This includes Irving Fisher of Yale and the founders of the so-called Chicago School of Economics. macroeconomists at the time supported 100 percent reserve banking. Then, there were two leading contenders for radical banking reform in the United States: the proposals that would eventually become the Glass-Steagall Act-which separated commercial and investment banks, created the deposit insurance program, and allowed greater branching by national banks-and proposals for 100 percent reserve banking, under which each dollar deposited by a bank customer must be backed by a dollar of cash in bank vaults or of bank reserves in the central bank. The response of macroeconomists-those who study the workings of national economies-in the 1930s was strikingly different from attitudes today. Economists therefore faced the challenge of providing policy prescriptions that could prevent a repeat of these traumatic experiences. In each case, insufficient regulation of the banking system was held to have contributed to the crisis. Problems in the banking sector played a critical role in triggering and prolonging the two greatest economic crises of the past 100 years: the Great Depression of 1929 and the Great Recession of 2008. 1īanks create new money when they lend, which can trigger and amplify financial cycles
