Introduction: The Quest for Stable Banking
The Bank of England performs two operations of banking, which are quite distinct, and have no necessary connection with each other: it issues a paper currency as a substitute for a metallic one; and it advances money in the way of loan, to merchants and others. That these two operations of banking have no necessary connection, will appear obvious from this-that they might be carried on by two separate bodies, without the slightest loss of advantage, either to the country, or to the merchants who receive accommodation from such loans. (Ricardo 1951, vo!. 4, 276)
The Bank Charter Act of 1844, commonly known as Peel's Act (after Robert Peel), implemented Ricardo's plan. The Bank of England was separated into a lending department and a money issuing department. In 1933 this same proposal was put forward by a group of economists at the University of Chicago as the "Chicago Plan for Banking Reform" (Hart 1951). The plan was presented as an expedient in getting the United States out of the Great Depression, as well as providing a basis for long-term reform of the financial system. Legislation was introduced to implement the Chicago plan by Progressives, including Senator Bronson Cutting of New Mexico, as part of the debate over the Banking Act of 1935. The objective of this book is to document the role of the Chicago plan in the debates over New Deal banking reform and provide an assessment of its impact on the legislation ultimately passed. Advocates of the Chicago plan viewed the New Deal banking legislation as a first step in the evolution of the financial system toward
what Henry Simons referred to as the "financial good society" (Simons 1948,239).