Author: Byron Gilliam

Translated by: Deep Tide TechFlow

Deep Tide Introduction: During the Great Depression in 1933, economists from the University of Chicago proposed the "Chicago Plan" — abolishing the fractional reserve banking system and completely separating monetary creation from credit issuance. This radical proposal was untouchable at the time, but 90 years later, Circle received a federal banking license and was prohibited from lending, and 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 gatekeepers of funds?

At the darkest moment of the Great Depression, every idea about currency was put on the table.

During the banking holiday in 1933, Roosevelt proposed converting all government bonds at face value into cash — arguably the ultimate operation of debt monetization.

His advisors considered having the Federal Reserve print enough new money to match all bank deposits, so that when banks reopened, they could meet withdrawal demands.

How open was the policy window at the time? A year later, Roosevelt appointed Marriner Eccles to lead the Federal Reserve. Eccles was a self-made banker with only a high school education.

However, the most radical proposal came from top academic institutions. The "Chicago Plan" proposed by economists from the University of Chicago could have ended the entire banking system 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 "produce significant adverse consequences" — "especially the terrifying instability of the entire economic system and its cyclical crises and collapses."

Scholars believed that the fractional reserve banking system combined money creation with credit expansion, often inflating bubbles in good times and triggering panics in bad times. Worse still, we had to pay for this destabilizing service provided by banks.

"Society pays 'interest' for the commercial banking system multiplying the number of transaction media, which is absurd and grotesque," Knight added.

The Chicago Plan could 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, this was the vision of the authors of a 2012 IMF paper regarding the potential effects of implementing the Chicago Plan: if banks suddenly needed government-issued currency to support all the deposits they created, they would have to borrow from the source of that currency — the government.

Banks would no longer create money when issuing loans, but would borrow government-created money — the kind that comes with a charge — and then lend it out.

The paper stated that turning the banking system upside down like this would "reduce business cycle fluctuations caused by banks' rapidly changing attitudes towards credit risk [and] eliminate bank runs."

The paper estimated that the plan would increase output by 10% and bring inflation down to zero — "without causing problems for the implementation of monetary policy."

Sounds good... but there is better. The authors said it could also eliminate national debt.

"Because under the Chicago Plan, banks would have to borrow reserves from the Treasury to fully support these enormous liabilities, the government would acquire a very large asset from the banks, making government debt a highly negative number after subtracting this asset."

Highly negative!

The authors reasoned that the new money created to lend to banks would be "government equity," not debt, and should therefore be recorded as an asset on the national balance sheet — considering the trillions in bank deposits and deposit-like liabilities that would need to be replaced, this would be a massive asset. Subtracting this new asset from existing national debt would push the government's net debt into highly negative territory.

Or, rather, it would have been so at the time of writing the 2012 paper. Now, with debt reaching $36 trillion, the math does not seem as dramatic.

It was not implemented for good reason. Inflation might soar. Banks might fail. The financial system might lack risk-free government bonds.

After all this, a new form of private currency could emerge in the shadow banking system, possibly recreating some of the boom-bust dynamics of fractional reserve finance.

However, the primary reason it was not implemented in the 1930s might be that banking reforms like FDIC deposit insurance made reinventing the banking system seem like an unnecessary risk.

A core feature of the plan keeps reappearing: a banking system where money creation is independent of credit creation — that is, narrow banking.

"The idea of narrow banking has received endorsement from top economists," a paper published by the Federal Reserve noted, "such as Irving Fisher and Nobel laureates Milton Friedman, James Tobin, and Robert Merton."

Recently, it has also begun to gain popularity among non-economists. "The increasing popularity of stablecoins and the introduction of this form of banking to the public in the United States by the 2025 GENIUS Act," the paper added.

Regulated stablecoin issuers like Circle are not entirely narrow banks — because issuing stablecoins is different from accepting deposits.

But it is very close — and getting closer. Last week, the government approved Circle to establish the first national digital currency bank, bringing recognition of this model a step closer.

This means Circle is now under federal regulation, legally organized as a bank (albeit a trust bank), and is explicitly prohibited from making loans.

Is the Chicago Plan making a comeback, one idea at a time? Let's wait until they hear about negative national debt.