Chicago plan

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The Chicago plan was a collection of banking reforms suggested by University of Chicago economists in the wake of the Great Depression. A six-page memorandum on banking reform was given limited and confidential distribution to about 40 individuals on March 16, 1933. The plan was supported by such notable economists as Irving Fisher, Frank H. Knight, Lloyd W. Mints, Henry Schultz, Henry C. Simons, Garfield V. Cox, Aaron Director, Paul H. Douglas, and Albert G. Hart.

During the period March to November, 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 but the suggested reforms, such as the abolition of the fractional reserve system and imposition of 100% reserves on demand deposits, were set aside and replaced by watered down alternative 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.[1][2]

After apparent recovery in the mid-1930s, America entered the Recession of 1937-1938 and the key elements of the Chicago plan resurfaced in a July 1939 draft proposal titled A Program for Monetary Reform but did not result in any new legislation.

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  1. ^ Phillips, Ronnie J. (June 1992), The 'Chicago Plan' and New Deal Banking Reform,Working Paper No. 76 (PDF), The Levy Economics Institute. 
  2. ^ Huerta de Soto, Jesús (2006), Money, Bank Credit, and Economic Cycles (PDF), Ludwig von Mises Institute, pp. 731–735