Chicago’s plan to “borrow a dead body to bring it back to life”: Circle has secured a banking license, and an aggressive monetary experiment from 90 years ago has quietly come ashore

Author: Byron Gilliam

Translated by: Deep Tide TechFlow

Deep Tide TechFlow Reader: During the Great Depression in 1933, economists at the University of Chicago proposed the “Chicago Plan”—banning fractional-reserve banking, so that money creation would be completely separated from credit issuance. No one dared touch this radical idea at the time, but 90 years later, Circle obtained a federal banking license, is barred from lending, and stablecoins are quietly turning the theory of that era 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 capital?

In the darkest moment of the Great Depression, every thought about money was put on the table.

During the 1933 bank holiday, Roosevelt proposed converting all government bonds into cash at face value—an extreme example of debt monetization.

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

How open were the policy windows back then? A year later, Roosevelt appointed Marriner Eccles to lead the Federal Reserve. Eccles was a banker who built his career from scratch, with only a high school education.

However, the most radical proposal came from the academic establishment at the very top. The “Chicago Plan” proposed by economists at the University of Chicago could have ended the entire banking industry as we know it.

Their idea was to abolish fractional-reserve banking.

Frank Knight, a co-author of the Chicago Plan, warned that allowing commercial banks to create money would “produce serious adverse consequences”—“especially the terrible instability of the entire economic system and its periodic crises collapsing.”

Scholars argued that fractional-reserve banking ties money creation together with credit expansion, which often inflates bubbles during booms and triggers panic during downturns. To make matters worse, we also have to pay for this destabilizing service provided by banks.

“Society pays ‘interest’ for multiplying the number of transactions intermediaries provided by the commercial banking system—it’s absurd and perverse,” Knight added.

The Chicago Plan could have overturned this arrangement: not everyone pays to have banks create money for us, but banks pay so that the government creates money for them.

At least, that was an IMF paper’s hypothetical in 2012 about what would happen if the Chicago Plan were implemented: if banks suddenly needed government-issued money to support all the deposits they create, they would have to borrow from the source of money—the government.

Banks would no longer create money when extending loans. Instead, they would borrow government-created money—paid for, of course—then lend it out again.

The paper said that by flipping the banking system like this, it would “reduce business-cycle fluctuations [caused by] rapid changes in banks’ attitudes toward credit risk [and] eliminate bank runs.”

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

Sounds good… but there’s more. The author said it could even eliminate national debt.

“Because under the Chicago Plan, banks would have to borrow reserves from the Treasury to fully back these huge liabilities. The government would acquire a very large asset from the banks, and when government debt is reduced by that asset, it would become a highly negative figure.”

A highly negative figure!

The author reasoned that the new money created to lend to banks would be “government equity,” not debt, so it should be recorded as an asset on the national balance sheet—given the tens of trillions of bank deposit and deposit-like liabilities that must be replaced, this would be a massive asset. Subtracting existing national debt from this new asset would push the government’s net debt into a highly negative range.

Or, at least, that’s how it would have looked in the paper’s 2012 writing. Now that debt has reached $36 trillion, the math is less dramatic.

It was not implemented for good reasons. Inflation could surge. Banks could fail. The financial system could run short of risk-free government bonds.

And after all of that, a new form of private money would emerge in the shadow banking system, potentially recreating some of fractional-reserve finance’s original boom-bust dynamic.

Still, the main reason it wasn’t implemented in the 1930s may have been that banking reforms like FDIC deposit insurance made it look like redeveloping the banking system would be an unnecessary gamble.

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

“Broad ‘narrow banking’ ideas have received recognition from top economists,” a Fed paper noted, “such as Irving Fisher and Nobel laureates Milton Friedman, James Tobin, and Robert Merton.”

Recently, it has also begun to catch on among non-economists. “The growing adoption of stablecoins, as well as the U.S. 2025 GENIUS Act introducing this form of banking to the public,” the paper added.

Regulated stablecoin issuers like Circle are not exactly narrow banking—because issuing stablecoins is not the same as accepting deposits.

But it’s getting close—and getting closer. Last week, the government approved Circle to establish the first nationwide digital currency bank, bringing it one step closer to legitimizing this model.

This means Circle is now subject to federal oversight, legally structured as a bank (though a trust bank), and is explicitly prohibited from making loans.

Is the Chicago Plan making a comeback—one idea at a time? Let’s talk again when they hear about negative national debt.