The ‘Chicago Plan’ and New Deal Banking Reform

Abstract

The history of the legislative changes in the financial system, which occurred during the 28 months from Franklin D. Roosevelt’s inauguration, in March 1933, until the passage of the Banking Act of 1935 has been well documented (Burns, 1974; Kennedy, 1973). This period saw the enactment of the Emergency Banking Act, the Banking Acts of 1933 and 1935, as well as reforms of the stock market and agricultural credit. The existing histories have given us detailed examinations of the political maneuvering involved in the passage of the legislation, but they have neglected the role of the ‘Chicago plan’ — the 1933 proposal put forward, in a series of memoranda by economists at the University of Chicago, to abolish the fractional reserve system and impose 100 per cent reserves on demand deposits. The proposal was known to the Roosevelt administration prior to the passage of the Banking Act of 1933, and later led directly to legislation introduced by Senator Bronson Cutting of New Mexico, and other Progressives, as part of the debate over the Banking Act of 1935. The influence of the Chicago plan was felt even before Irving Fisher’s more widely known, and largely unsuccessful, efforts to enlist Roosevelt’s support for the 100 per cent reserve plan (Allen, 1977, 1991).