chapter  14
10 Pages


You are wrong in supposing that the subject is only of historical interest. In connection with discussions of the present problems of the banking industry, stimulated in considerable measure by the course of the S & L disaster, some of the current commentators are reviving the idea of a 100 percent reserve plan as a better solution than guaranteeing bank deposits. (letter to William Allen, December 26, 1990, in author's possession)

All that is necessary is to pass legislation requiring that banks offering transactions deposits have as assets either cash, whether in the form of vault cash or as deposits at the Fed, or U.S. government securities equal in total amount to the volume of demand deposits outstanding. That would be 100% reserves, but 100% reserves in the form of either government securities or cash. There would also be a phase-in. The fractional reserve would be stated, let's say, 25% a year from now, 50% two years from now, and so on. The banks which offer transactions deposits, the narrow banks in Litan's phrase, would acquire the government securities by selling off their other assets, whether they are loans or investments, and purchasing government securities. (letter to author, November 7, 1991)

Is there any substantial argument that Chicago plan type reforms should be implemented today? We can answer the question by asking if the following are desirable (and require government intervention):

1. Less discretion by the Federal Reserve Board, and setting ofmonetary targets by Congress; a Reconstruction Finance Corporation and a Postal Savings system; and no Federal Reserve discount window.