Author: Byron Gilliam
Compiled by: Deep Chao TechFlow
Deep Chao Guide: During the Great Depression in 1933, economists from the University of Chicago proposed the "Chicago Plan" – to ban the fractional reserve banking system, completely separating money creation from credit issuance. This radical proposal was too daring to touch at the time, but 90 years later, with Circle obtaining a federal banking license and being prohibited from lending, stablecoins are quietly turning that theory into reality. For investors, this raises a question: if banks can no longer "create money out of thin air," who will become the new gatekeeper of funds?
In the darkest hours of the Great Depression, every conceivable idea about money was put on the table.
During the 1933 Bank Holiday, Roosevelt proposed converting all government bonds at face value into cash—arguably an extreme act of debt monetization.
His advisors considered having the Federal Reserve print enough new currency to match all bank deposits, so banks could meet withdrawal demands when they reopened.
How open was the policy window back then? A year later, Roosevelt appointed Marriner Eccles to lead the Fed. Eccles was a self-made banker with only a high school education.
Yet the most radical proposal came from a top academic institution. The "Chicago Plan," proposed by economists at the University of Chicago, could have ended the banking industry as we know it.
Their idea was to abolish the fractional reserve banking system.
Frank Knight, a co-author of the Chicago Plan, warned that allowing commercial banks to create money would lead to "significant evils"—"particularly the terrible instability of the entire economic system and its periodic crisis collapses."
The scholars argued that the fractional reserve system intertwined money creation with credit expansion, often inflating bubbles during booms and triggering panics during busts. Worse, we pay for this destabilizing service banks provide.
"It is absurd and monstrous for society to pay 'interest' to the commercial banking system for multiplying the supply of media of exchange," Knight added.
The Chicago Plan would have overturned this arrangement: instead of everyone paying banks to create money for us, banks would pay the government to create money for them.
At least, that's how the authors of a 2012 IMF paper envisioned the effect of implementing the Chicago Plan: if banks suddenly needed government-issued money to back all the deposits they had created, they would have to borrow it from the source—the government—for a fee.
Banks would no longer create money when making loans; instead, they would borrow government-created money—for a charge—and then lend it out.
The paper stated that flipping the banking system upside down like this would "reduce business cycle volatility driven by rapid changes in banks' attitudes towards credit risk [and] eliminate bank runs."
The paper estimated the plan would boost output by 10% and bring inflation down to zero—"without posing problems for monetary policy implementation."
Sounds good... but there's more. The authors said it could also eliminate national debt.
"Because, under the Chicago Plan, banks have to borrow reserves from the Treasury to fully back the enormous liabilities, the government obtains a very large asset vis-a-vis the banks, and government debt net of this asset becomes highly negative."
Highly negative!
The authors reasoned that the new money created to lend to banks would be "government equity," not debt, and thus should be recorded as an asset on the national balance sheet—a huge asset given the trillions in bank deposits and deposit-like liabilities that would need replacing. Subtracting existing national debt from this new asset would push the government's net debt deep into highly negative territory.
Or at least it would have at the time of the 2012 paper. With debt at $36 trillion now, the math is less dramatic.
It wasn't implemented for good reasons. Inflation might have surged. Banks might have failed. The financial system might have lacked risk-free government bonds.
And after all that, new forms of private money might have emerged in the shadow banking system, potentially recreating the original boom-bust dynamics of fractional reserve finance.
However, the main reason it wasn't implemented in the 1930s was likely that banking reforms like FDIC deposit insurance made reinventing the banking system seem like an unnecessary risk.
One core feature of the plan keeps resurfacing: a banking system where money creation is independent of credit creation—a narrow bank.
"The idea of narrow banking has been endorsed by prominent economists," notes a paper published by the Federal Reserve, "such as Irving Fisher and Nobel laureates Milton Friedman, James Tobin, and Robert Merton."
Lately, it's gained popularity among non-economists too. "The growing popularity of stablecoins and the U.S. GENIUS Act of 2025 introduced this form of banking to the public," the paper adds.
Regulated stablecoin issuers like Circle aren't exactly narrow banks—because issuing stablecoins differs from taking deposits.
But it's close—and getting closer. Last week, the government approved Circle to establish the first national digital currency bank, moving a step closer to endorsing this model.
This means Circle is now federally regulated, legally organized as a bank (albeit a trust bank), and explicitly prohibited from making loans.
Could the Chicago Plan be making a comeback, one idea at a time? Wait until they hear about negative national debt.
