The Chicago Plan Comeback

In the depths of the Great Depression, every idea about money was on the table.

During the 1933 bank holiday, FDR proposed converting every government bond into cash at par — a singularity of debt monetization, so to speak.

His advisors considered having the Federal Reserve print enough new notes to match all bank deposits, so banks could meet withdrawal demands when they reopened.

How wide open was the Overton Window? A year later, FDR appointed Marriner Eccles to lead the Federal Reserve. Eccles, a self-made banker, had only a high-school education.

The most radical proposal, however, came from the pinnacle of academia. The Chicago Plan, proposed by economists at the University of Chicago, would have ended banking as we know it.

Their idea was to abolish fractional reserve banking.

Frank Knight, a co-author of the Chicago Plan, warned that “important evils result” when commercial banks are allowed to create money — "notably the frightful instability of the whole economic system and its periodical collapse in crises."

By combining the creation of money with the extension of credit, the academics argued, fractional-reserve banking tends to inflate bubbles on the way up and incite panic on the way down.

Worse still, we pay the banks to provide this destabilizing service.

“It is absurd and monstrous for society to pay the commercial banking system ‘interest’ for multiplying several fold the quantity of medium of exchange,” Knight added.

The Chicago Plan would have turned that arrangement upside down: instead of everyone paying banks to create money for us, banks would pay the government to create it for them.

That, at least, is how the authors of an IMF paper from 2012 envisioned the Chicago Plan playing out: If banks suddenly needed government-issued money to back all the deposits they had created, they’d have to borrow it from its source: the government.

Instead of creating money when they extended loans, banks would borrow government-created money — for a fee — and lend that instead.

Turning the banking system on its head like this, the paper says, would “reduce business cycle volatility caused by rapid changes in banks' attitudes towards credit risk [and] eliminate bank runs.”

The paper estimates that the Plan would raise output by 10% and reduce inflation to zero — “without posing problems for the conduct of monetary policy."

Pretty good… but it gets better.

The authors say it would also eliminate the national debt. 

"Because under the Chicago Plan banks have to borrow reserves from the treasury to fully back these large liabilities, the government acquires a very large asset vis-à-vis banks, and government debt net of this asset becomes highly negative."

Highly negative!

The authors reason that the new money created to lend to banks would be "government equity," not debt, and should therefore be recorded on the national balance sheet as an asset — a massive one, considering the trillions of bank deposits and deposit-like liabilities that would have to be replaced.

Subtracting this new asset from the existing national debt pushes the government’s net debt into highly negative territory.

Or, it would have when the paper was written in 2012. The math doesn’t work quite as dramatically with the debt at $36 trillion now.

There are good reasons why it hasn’t happened. Inflation might skyrocket. Banks might collapse. The financial system might be starved of risk-free Treasuries.

And after all that, new forms of private money would emerge in the shadow banking system, likely re-creating the original boom-and-bust dynamics of fractional finance. 

Still, the primary reason it didn’t happen in the 1930s might be that banking reforms like FDIC insurance made reinventing the banking system seem like an unnecessary risk. 

One core feature of the Plan keeps resurfacing: a banking system where money creation is independent of credit creation — aka, narrow banking.

“The idea of narrow banking was endorsed by top economists,” a paper published by the Fed observed, “such as Irving Fisher and Nobel Prize laureates Milton Friedman, James Tobin, and Robert Merton.”

Recently, it’s been catching on with non-economists, too. “The rising popularity of stablecoins and the 2025 GENIUS Act in the United States introduce this form of banking to the general public,” the paper adds. 

A regulated stablecoin issuer like Circle isn’t exactly a narrow bank — because issuing stablecoins is different than taking deposits. 

But it’s pretty close — and getting closer.

Last week, the government got a little closer to endorsing it by granting Circle approval to establish the First National Digital Currency Bank, NA.

This means Circle is now federally supervised, legally organized as a bank (albeit a trust bank), and explicitly prohibited from making loans.

Could the Chicago Plan be making a comeback, one idea at a time?

Just wait till they hear about negative national debt.

— Byron Gilliam