By: Thomas Sowell
The decision of the government in Cyprus to simply take money out of people’s bank accounts there sent shock waves around the world. People far removed from that small island nation had to wonder: “Can this happen here?”
The economic repercussions of having people feel that their money is not safe in banks can be catastrophic. Banks are not just warehouses where money can be stored. They are crucial institutions for gathering individually modest amounts of money from millions of people and transferring that money to strangers whom those people would not directly entrust it to.
Multi-billion dollar corporations, whose economies of scale can bring down the prices of goods and services — thereby raising our standard of living — are seldom financed by a few billionaires.
Far more often they are financed by millions of people, who have neither the specific knowledge nor the economic expertise to risk their savings by investing directly in those enterprises. Banks are crucial intermediaries, which provide the financial expertise without which these transfers of money are too risky.
There are poor nations with rich natural resources, which are not developed because they lack either the sophisticated financial institutions necessary to make these key transfers of money or because their legal or political systems are too unreliable for people to put their money into these financial intermediaries.
Whether in Cyprus or in other countries, politicians tend to think in short run terms, if only because elections are held in the short run. Therefore, there is always a temptation to do reckless and short-sighted things to get over some current problem, even if that creates far worse problems in the long run.
Seizing money that people put in the bank would be a classic example of such short-sighted policies.
After thousands of American banks failed during the Great Depression of the 1930s, there were people who would never put their money in a bank again, even after the Federal Deposit Insurance Corporation was created, to have the federal government guarantee individual bank accounts when the bank itself failed.
For years after the Great Depression, stories appeared in the press from time to time about some older person who died and was found to have substantial sums of money stored under a mattress or in some other hiding place, because they never trusted banks again.
After going back and forth, the government of Cyprus ultimately decided, under international pressure, to go ahead with its plan to raid people’s bank accounts. But could similar policies be imposed in other countries, including the United States?
One of the big differences between the United States and Cyprus is that the U.S. government can simply print more money to get out of a financial crisis. But Cyprus cannot print more euros, which are controlled by international institutions.
Does that mean that Americans’ money is safe in banks? Yes and no.
The U.S. government is very unlikely to just seize money wholesale from people’s bank accounts, as is being done in Cyprus. But does that mean that your life savings are safe?
No. There are more sophisticated ways for governments to take what you have put aside for yourself and use it for whatever the politicians feel like using it for. If they do it slowly but steadily, they can take a big chunk of what you have sacrificed for years to save, before you are even aware, much less alarmed.
That is in fact already happening. When officials of the Federal Reserve System speak in vague and lofty terms about “quantitative easing,” what they are talking about is creating more money out of thin air, as the Federal Reserve is authorized to do — and has been doing in recent years, to the tune of tens of billions of dollars a month.
When the federal government spends far beyond the tax revenues it has, it gets the extra money by selling bonds. The Federal Reserve has become the biggest buyer of these bonds, since it costs them nothing to create more money.
This new money buys just as much as the money you sacrificed to save for years. More money in circulation, without a corresponding increase in output, means rising prices. Although the numbers in your bank book may remain the same, part of the purchasing power of your money is transferred to the government. Is that really different from what Cyprus has done?
Source: RCP
Stick with local news.
This is local news. What happens in the United States of America effects Evansville, Indiana. If your dollar that you earned here buys 10% less food at Schnucks it is a local issue brought to you courtesy of the Federal Reserve printing press.
It is not local news. Neither the city nor the county have any control over this. You can take any federal issue, whether it’s fiscal or social, and it will affect the local area but you simply cannot cram it into local politics i.e cooking up some hypothetical about a gun ban.
If this city was in good shape, you could make the argument that it’s a slow news day and this makes for good fill but it isn’t. I can name on one hand at most the local departments in either local gov’t that are doing their job. I can also name several local issues that are/have been bypassed on this site because of federal and libertarian biased distractions took it’s eye off them.
It’s bad enough “temples to sports” and other projects that don’t fit the mold of a certain political viewpoint are looked upon with a double standard, but when you bring federal issues into the equation this becomes a full blown libertarian bulletin board and that is not good public policy.
The CCO thrives when local politicians fear it and when it’s fighting for good public policy that is common sense to everyone. Exposing the Homestead Tax Credit Grab, exposing the mayor having secret meetings while selecting a hotel company behind closed doors, wasting valuable buildings in favor of more parks while the parks system is already in shambles, exposing the true state of Evansville’s accounting records, and most importantly, fighting back against the machine candidates who have had a monopoly over this city since the beginning of time and were running amuck before the CCO are all things this site has done a wonderful job of bringing to light. All of those issues are also why the CCO is beating the living daylights out of the CP and others who refuse to do investigative journalism. T
That is what should be on the CCO, not Rand Paul, not Obamacare, not Hugo Chavez, not the Bush Tax Cuts, not any of that garbage.
You’ve really got your back up against libertarians now, haven’t you? I guess when one points out what a fool you’ve been on so many local issues and how a libertarian perspective could have saved you from looking so foolish it tends to have that blowback effect.
I agree the CCO is usually at its best when focusing on local issues, but the Editor is right here… Inflation is a national issue that directly affects ALL OF US. The banking system is a national issue that directly affects ALL OF US. If you want a local angle on this, just look at what happened to the Liberty Dollar of Evansville in 2007. There’s your local angle. That guy was trying to create a private barter currency to compete with the Federal Reserve Note. He was breaking absolutely ZERO laws, yet he was raided and tried on several trumped up charges. Basically he was taken before the Priests of the Temple and found guilty of trying to give people the means to combat inflation.
The same is about to happen to Bitcoin.
If I ever ran or Mayor, in my platform would be the creation of a local barter exchange currency designed to boost local business and hedge against wealth confiscation through inflation. Our past several Mayors are too stupid to even know what that means.
Stick your head in the sand if it makes you feel better, I wonder if you can see the big picture? Me thinks not. Do you understand the old quote/adage “All Politics is Local!”?
I suggest you ignore what’s happening at the National level, Rails, yeah that will fix it.
Keep on kicking butt CCO, don’t´ let political boundaries, or small town minds hold you back!
Thomas Sowell is one of the best. Well thought out points and able to communicate in a way that even lower minded people, like myself, can understand. He’s written many great books, but “Basic Economics” and “Applied Economics: Thinking Beyond Stage One” should be required reading for every young adult.
Mr. Editor, please continue to offer his editorials when possible. I think you will find that his editorials will stimulate objective arguments by your readers. Much appreciated, Shaun Short
I’m sure all of the above is accurate. However, I can do about as much to change it as I can to prevent a meteor from striking my house. Accordingly, I will worry about such a thing about as much as I do a meteor striking my house. Which is to say, not at all. If such a thing happens here I’ll deal with it then, along with everybody else.
If that’s your attitude, then you will be caught with your pants down just like the Cypriot people were.
You’re putting the odds of a financial catastrophe on the order of a meteor hitting your house? Have you been in a coma the last 6 years?
No one knows when there will be a run on a bank. It just happens. Then people like you who twiddled your thumbs and threw up your hands instead of moving your wealth into tangible assets and out of banks will be jerking at the locked doors of your local bank branch screaming “give me my money” and “why me?”
I presume that you’re stockpiling piles of money in coffee cans? Here’s a quote from the article to think about:
“More money in circulation, without a corresponding increase in output, means rising prices.”
In the economic world, that’s called ‘inflation’. At it’s worst it’s called ‘hyperinflation’ and it would take a wheelbarrow full of paper money to buy a loaf of bread. So, unless you have millions of dollars stored in coffee cans in your backyard, you’re in exactly the same boat as everybody else in this country if that happens. Not sure what you mean by ‘tangible assets’. If you’re planning to swap a pound of gold for a can of my soup when a financial TEOTWAWKI comes about, you’ll be very hungry indeed. If you’re stockpiling non-hybrid seeds, etc., good for you.
I do love the smugness and assumption that ‘people like me’ will fare poorly in such a situation, though.
“Those who do not remember the past, are condemned to repeat it.”
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