The 'Chicago Plan' and New Deal Banking Reform
During the 1930s, there were numerous proposals put forth to modify the financial system. The "Chicago Plan," submitted in 1933 by economists at the University of Chicago, recommended abolition of the fractional reserve system and imposition of 100% reserves on demand deposits. Despite the radical nature of this proposal, Phillips argues that it played an important, and hitherto neglected, role in the banking legislation passed during the New Deal. The paper addresses the question of whether our present financial problems might have been avoided had the - "Chicago Plan" been fully implemented during the New Deal. Phillips provides a historical analysis of banking reform during that era, and explores the reasons why the Chicago Plan was not adopted. On the surface, it appears to have been defeated as a matter of pure political expediency. The Banking Act of 1935, by institutionalizing Federal deposit insurance and the separation of commercial and investment banking, successfully restored the public's confidence in the banking system. Moreover, Roosevelt was satisfied since the act permitted enhanced control over monetary policy by a reconstituted Federal Reserve. The Chicago Plan ultimately succumbed to alternative (and less stringent) measures embodied in the Banking Act of 1935, but its principles (e.g. restricting bank assets and limiting taxpayers' liability from Federal deposit insurance) have reemerged in the contemporary debate over banking reform in this country: after all, there has been a rejuvenation of the 100% reserve plan via "narrow banking" or "core banking" proposals. Though the early New Deal legislation must be considered a success since it remained relatively unchanged for almost fifty years, a formidable challenge is posed in devising a financial system that will last well into the twenty-first century.
When requesting a correction, please mention this item's handle: RePEc:lev:wrkpap:wp_76. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Elizabeth Dunn)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.