So both John Cochrane and Martin Wolf are advocating 100% reserve banking. If these two agree on anything, it’s worth taking seriously! (It’s pretty amazing how advocates for narrow banking come from across the political spectrum.) We have some thoughts on banking and private money creation, but you’ll have to read our book to figure out what they are.
Instead, we wanted to provide some history behind the idea. One of the greatest economists of the 20th century (indeed, in our view, perhaps the greatest), Irving Fisher was a strong supporter of the so-called Chicago Plan which would implement 100% reserve banking. Here is a link to the one of the original documents from 1939. The Chicago Plan economists were living in the shadow of the Great Depression, and it had a very strong influence on their thinking.
Some of the document is a bit hard to get through, but we recommend starting on page 14 where the section entitled “The Fractional Reserve System” begins. The economists pulled no punches:
“A chief loose screw in our present American money and banking system is the requirement of only fractional reserves behind demand deposits. Fractional reserves give our thousands of commercial banks power to increase or decrease the volume of our circulating medium by increasing or decreasing bank loans and investments. The banks thus exercise what has always, and justly, been considered a prerogative of sovereign power. As each bank exercises this power independently without any centralized control, the resulting changes in the volume of the circulating medium are largely haphazard. This situation is a most important factor in booms and depressions.”
And here is the core of their proposal:
“Since the fractional reserve system hampers effective control by the Monetary Authority over the volume of our circulating medium it is desirable that any bank or other agency holding deposits subject to check (demand deposits) be required to keep on hand a dollar of reserve for every dollar of such deposit, so that, in effect, deposits subject to check actually represent money held by the bank in trust for the depositor.”
Another excellent read is from Ronnie Phillips entitled “The ‘Chicago Plan’ and New Deal Banking Reform.” He goes through the Chicago Plan and shows just how close it was to being implemented. It’s pretty amazing for many reasons. The idea had a lot of support. Henry Wallace, the Secretary of Agriculture handed the plan over the President Roosevelt in 1933 and wrote the following:
“The memorandum from the Chicago economists which I gave you at [the] Cabinet meeting Tuesday, is really awfully good and I hope that you or [Treasury] Secretary Woodin will have the time and energy to study it. Of course the plan outlined is quite a complete break with our present banking history.”
Phillips also has some quotes from FDR and others during the Chicago Plan debate that are absolute gems. Check this one out from President Roosevelt:
“I wish our banking and economists friends would realize the seriousness of the situation from the point of view of the debtor classes — i.e., 90% of the human beings in this country — and think less from the point of view of the 10% who constitute the creditor classes.”
And another one from Senator Bronson Cutting of New Mexico:
“The fight against the abolition of the credit power of private banks will be a savage one, for their power as a unit is without equal in the country.”
Phillips goes through the politics of the Chicago Plan, and why it didn’t end up getting passed. It is a fascinating read that even involves the unexpected death of a Senator that supported the plan. We won’t ruin it for you — just go read it.