The Roaring Twenties, a period of economic growth in the United States, was marked by speculation and excessive lending.
[6] Banks with inadequate capital reserves found themselves unable to absorb potential losses from loan defaults or market fluctuations.
[8] Its main provision was to require 100% reserves on deposits subject to check, so that "the creation and destruction of effective money through private lending operations would be impossible".
Other proponents of full reserves, however, such as Currie and Fisher, would still have allowed commercial banks to make loans out of savings deposits, as long as these could not be made transferable by check.
[12][13] An important motivation of the Chicago Plan was to prevent the nationalization of the banking sector, which, in the context of the Great Depression, was considered by some as a real possibility.
Frank Knight, a laissez-faire proponent at the University of Chicago, wrote in his review[16] "The practical thesis of the book is distinctly unorthodox, but is in our opinion both highly significant and theoretically correct.
In the abstract, it is absurd and monstrous for society to pay the commercial banking system “interest” for multiplying several fold the quantity of medium of exchange when (a) a public agency could do it at negligible cost, (b) there is no sense in having it done at all, since the effect is simply to raise the price level, and (c) important evils result, notably the frightful instability of the whole economic system and its periodical collapse in crises, which are in large measure bound up with the variability and uncertainty of the credit structure if not directly the effect of it.
However, the suggested reforms, such as the imposition of full reserves on demand deposits, were shelved and replaced by less drastic measures.
[25] This idea of full reserves on checking deposits would be advocated by other economists in the 1930s, including Lauchlin Currie of Harvard[26] and Irving Fisher of Yale.
[30] In 1934, Thomas Alan Goldsborough sponsored bills HR 7157/8780 to create a Federal Monetary Authority with sole right to issue legal tender.
[34] In July 1935, Senator Gerald Nye proposed a substitute bill that incorporated elements of the Chicago Plan, including 100% reserves and a central monetary authority.
[36] As America entered the Recession of 1937–1938, this caused renewed discussion of the key elements of the Chicago plan, and in July 1939 a new proposal was drafted, titled A Program for Monetary Reform.
[37] The draft paper was attributed on its cover page to six American economists: Paul H. Douglas, Irving Fisher, Frank D. Graham, Earl J. Hamilton, Wilford I.
[42] In August 2012, the proposal was given renewed attention after the International Monetary Fund (IMF) published a working paper by Jaromir Benes and Michael Kumhof.