The Chicago Plan Resurrected: Circle Secures Banking License, 90-Year-Old Radical Monetary Experiment Quietly Lands
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The Chicago Plan Resurrected: Circle Secures Banking License, 90-Year-Old Radical Monetary Experiment Quietly Lands
If banks can no longer "create money out of thin air", who will become the new capital gateway?
Navigating Web3 tides with focused insightsAuthor: Byron Gilliam
Compiled by: TechFlow
TechFlow Editor's Note: During the Great Depression of 1933, University of Chicago economists proposed the "Chicago Plan"—banning fractional reserve banking and completely separating money creation from credit issuance. No one dared to touch this radical proposal at the time, but 90 years later, Circle obtained a federal banking license and was prohibited from lending, with stablecoins quietly turning the theory of that era into reality. For investors, this means one question: if banks can no longer "create money out of thin air," who will become the new gatekeeper of funds?
In the darkest moment of the Great Depression, all conceivable ideas about money were put on the table.
During the 1933 Bank Holiday, Roosevelt proposed converting all government bonds to cash at face value—arguably an extreme measure of debt monetization.
His advisors considered having the Federal Reserve print enough new bills to match all bank deposits, so that withdrawal demands could be met when banks reopened.
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 a top institution in the academic world.
The "Chicago Plan" proposed by University of Chicago economists could have ended the entire banking industry as we know it.
Their idea was to abolish the fractional reserve banking system.
Frank Knight, co-author of the Chicago Plan, warned that allowing commercial banks to create money would "produce significant evil consequences"—"especially the terrible instability of the entire economic system and its periodic crisis collapses."
Scholars believed that the fractional reserve banking system combines money creation with credit expansion, often inflating bubbles during upturns and triggering panics during downturns.
Worse still, we also have to pay for this destabilizing service provided by banks.
"It is absurd and monstrous that society pays 'interest' for the commercial banking system to multiply the quantity of the medium of exchange," 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 is how the authors of a 2012 IMF paper envisioned the implementation effects of the Chicago Plan: if banks suddenly needed government-issued currency to back all the deposits they created, they would have to borrow from the source of money—the government.
Banks would no longer create money when issuing loans, but instead borrow government-created money—the kind that charges fees—and then lend it out.
The paper said that turning the banking system upside down like this would "reduce business cycle fluctuations caused by rapid changes in banks' attitudes toward credit risk [and] eliminate bank runs."
The paper estimated that the plan would increase output by 10% and reduce inflation to zero—"without causing problems for the implementation of monetary policy."
Sounds good... but there's better.
The authors said it could also eliminate national debt.
"Because under the Chicago Plan, banks must borrow reserves from the Treasury to fully back these massive liabilities, the government acquires a very large asset against banks, and government debt becomes highly negative after deducting this asset."
Highly negative!
The authors reasoned that new money created to lend to banks would be "government equity," not debt, and therefore should be recorded as an asset on the national balance sheet—considering the trillions of bank deposits and deposit-like liabilities that must be replaced, this would be a huge asset.
Subtracting existing national debt from this new asset would push the government's net debt into highly negative territory.
Or rather, that's how it would have been when the paper was written in 2012. Now that debt has reached $36 trillion, the math isn't that dramatic.
There are good reasons why it was not implemented.
Inflation could surge.
Banks could fail.
The financial system might lack risk-free government bonds.
And after all this, new forms of private money would emerge in the shadow banking system, potentially recreating the original boom-bust dynamics of fractional reserve finance.
However, the main reason it was not implemented in the 1930s was likely that banking reforms like FDIC deposit insurance made reinventing the banking system look like an unnecessary risk.
A core feature of the plan keeps reappearing: a banking system where money creation is independent of credit creation—also known as narrow banking.
"The idea of narrow banking has been endorsed by top economists," a paper published by the Federal Reserve pointed out, "such as Irving Fisher and Nobel laureates Milton Friedman, James Tobin, and Robert Merton."
Recently, it has also started to become popular among non-economists. "The increasing popularity of stablecoins and the U.S. 2025 GENIUS Act have introduced this form of banking to the public," the paper added.
Regulated stablecoin issuers like Circle are not exactly narrow banks—because issuing stablecoins is different from taking deposits.
But it's very close—and getting closer.
Last week, the government approved Circle to establish the first National Digital Currency Bank, taking another step closer to recognizing this model.
This means Circle is now subject to federal regulation, legally organized as a bank (although a trust bank), and explicitly prohibited from issuing loans.
Is the Chicago Plan making a comeback, one idea at a time? Wait until they hear about negative national debt.
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