Abstract

ON THE CONTROVERSY OVER THE ORIGINS OF THE CHICAGO PLAN FOR 100 PERCENT RESERVES


George S. Tavlas

Bank of Greece


Abstract

The idea of 100 percent reserve requirements against demand deposits received a renewed impetus following the 2007-08 financial crisis. In 1933, a group of University of Chicago economists, led by Frank Knight and Henry Simons, circulated two memoranda that called for 100 percent reserve requirements. The idea became known as the Chicago Plan of Banking Reform. That same idea had been proposed in 1926 by Frederick Soddy, a Nobel Laureate in chemistry, in his book, Wealth, Virtual Wealth and Debt. Soddy claimed precedence, a claim that caught on. I provide evidence showing that Knight, and probably Simons, conceived the idea of 100 percent reserves prior to the publication of Soddy’s 1926 book. By 1934, however, Simons raised concerns that 100 percent reserves would not be sufficient in a world where financial markets could innovate around legal restrictions on banks.

Keywords: 100 percent reserves, Chicago Plan, Frank Knight, Henry Simons, Frederick Soddy.

JEL-classifications: B22, E42

Acknowledgements: I am grateful to John Cochrane, Harris Dellas, Samuel Demeulemeester, Robert Dimand, Thomas Humphrey, David Laidler, Ed Nelson, Hugh Rockoff, Roger Sandilands, William Silber, Frank Smets, and Mike Ulan for very helpful comments. I am also grateful to David McCartney, University Archivist at the University of Iowa Libraries, for providing me with material about teaching assignments at the University of Iowa during the 1920s. This paper is based on research conducted while I was a Visiting Scholar at the Becker Friedman Institute at the University of Chicago. I also thank Elisavet Bosdelekidou and Maria Monopoli for research assistance.

Correspondence:
George Tavlas
Alternate to the Governor of the Bank of Greece on the ECB Governing Council and a Distinguished Visiting Fellow at the Hoover Institution at Stanford University.
Bank of Greece
21 E Venizelos Ave
Athens, 10250, Greece
Tel. no. +30 210 320 2370
Fax. no. +30 210 320 2432
Email address: gtavlas@bankofgreece.gr


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