Anatomy of the Bank Run

Mises Institute ^ | March 25, 2013 | Murray N. Rothbard

[old curmudgeon]

Unless the laws are changed, you have a contract which they can enforce, but so can you.

Just hope there is no small print that gives them options that would be unacceptable to you, like an adjustable rate.

Inflation is to your advantage, so long as you have the income to make payments, and that is why we have it for the same inflation that works for you works for the government when they are paying off their loans.

Inflation also puts you in a higher bracket, so they get more of your money. Adjustments the IRS makes are behind the curve, so you can’t stay even.

[Bon mots]

This is the enviable situation to be in, loads of assets bought with fixed-rate credit.

The only problem is, that when money fails, governments go after other assets as well.

Under the Weimar Republic, landlords gave away the keys to property to tenants as property taxes soared to untenable levels, anyone with any kind of property that could be seized or taxed could lose it - including real estate.

It is difficult to predict how this will play out.

[LearsFool]

It is impossible to "insure" a firm, even less so an industry, that is inherently insolvent. Fractional reserve banks, being inherently insolvent, are uninsurable.

Perhaps not impossible, but nearly impracticable. A workable insurance scheme would require premiums that'd be incredibly expensive and in constant fluctuation.

Loan-sharking, pawnbroking, even "try-me" loans - these all reflect the risk in their "premiums". If the same were required of banks, the mask of respectability would be stripped from the industry.

If private corporations insured banks, they'd need a rating system like what auto insurers have for drivers. And just as for drivers, the insurance premiums would vary according to their risk rating.

Banks would then need to pass on the insurance costs to their customers. Some banks would be able to pay depositors, while others would have to charge them. Depositors and borrowers would then be able to judge which banks were good risks and which were shaky.

Again, such a system would bring transparency to the entire banking facade - which is precisely why it will never be allowed to happen. What we have instead is a system of subsidized franchises of the same business, none of which are in competition with one another, and none of which need fear anything but having its franchise charter revoked.

A very good article. Thank you for posting it!

[Jane Long]

Just hope there is no small print that gives them options that would be unacceptable to you, like an adjustable rate.

That, or inflation adjusted dollars. I'd read somewhere, a while back, that some newer contracts had tricky wording inserted regarding future repayment. Not sure if it's true, though.

[Gluteus Maximus]

Well said. Ultimately, with the Banksters, it's "heads I win, tails you lose." They'll re-write the rules if and when it gets down to it. You know, I remember well in 2008 the traders who really saw what was coming shorted the heck out of Lehman Brothers and Goldman Sachs. Hank Paulson, a Goldman Sachs insider, as Treasury Secretary let the shorts kill Lehman, but when it came to his baby Goldman Sachs, he suspended trading and screwed the shorts. He literally re-wrote the rules when the smart traders were about to win to save his insider cronies.

That's already happened. We know they're not gonna let the other side win.

And the sides really are now "Main Street" versus "Wall Street." Wall Street will do whatever is necessary to prevent Main Street from winning, at least if it means their being wiped out.

Frankly, I really don't know how to play it. Part of me says to get another house right away while sale prices are still low and interest rates are ridiculously low. But the other part of me says no, invest in an Airstream Trailer with a Ford 350 and hit the road. They'd have to find me first before they confiscate my stuff.

Hmmmm . . .

[Bon mots]

Me too, I don’t know what the best course of action is. We see the old system crumbling around us, the sheeple see the stock market going up and think, “WOW! The economy is fixed!”, when in fact, it’s hot money from the fed pumping up stock prices in the first bout of inflation.

Another way the little people got screwed was with this whole MF Global theft and Corzine skated. People had ownership certificates for bullion with serial numbers - that is a warehouse receipt. This property was stolen.

During the Weimar collapse, even real estate was not safe. All property was subject to excess taxation and/or outright confiscation.
During Weimar, property owners gave the keys to tenants so as not to be robbed of their entire fortunes via confiscatory taxation.

I’ve been directing people to a great book I read on the Weimar collapse, “When Money Dies”. Check my back posts where I posted a link that you could download it for free.

[Bon mots]

Never mind, found the old link.

You can click on the book below to get it from Amazon:

You are in luck... it appears that you can still read it or download it for free online here and only here:

When Money Dies: The Nightmare of the Weimar Collapse

This book was out of print for a while, but now is being reissued. If you are interested, I suggest you grab the free e-book above while it lasts, as it will likely soon disappear since the book has gone back into print.

:)

Of course you can always buy a bookshelf copy from Amazon as it's cheap enough.

[Gluteus Maximus]

Thanks, Bon Mots. I'll check it out.

Rushdoony has a book from the 70s called "Larceny in the Heart." His basic argument is that it's immoral for a Christian to play the "I can beat this inflation thing" game. He says it's a fundamentally immoral thing and that a good man would have nothing to do with it, at least that's how I understand it. He backs it up with lots of Scripture. You can get it cheap on Amazon for kindle.

[Bon mots]

Never take religious advice from economists, nor financial advice from spiritual advisors... just my take.

Here is one more to read that is excellent, but a bit more academic:

This Time Is Different

This book was written by Harvard Economics Professor Rogoff and is well researched - it goes back some 800 years to crises just like the one we face now and how they always do the same thing... just like they are doing now.

A good 'heads-up' on how this will play out.

[BfloGuy]

In either case, the financial system is ruined and barter is the only way out.

Well, yes. That is the end game.

[BfloGuy]

Unfortunately, there is not enough gold (and silver, combined) in the world today to back a major currency.

You were on a roll till that statement.

Any amount of gold will serve to back a currency. If the dollar were defined as 1/4 of 1 grain of gold (1/1920 of a troy ounce) and dollar-holders could redeem their dollars at will for that amount; it would suffice to back the currency.

As long as banks are required to part with their gold reserves upon demand of the depositor, they will be careful not to over-extend themselves. Increasing redemption of gold serves as a signal to a bank that customers are losing confidence and the situation should be corrected: loans called in, interest rates on deposits increased, etc..

Redemption is the key to a successful gold standard. The amount of backing must be defined, but the quantity doesn't matter.

[BfloGuy]

That is my theory.

You are welcome to proceed on the basis of yours.

Mine is no different from yours. Where did you get that impression?

[yefragetuwrabrumuy]

Seriously, 1/4 of a grain of gold? That is just nonsensical as a means to back a currency. You might as well base it on fairy dust, which probably has a better conversion ratio with the dollar.

[BfloGuy]

Seriously, 1/4 of a grain of gold? That is just nonsensical as a means to back a currency. You might as well base it on fairy dust, which probably has a better conversion ratio with the dollar.

You obviously did not read my comment very carefully. The amount of gold backing the currency DOES NOT MATTER.

Why do you consider my suggestion so ridiculous? Please expound. I await your explanation eagerly,.

[yefragetuwrabrumuy]

You answered your own question:

“The amount of gold backing the currency DOES NOT MATTER.”

Priceless is the same as worthless.

Gold only has value to those that value gold. Because there is so little of it in the world, it is no different than baseball trading cards: of great value to those who collect it and trade it, but of no value to those who don’t.

Try this experiment. Go to a grocery store and fill that cart up. Then offer gold as payment to the cashier. Since they have no way of converting it, ask the manager to do so. He will have no way of converting it either.

“Sorry, Mac. Cash, credit, debit or check only.”

“But don’t you *understand*??? This is GOLD!”

“Sorry, Mac. Cash, credit, debit or check only.”

[old curmudgeon]

“Yours” was meant to mean anyone and every one reading the thread.

[old curmudgeon]

When money is worthless, as it has been in so many countries and is now in quite a few, gold does become desirable.

I am amazed at those who say it has no worth because you can’t eat it when our country required that the currency be coin for many many years.

Since Biblical times, gold has been sought after.

What was the California gold rush all about?

[yefragetuwrabrumuy]

My point is that there is just far too little of it in the world, much less the US, to matter.

In physical ownership, there is only about $250 billion in gold in the US, assuming $1600/ounce. Our daily retail is over $2 trillion.

Ironically, if the US government owned all this gold, it would back about 12.5% of daily retail. Paper money is so rare that there is only enough to back 5% of daily retail.

So, if something went wrong with our virtual money right now, like what is happening in Cyprus, our paper money would be worth more than gold. Assuming, of course, the government had decided to nationalize all gold, again.

[BfloGuy]

Gold only has value to those that value gold.

That's true, of course. But you miss the point of a properly gold-backed currency. It limits the amount of paper dollars that can be printed.

That's the point.

[yefragetuwrabrumuy]

In practical terms, at least right now, no it doesn’t.

First, distinguish between the hyperinflated virtual dollar that exists only on computer, and the 20 times deflated paper dollar. The government literally cannot print more paper money than it is doing right now. For it to do so, it would have to open at least 18 more high security printing offices, spend billions on the printing presses, which almost have to be built from scratch, and spend more billions on the right kind of ink, paper, and printing plates.

A minimum of ten years, my guess, for them to do this.

The flip side is that the USG could announce tomorrow that the dollar was again backed by gold. With one microgram of gold being worth a dollar (.000047 of a dollar at current prices). And that the public ownership of gold is again forbidden. And that the transfer of gold will only be with banks and foreign governments.

On top of which, based on its current supplies of gold, the USG has $50 trillion in the bank.