertainty of the credit structure if not directly the effect of it."}}

The Chicago Plan was suggested by University of Chicago economists including Henry Simons, Garfield Cox, Aaron Director, Paul Douglas, Albert G. Hart, Frank Knight, Lloyd Mints and Henry Schultz.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. [https://desmarais-tremblay.com/Resources/Simons%20Henry%20C.%201934%20A%20Positive%20Program%20for%20Laissez%20Faire.pdf A Positive Program for Laissez Faire]. The University of Chicago Press.

A six-page memorandum on banking reform was given limited and confidential distribution to about forty individuals on 16 March 1933.M. King, The End of Alchemy (London 2017) p. 388. The plan was supported by such notable economists as Frank H. Knight, Paul H. Douglas, and Henry C. Simons,M. King, The End of Alchemy (London 2017) p. 262. as well as by Lloyd 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 full 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.{{Citation |last=Phillips |first=Ronnie J. |title=The 'Chicago Plan' and New Deal Banking Reform, Working Paper No. 76 |date=June 1992 |url=http://www.levyinstitute.org/pubs/wp/76.pdf |publisher=The Levy Economics Institute}}.{{Citation |last=Huerta de Soto |first=Jesús |title=Money, Bank Credit, and Economic Cycles |date=2006 |url=https://mises.org/sites/default/files/Money_Bank_Credit_and_Economic_Cycles_De%20Soto.pdf |pages=731–735 |publisher=Ludwig von Mises Institute}}.

The Chicago Plan was presented to President Franklin D. Roosevelt (FDR) by Henry A. Wallace within a week.{{cite book |last1=Muzio |first1=Tim Di |last2=Robbins |first2=Richard |title=An Anthropology of Money: A Critical Introduction |date=16 March 2017 |publisher=Taylor & Francis |isbn=978-1-315-45344-6 |url=https://books.google.com/books?id=eCAlDwAAQBAJ&dq=%22Chicago+Plan%22+Franklin+D+Roosevelt+Henry+A+Wallace&pg=PA113 |language=en}} FDR asked Congress for legislation in 1934 to establish a sound and adequate currency system.{{cite book |last1=Papadimitriou |first1=Dimitris |title=Stability in the Financial System |date=12 September 1996 |publisher=Springer |isbn=978-1-349-24767-7 |url=https://books.google.com/books?id=MbevCwAAQBAJ&dq=FDR+establish+a+sound+and+adequate+currency+system&pg=PA100 |language=en}}

This idea of full reserves on checking deposits would be advocated by other economists in the 1930s, including Lauchlin Currie of HarvardCurrie, L. B. (1934), The Supply and Control of Money in the United States, New York, NY, Russell & Russell, pp. 151–156. and Irving Fisher of Yale.Fisher, I. (1935), [https://cdn.mises.org/100%20Percent%20Money_Fisher.pdf 100% Money], 2nd ed., 1936, New York, NY: Adelphi. A more recent variant of this reform idea is to be found in the "narrow banking" proposal.{{Cite book |last1=Freixas |first1=Xavier |url=https://books.google.com/books?id=mHOdEAAAQBAJ&dq=narrow+banking+chicago+plan&pg=PA134 |title=Microeconomics of Banking, third edition |last2=Rochet |first2=Jean-Charles |date=2023-08-22 |publisher=MIT Press |isbn=978-0-262-04819-4 |language=en}}

The American Bankers Association (ABA) warned against "political control of banking" and feared more radical change.{{cite book |last1=Horn |first1=Martin |title=J.P. Morgan & Co. and the Crisis of Capitalism |date=3 March 2022 |publisher=Cambridge University Press |isbn=978-1-108-49837-1 |url=https://books.google.com/books?id=mGtYEAAAQBAJ&dq=Carter+Glass+feared+political+control+1935&pg=PA246 |language=en}}

Congress passed the Banking Act of 1933 on June 16, 1933, creating the Federal Deposit Insurance Corporation (FDIC) and separating commercial and investment banking through the Glass-Steagall Act.{{cite book |title=FDIC Banking Review |date=2000 |publisher=Federal Deposit Insurance Corporation |url=https://books.google.com/books?id=2W9pbg0dyhcC&dq=FDIC+Glass-Steagall+%22Banking+Act+of+1933%22&pg=RA1-PA3 |language=en}}

In 1934, Thomas Alan Goldsborough sponsored bills HR 7157/8780 to create a Federal Monetary Authority with sole right to issue legal tender.{{cite book |title=Congressional Record: Proceedings and Debates of the ... Congress | date=1934 |url=https://books.google.com/books?id=C2AcUMgg-W8C&dq=Goldsborough+sponsored+bills+HR+7157/8780+Federal+Monetary+Authority&pg=PA192}} Lauchlin Currie proposed a plan essentially identical to the Chicago Plan except for its allowance of branch banking{{cite book |last1=Phillips |first1=Ronnie J. |title=The Chicago Plan & New Deal Banking Reform |date=1995 |publisher=M.E. Sharpe |isbn=978-1-56324-469-8 |pages=104 |url=https://books.google.com/books?id=izO25SyQU9QC&dq=Currie+%22Chicago+Plan%22+branch&pg=PA104 |language=en}} that gained support from Treasury advisors as well as experts supporting significant monetary system changes.

Senator Bronson M. Cutting sponsored S 3744 based on an outline of the Chicago Plan. Rep. Wright Patman introduced a companion bill H.R. 9855.{{cite book |last1=Phillips |first1=Ronnie J. |last2=Minsky |first2=Hyman P. |title=The Chicago Plan and New Deal Banking Reform |date=16 September 2016 |publisher=Routledge |isbn=978-1-315-28663-1 |url=https://books.google.com/books?id=14kYDQAAQBAJ&dq=Cutting+sponsored+S+3744+%22Chicago+Plan%22&pg=PT86 |language=en}} Unfortunately Cutting died on May 6, 1935.{{cite book |last1=Melzer |first1=Richard |title=Buried Treasures: Famous and Unusual Gravesites in New Mexico History |date=2007 |publisher=Sunstone Press |isbn=978-0-86534-531-7 |url=https://books.google.com/books?id=UxiTZmoAAKgC&dq=Cutting+died+on+May+6,+1935&pg=PA222 |language=en}}

In July 1935, Senator Gerald Nye proposed a substitute bill that incorporated elements of the Chicago Plan, including 100% reserves and a central monetary authority.{{cite book |last1=Phillips |first1=Ronnie J. |title=The Chicago Plan & New Deal Banking Reform |date=1995 |publisher=M.E. Sharpe |isbn=978-1-56324-469-8 |pages=126 |url=https://books.google.com/books?id=izO25SyQU9QC&q=Gerald+Nye+7617 |language=en}}

The Banking Act of 1935 passed on August 19, 1935. It did not include 100% reserves. Jacob Viner and other economists and politicians believed that this was a first step in reform.{{cite book |last1=Phillips |first1=Ronnie J. |last2=Minsky |first2=Hyman P. |title=The Chicago Plan and New Deal Banking Reform |date=16 September 2016 |publisher=Routledge |isbn=978-1-315-28663-1 |url=https://books.google.com/books?id=14kYDQAAQBAJ&dq=Jacob+Viner+general+sentiment+first+step+in+reform&pg=PT133 |language=en}}

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.Douglas, Paul H.; Hamilton, Earl J.; Fisher, Irving; King, Willford I.; Graham, Frank D.; Whittlesey, Charles R. (July 1939), [https://web.archive.org/web/20110726013412/http://www.economicstability.org/wp/wp-content/uploads/2010/07/A-Program-for-Monetary-Reform-.pdf A Program for Monetary Reform] (original scanned PDF), ([https://web.archive.org/web/20121103110209/http://home.comcast.net/~zthustra/pdf/a_program_for_monetary_reform.pdf transcript text here]), archived from the original (PDF) on 26 July 2011. 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 is in the Yale University Library.{{Cite book |last1=Fiorito |first1=Luca |url=https://books.google.com/books?id=e4LPDwAAQBAJ&dq=A+%22Program+for+Monetary+Reform%22+(1939)+college+library&pg=PA142 |title=Research in the History of Economic Thought and Methodology: Including a Symposium on Public Finance in the History of Economic Thought |last2=Scheall |first2=Scott |last3=Suprinyak |first3=Carlos Eduardo |date=2020-02-19 |publisher=Emerald Group Publishing |isbn=978-1-83867-699-5 |language=en}} Copies of the paper, stamped on the bottom of the first and last pages "LIBRARY{{snd}} COLORADO STATE COLLEGE OF A. & M. A.{{snd}} 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.

The Chicago plan was submitted to the Government, but did not become law.R. Phillips, [http://www.levyinstitute.org/pubs/wp/76.pdf The Chicago Plan and New Deal Banking Reform] (1992) p. 158.

Following the Recession of 1937–1938, Jerry Voorhis made the case for 100% reserves.{{cite book |last1=Congress |first1=United States |title=Congressional Record: Proceedings and Debates of the ... Congress |date=1939 |publisher=U.S. Government Printing Office |url=https://books.google.com/books?id=u8GH9DU9GusC&dq=Jerry+Voorhis+100+reserves&pg=PA3136 |language=en}} In 1941, the US economy heated up with WWII. In 1945, Voorhis sponsored HR 3648 to establish a Monetary Authority.{{cite book |last1=Congress |first1=United States |title=Congressional Record: Proceedings and Debates of the ... Congress |date=1959 |publisher=U.S. Government Printing Office |url=https://books.google.com/books?id=JPzd4_AzBqsC&dq=Voorhis+HR+3648&pg=PA7514 |language=en}} Jerry Voorhis was defeated in 1946 by Richard Nixon.{{cite book |last1=Price |first1=John Roy |title=The Last Liberal Republican: An Insider's Perspective on Nixon's Surprising Social Policy |date=17 November 2023 |publisher=University Press of Kansas |isbn=978-0-7006-3613-6 |url=https://books.google.com/books?id=ToDkEAAAQBAJ&dq=Nixon+defeated+Voorhis&pg=PA4 |language=en}}

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.{{Cite web |title=IMF's epic plan to conjure away debt and dethrone bankers |url=https://www.telegraph.co.uk/finance/comment/9623863/IMFs-epic-plan-to-conjure-away-debt-and-dethrone-bankers.html |access-date=2020-11-30 |website=The Telegraph |date=21 October 2012 |language=en-GB}} 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,[https://www.youtube.com/watch?v=tnehf-U527g Presentation by Michael Kumhof], 12 September 2012. 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.{{Cite web |title=On Kumhof The Chicago Plan Revisited |url=https://sovereignmoney.site/on-kumhof-the-chicago-plan-revisited |access-date=2020-11-30 |website=sovereign money |language=en-US}}

Asked about the paper in 2019, Christine Lagarde (managing director of the IMF when the paper was published) said that she was not convinced "that eliminating the role of private banks in the supply of 'broad' money is a good idea"."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." [https://www.europarl.europa.eu/doceo/document/A-9-2019-0008_EN.html Answers by Christine Lagarde to the questionnaire by the European Parliament], September 2019.

• Islamic banking and finance
• Full-reserve banking
• Money creation
• NEED Act
• Technocracy movement

{{Reflist|2|}}

• Douglas, Paul H.; Hamilton, Earl J.; Fisher, Irving; King, Willford I.; Graham, Frank D.; Whittlesey, Charles R. (July 1939), [https://web.archive.org/web/20110726013412/http://www.economicstability.org/wp/wp-content/uploads/2010/07/A-Program-for-Monetary-Reform-.pdf A Program for Monetary Reform] (original scanned PDF), ([https://web.archive.org/web/20121103110209/http://home.comcast.net/~zthustra/pdf/a_program_for_monetary_reform.pdf transcript text here]), archived from the original (PDF) on 26 July 2011

{{Portal bar|Banks|Business and economics|Money}}

Category:Great Depression

Category:Monetary policy

Category:Monetary reform