On the Controversy Over the Origins of the Chicago Plan for 100 Percent Reserves: Sorry, Frederick Soddy, it was Knight and (Most Probably) Simons!

Sunday, March 1, 2020

Economics Working Paper 20102

Abstract: 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.

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