ON THE CONTROVERSY OVER THE ORIGINS OF THE CHICAGO PLAN FOR 100 PERCENT
George S. Tavlas
Bank of Greece
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
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.
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