In 2018, I put together a small booklet titled An Introduction to Money and Banking which I gave out to friends, potential clients, and anyone who I thought would be interested. One goal of mine was to provide readers with a better understanding of the U.S. central bank, The Federal Reserve, particularly in the aftermath of the financial 2008 – 2009 financial crisis. More broadly, I attempted, in about 70 pages or so, to provide an overview of the U.S. monetary system.
When the global pandemic hit in 2020, the actions of the Federal Reserve were again put on display. The Federal Reserve and other global central banks introduced massive amounts of liquidity into the system. The result was a surge in the money supply and a sharp decrease in interest rates. For those of us who believe that there is at least a tentative link between money supply growth and higher prices, the long-run consequences seemed clear. And sure enough, inflation crept up to levels not seen in forty years, causing the Federal Reserve to sharply raise interest rates.
The point being, I thought it was time to reissue our little primer on the monetary system. But this booklet needed a rewrite for at least two reasons. First, much has changed in the monetary system in the last few years as economies dealt with the challenges of the global pandemic and its aftermath. Second, and perhaps more importantly, it became apparent that few people had actually read the booklet. I knew I had to at least attempt to make the material more engaging, but I was unsure how to do so. I then received inspiration from a very unlikely source.
The Most Wonderful Time of the Year
During the recent holiday season my family and I watched the movie It’s a Wonderful Life, starring Jimmy Stewart. For the few readers who are unfamiliar with the plot, the movie concerns a selfless man named George Bailey who faces a crisis at his family’s building and loan business (a banking institution which was popular in the early 20th century). During this crisis, George declares that the world would be better off had he not been born, at which point an angel named Clarence appears to show George what the world would be like without him. In the end, George returns to his life to find the town rallying around him. The movie’s message is summarized in a quote from Clarence, “Strange, isn’t it? Each man’s life touches so many other lives. When he isn’t around he leaves an awful hole, doesn’t he?”
It is a beautiful movie with a beautiful message. But there are a few interesting scenes in the movie which hold interest to those interested in money and banking. For one, the movie, which premiered in 1947, recreates a depression-era bank run.
The scene unfolds as follows. George and his new wife, Mary, are in a cab on their way out-of-town for their honeymoon. The cab passes the Bailey Brothers Building and Loan and the cab driver, noticing a commotion outside, remarks “…I’ve never really seen one, but that’s got all the earmarks of being a run.” George runs to the front doors of the Building and Loan only to find it locked. He uses his key to open the door, with the crowd pushing their way in behind him. He finds his uncle Billy cowering inside. George asks his uncle, “how did it start?” “Well, how does a thing like this ever start” retorts Uncle Billy. “All I know is that the bank called our loan …… I had to hand over all our cash …… I then got scared and closed our doors.”
At this point local businessman Mr. Potter, a miser and antagonist of George’s throughout the film, calls George at the bank, “George I’m going all out to help in this crisis. I’ve just guaranteed the bank sufficient funds to meet their needs…… I may lose a fortune, but I’m willing to guarantee your people too. Just tell them to bring their shares over here, and I will pay fifty cents on the dollar.”
George hangs up on Potter. As the depositors continued to demand their money, George explains, “you’re thinking of this place all wrong. As if I had the money in the back in a safe. The, the money’s not here. Well, your money’s in Joe’s house….and in the Kennedy house….and a hundred others. Why, you’re lending them the money to build, and then, they’re going to pay it back to you as best they can.”
A depositor, Tom, steps forward asking for the two-hundred and forty-two dollars in his account. George explains to the man that he can receive his money in sixty days, in accordance with his deposit / share purchase agreement. A man then walks up to the counter, “Tom did you get your money? …. Well, I did. Old man Potter’ll pay fifty-sense on the dollar.” Tom and the others begin to walk out the door. “Better to get half than nothing” Tom responds.
George tries to talk sense into the crowd, “Don’t you see what’s happening? Potter isn’t selling, Potter’s buying. And why? Because we’re panicking and he’s not. That’s why. He’s picking up some bargains.”
As much as the townspeople despise Potter, George’s words are of little use. The building and loan customers, many of whom are out of work due to the depression, need cash.
Mary, who has thus far been quietly watching, holds up a pile of cash which the Baileys were to use on their honeymoon. “How much do you need?” shouts Mary. George sees the cash and tells the crowd, “I got two thousand dollars. Here’s two thousand dollars. That’ll tide us over until the bank reopens.”
George then doles out the funds to the depositors. Some, like Tom, request their entire account balance. Others ask only for enough to hold them over until the bank opens. At the end of the day, they had only two dollars left, but have made it through the panic.
The movie goes on. The Building and Loan survives the depression. During a later scene in which Potter tries to offer George a job so that he can remove George as a source of competition, Potter states “Take the depression for instance. You and I were the only ones that kept our heads. You saved the Building and Loan, and I saved all the rest.”
George then has to face another crisis. His Uncle Billy goes to the bank with a large deposit, which he then misplaces. Mr. Potter is the one who finds it and is not about to report this to anyone.
The timing could not be worse. The Building and Loan is in the middle of a bank examination. Uncle Billy pulls George aside and tells him about the misplaced deposit. They look everywhere to no avail. George lashes out at his uncle, “Do you realize what this means, it means bankruptcy and scandal, and prison! That’s what it means. One of us is going to jail!”
George heads home. With the weight of the bank’s funding deficit on his mind, he is short with his wife and children and storms out of the house. He then goes to the only man in town who he thinks can help him, Mr. Potter.
George, being the selfless person that he is, accepts responsibility for the misplaced deposit. “I’ve just misplaced eight thousand dollars. I can’t find it anywhere.” Mr. Potter knows full well it was Uncle Billy who misplaced the funds, “you misplaced eight thousand dollars?” asks Potter.
After stringing George along a bit, Mr. Potter, of course, refuses to help him. In fact, he goes even further, “I tell you what I’m going to do for you, George. Since the state examiner is still here, as a stockholder of the Building and Loan, I’m going to swear out a warrant for your arrest. Misappropriation of funds, manipulation, malfeasance…”
George then runs out of Potter’s office. He does what any desperate man would do – he drinks, and he prays. This is where George’s guardian angel, Clarence, comes and shows him an alternate world where George was never born. George sees that his friends and loved ones are worse off and he begs to go back to his life. George finds himself back in Bedford Falls, on the very bridge where he had contemplated taking his own life.
George rushes home to his wife and kids, grateful for his second chance. He returns home to find the bank examiner and several news reporters. He is nonetheless happy to see them, “I’m going to jail, isn’t it wonderful.” Mary, who had been out looking for George, then comes through the door. Shortly behind her is Uncle Billy, who is holding a large basket full of cash, “Mary did it, George! She did it! She told some people you were in trouble and then, they scattered all over town collecting money.” Familiar faces from the town pore in, placing cash on top of the increasing pile. George’s childhood friend, wealthy industrialist Sam Wainwright, sends a cable from London instructing his office to advance George up to twenty-five thousand dollars. Even the bank inspector throws money into the pile. The movie ends with George’s brother Harry, who just returned into town a war hero, proposing a toast “….to my brother George, the richest man in town.”
Jimmy Stewart and the Lessons of Money
I get teary eyed every time I watch this movie. Its message is timeless. But I realized something which I had not before – an analysis of these subplots would be a great place to start when writing a treatise on money and banking.
The lessons are all there. The bank run warrants a discussion of the banking system both before and after the depression. When George tells the anxious depositors “You’re thinking of this place all wrong, as if I had the money in the back in a safe”, he’s describing fractional reserve banking – a highly important feature of the monetary system. When George and his wife, Mary, use their honeymoon funds to provide currency to the depositors, they are acting as a “lender of last resort”, an important function of modern central banks. The misplaced deposit and the presence of the bank examiner warrant a discussion of financial regulation and bank capital. And of course, the Great Depression itself warrants a discussion of deflation (and, by extension, inflation).
So as crazy as it sounds, I decided that this minor subplot of a classic Christmas movie is the perfect pretext for essays on the monetary system. But before we get to that, we will address in our next post an even more fundamental question: what exactly is money?
