RUN TO THE BANK--FAST!

An infamous image from the Great Depression shows people lined up in front of a bank building. They are there to withdraw their life savings. What is taking place is called a "bank run," equally dreaded by depositors and bankers alike. Similar scenes have revisited the United States in recent weeks and months. Bank runs occur because people know that banks never have enough cash on hand to return all of their depositors' funds if they all show up at once. During the Great Depression some people literally run to the bank in order to get their money before their bank ran out of cash and shut its doors on the slower folks who walked. The victim bank is then bankrupt.  Bank runs today move at a faster pace than during the 1930s because folks can withdraw their funds by means of ATMs and other electronic transfers. 

No bank in America, except the Fed (Note: there are 12 regional Federal Reserve banks in the Federal Reserve System. I refer here to the System and the banks as one entity--the Fed ), can weather a run on its own because all other banks operate under the Fed's "fractional-reserve" system. What that means is that banks are keep a small fraction of their depositors' funds on hand (viz., in reserve) at any time. The rest of their depositors' funds--and many times more--are lent out on terms that do not require repayment until sometime in the future.

The fractional-reserve system is basically dishonest.  The banks accept their depositors' funds for safekeeping knowing full well the depositors cannot be repaid if too many of them want their money back all at once.

A run starts when a bank's depositors question the bank's financial condition. It can be set off by real bad news or merely a rumor. Depositors' concerns quickly become self fulfilling when they flock to withdraw. That is esssentially what drove the staid, old--founded in 1850--investment bank, Lehman Brothers, out of business recently, and Washington Mutual and Indy Mac Bank a little earlier this year. No bank in America has sufficient funds in reserve to withstand a run, which is why economist Murray Rothbard in his ground-breaking analysis of the Great Depression could say "all banks are inherently bankrupt."  (See, America's Great Depression, http://mises.org/rothbard/agd.pdf)

The reason the Fed can't be driven out of business by a bank run is because it can print as much money as it needs to meet all of its depositors' withdrawals. Its depositors are other banks. With unlimited printing-press money available to it, the Fed undoubtedly would also use it to save at least some other banks hit by runs. However, the printing-press money the Fed relies on could itself become worthless. The only thing that gives the dollar value is people's faith in the federal government's ability to protect the dollar's value as a medium of exchange. Since American dollar has lost over 96% of its value since the Fed was created, faith is beginning to wane.

This worst-case scenario of a nation's currency becoming worthless is happening in Zimbabwe right now. Back when Zimbabwe was Rhodesia it was the richest nation in Africa and a net exporter of agricultural products. Its present rate of inflation, 230,000,000 percent annually (!), is so great that a Zimbabwe dollar worth a hundred pennies today will be worth only a teeny, tiny fraction of a cent by tomorrow.  In other words, because its central bank printed Zimbabwe dollars with reckless abandon to meet the government's debts and other obligations, its currency is worthless. Most Zimbabwe citizens, although not the political class, are starving. Very much the same thing happened in one of Europe's most economically sophisticated nations, Germany, in 1923. The same dire fate could befall America because the American dollar, which was once "as good as gold" (because it was backed by gold), is utterly dependent on faith.

Faith in government, both here and abroad, has severely eroded as the incapacity of its institutions to cope with the current financial-economic crisis becomes ever more apparent. The only weapon the United States has to battle severe depression is its faith-based printing-press money.

What, one might ask, is commentary on bank runs, the Fed, currency and economics doing on a JesusOnTaxes website? The common thread is the word faith. Our placement or withdrawal of faith has consequences. Faith in your bank, faith in the Fed, faith in the dollar, faith God. Faith in the wisdom and teaching of Jesus will save us, I think, from the consequences of misplaced faith.