Good ideas that didn't pan out, part 5: alternative banking


The last in a five-part series on worthy innovations from the past that didn't quite make it

24th September 2014
By Stian Westlake

Every so often you happen across an old project or scheme that had some success but then later disappeared. A few such ideas might still even have something helpful to offer us now.

Part 5: The Chicago Plan

Back in 1933, a group of American economists from the University of Chicago prepared an alternative plan for how to run a banking system.

Normal banking is a sort of authorised scam. No bank keeps enough money on hand to pay back everyone who has an account with them. They rely on the fact that people won’t all want their money back at once. So long as a bank maintains an agreed amount on deposit with its country’s central bank, it can borrow and lend far greater amounts. Appropriately, the ratios are set in periodic negotiations in Switzerland.

This system, called 'fractional reserve' banking, has two side effects. First of all, it means that banks create money. Every time a bank makes £100 of loans but only has to put £4 on deposit at the Bank of England, it is creating £96. Secondly, it gives the government a strong interest in keeping banks afloat, because bank runs result in unrest and economic calamity – hence deposit insurance, and the nationalisation of so many banks in 2008.

The Chicago economists had a different idea. The Chicago Plan was a six-page memo that argued that all banks should be required to hold 100 per cent reserves to cover any loans they made. Money creation should be the preserve of the government, who can use it more effectively to fight downturns or damp down inflationary growth.

The plan didn’t make it into America’s 1935 banking reforms. But it was re-proposed in 2012 by IMF economists as a way of preventing another global financial crisis. And by embracing quantitative easing as a tool to fight the post-2008 recession, governments seem to have warmed to the idea that they should be in charge of creating money. Perhaps the Chicago Plan is due a revival?

More in this series

Part 1: a new economy in the Tyrol

Part 2: Project Cybersyn

Part 3: the Peckham Experiment

Part 4: Sword into ploughshares at Lucas


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