Happy Holidays from HardmoneyJim

A lesson on money and banking from your favorite Christmas movie!

🎉 Happy Holidays, everyone! I am writing from the sun-kissed shores of Coronado, California, where the clouds finally decided to take a vacation after two weeks of moody marine layers. For the next few months, I’ll be writing or broadcasting my Stacks from the beach, dodging the frigid Wyoming winter.

Now, let's sprinkle in a dash of holiday cheer! Here at HardmoneyJim, while we love to spread joy, our main mission is exploring the nitty-gritty of money creation and its consequences. Enquiring minds must be asking: "How on earth do you combine a happy holiday greeting with the arcane reality of money and banking? Well, grab some eggnog because I think I’ve cracked the code!

I just watched that classic holiday gem, It’s a Wonderful Life. It’s like visiting grandma’s cookie jar – tried and true, but with some delightful bits I hadn’t noticed in years! There's this unforgettable bank run scene that comes packed with life lessons about banking and money creation – and some great cinematic magic, of course.

For my holiday gift to you, let’s stroll through that iconic eight-minute scene where our hero, George Bailey, along with his new bride, Mary, save the Bailey Building and Loan from a financial meltdown. I promise it’ll set you up for a holiday movie moment that’s both fun and educational.

The scene is 1933 in Bedford Falls, New York. George and Mary are kicking off their honeymoon with $2000 cash – a princely sum in those days! (By the way, a number of money sums are mentioned in this scene. if you want to adjust for inflation, you can multiply those amounts by at least 20.)

As George and Mary take off for their honeymoon, they see that a bank run is brewing at George’s business, the Bailey Building and Loan. George goes to investigate the crowd and discovers that the Big Bank that loaned him money is facing hard times and has called its loan, draining the little bank (Bailey Building and Loan) of all its cash reserves. Bailey’s customers have gotten wind of this and are panicking at Bailey’s door, demanding their money in cash.

So take a breather, check out the bank run scene linked below, and when you’re done, we’ll dive into some lighthearted holiday lessons about money and banking that’ll have you appreciating the film all the more!

You can watch it here.

Now, to make that delightful scene even more meaningful, let’s explore a few lessons on money and banking that emerge from the story.

First Lesson: Bank runs can still happen today, but they take a different form. When Silicon Valley Bank suddenly failed in March of 2023, the “bank run” took the form of electronic transfers of deposits out of Silicon Valley Bank (SVB) into larger, safer banking institutions. In that case, over $40 billion in deposits left SVB in a matter of hours! Also, today, banks like Silicon Valley do not technically go bankrupt. First, part of the deposits are covered by federally-backed FDIC insurance. Second, in case of a bank run today, the US Federal Reserve creates enough brand-new cash reserves out of thin air to cover all withdrawals. (See my Substack of March 2023 for details.)

Second lesson: Banking is all about confidence. George and Mary successfully restore confidence in the panicking crowd by projecting normalcy, demonstrating the ability to make partial payments to customers, and stressing the long-term permanency and quality of the assets behind the customers’ deposits. George eloquently explains that “the money isn’t here. Its in Joe’s house and the Kennedy house and a hundred others.” If those assets are solid, then the customers’ deposits are also solid. Ultimately, George saves the depositors from selling out their deposits for 50 cents on the dollar by keeping faith with Bailey Building and Loan.

(See Chapter Two of my book, A Black Hole in Economics, to learn how public confidence in bankers was the first and most important reason for the invention of modern banking.)

Now, back to the scene. An interesting aspect of this confidence issue comes up in George’s interaction with Tom, who wants every penny of his $242 dollars on deposit. Tom insists on getting all his money out immediately, saying, “$242 isn’t going to break anyone.”

That statement is a reflection on the ironic nature of bank deposits. A bank depositor is entitled to receive cash on demand in exchange for his deposits. Any depositor can have his money any time – as long as all depositors do not want all their money at the same time, in which case no one will get all their money! This simple truth is apparently lost on Tom, but seems to be understood by the rest of the customers, who are willing to accept just enough money to tide them over till the creditor bank reopens next week and can once again supply the Bailey Building and Loan with cash reserves.

The third and final lesson I will mention today also concerns the prickly customer Tom. As he removes his cash from the counter, Tom says, “That will close my account.” But in a gesture of confidence and goodwill, George Bailey replies, “No, your account is still here. That’s a loan.”

What has happened here? George Bailey has just created new money by lending to Tom! Tom has withdrawn his money, decreasing Bailey’s assets (cash reserves) and liabilities (deposits) by $242. In a gesture of confidence and goodwill, George then promptly replaces the asset with a new loan and replaces the liability with a new deposit. Presumably, he does this because he does not want to lose Tom’s business and confidence. With no more than a word from its president, Bailey Building and Loan has increased its assets and liabilities by $242. That is how banks create money. (See Chapters Two and Three of Black Hole.)

Finally, I must mention a touching scene at the movie's end. Old Man Potter has stolen Bailey’s cash reserves from Uncle Billy, and the Bailey Building and Loan again faces bankruptcy. Who rides to the rescue this time? George’s friends, relatives, and business associates generously offer their funds to make the Bailey Building and Loan solvent.

In It’s a Wonderful Life, everything is as it should be: Even bank bailouts are handled by the free market, not the government!

Happy New Year to all!

“Like” this post and watch the movie!

HardmoneyJim

December 27, 2024