A plan that has been gathering dust for a hundred years may soon find new life in the digital age.

The Chicago Plan, originally proposed during the Great Depression, envisioned a radical restructuring of the financial system to eliminate instability caused by speculative credit cycles.

While its principles once seemed impractical, the advent of Central Bank Digital Currencies (CBDCs) now offers the technological means to implement it. Yet, the promise of stability comes with a hidden price: the disappearance of commercial banking as we know it and a shift toward unprecedented centralization of financial power.

The Radical Premise of the Chicago Plan

The Chicago Plan was conceived in the aftermath of the 1930s banking crises, which exposed the fragility of fractional reserve banking. Economists such as Frank H. Knight and Henry C. Simons proposed a system built on two foundational principles: full reserve banking and the separation of money creation from lending.

Under this plan, banks would no longer create money by lending out deposits. Instead, every dollar in the financial system would be fully backed by central bank reserves. Lending would be handled by specialized institutions such as public investment banks, cooperative banks, or non-profit loan funds, removing credit allocation from the domain of deposit-taking banks.

This proposal promised to end bank runs, reduce systemic risk, and eliminate the boom-and-bust cycles fuelled by speculative credit. In theory, the Chicago Plan offered a safer, more stable financial system. However, in the analogue world of the 20th century, implementing such a system was logistically impossible. The infrastructure to enforce these principles simply did not exist. Today, CBDCs provide the technological foundation that could make the Chicago Plan a reality – but at a significant cost to the structure of modern banking.

CBDCs: A Game-Changer for Monetary Policy

Central Bank Digital Currencies are digital representations of fiat currency, issued and controlled directly by central banks. Unlike decentralized cryptocurrencies, CBDCs are centralized and programmable, enabling central authorities to have direct control over the money supply. These features align closely with the principles of the Chicago Plan.

First, CBDCs would make full reserve banking feasible. Every unit of CBDC would represent a direct liability of the central bank, ensuring that all deposits are fully backed by reserves. This would eliminate the risk of fractional reserve banking, where commercial banks lend out more money than they actually hold. Second, CBDCs would allow central banks to directly manage the money supply, bypassing commercial banks entirely. By separating money creation from lending, CBDCs could eliminate the speculative credit cycles that often lead to economic crises.

The End of Commercial Banking as We Know It

While the implementation of CBDCs could fulfill the Chicago Plan’s vision of financial stability, it would also mean the disappearance of the traditional commercial banking model. Commercial banks today perform two critical functions: they serve as intermediaries between depositors and borrowers and create money through lending. CBDCs would render both functions obsolete.

Depositors would no longer need to rely on commercial banks to hold their money, as CBDCs would be issued and stored directly by central banks. Similarly, the role of banks in money creation would vanish, as central banks would control the supply of digital currency. Lending, under the Chicago Plan framework, would be managed by separate institutions such as public investment banks or cooperative credit unions. This would fundamentally alter the financial landscape, reducing the influence of commercial banks and centralizing financial power in the hands of the state.

The consequences of such a shift would be profound. On one hand, eliminating commercial banks’ ability to create money could reduce systemic risks and bring greater transparency to the financial system. On the other hand, the absence of commercial banks could stifle innovation. Banks, driven by competition, have historically been hubs of financial creativity, introducing products and services that have fuelled economic growth. A system dominated by centralized institutions could lack the dynamism and adaptability of the current model.

The Abolishment of Commercial Banking: A Step Toward Socialism?

The disappearance of commercial banking as envisioned by the Chicago Plan and enabled by CBDCs would fundamentally alter the financial system and the socio-economic structure. Such a centralized model, where financial power and money creation are entirely controlled by the state, would mirror conditions seen in the Eastern Bloc during the 20th century.

In those economies, the absence of private financial institutions and centralized control over resource allocation were hallmarks of socialist, if not outright communist, systems. By eliminating the competitive, decentralized functions of commercial banking, this shift could pave the way for a more state-controlled economy, reducing individual and entrepreneurial freedoms in favor of collectivist financial management. While proponents may argue this ensures stability and equity, critics caution that it risks recreating a centralized economic system where innovation stagnates and financial autonomy erodes under the weight of state control.

The Dark Side of Centralization

The centralization enabled by CBDCs introduces significant risks, particularly in terms of individual financial autonomy and privacy. Unlike physical cash, CBDCs would never be fully owned by individuals. Central banks, acting as intermediaries, could impose restrictions on how money is used. They could block transactions, impose spending limits, or even freeze accounts, fundamentally altering the relationship between citizens and their money.

Moreover, CBDCs would give governments unprecedented surveillance capabilities. Every transaction would be recorded on a digital ledger, allowing authorities to track spending habits, political affiliations, and even lifestyle choices. This level of control could be used to enforce policy objectives, such as penalizing purchases deemed harmful to society or restricting funds for certain activities. While proponents argue that such measures could reduce corruption and tax evasion, they also raise serious concerns about privacy and civil liberties.

The programmable nature of CBDCs also creates the potential for direct government intervention in economic behaviour. Governments could impose time-limited validity on digital currency to encourage spending during economic downturns or penalize savings by programming depreciation into the currency. These tools, while powerful, could erode trust in money as a stable store of value.

The disappearance of commercial banking would mark a seismic shift in the financial landscape, with implications for innovation, competition, and economic growth.

Progress or Peril?

As the world moves not only closer to the implementation of CBDCs but also towards a situation reminiscent of the 1930s, the lessons of the Chicago Plan serve as both a guide and a warning. The potential to create a safer and more stable financial system is within reach, but the cost of such a transformation would be enormous.

It would take a major toll on civil liberties as well as on the economic system as a whole. Commercial banking, a cornerstone of modern economies, could become a relic of the past. With it, we risk losing the innovation and competition that have driven financial progress for centuries.

Featured image credit: edited from freepik