A (Federal Reserve) bank run: German style

2012-NOV-15

Call it wishful thinking, but a small part of me thinks that the real reason why German officials are starting to ask tough questions about their gold reserves is because it is losing confidence in our monetary system. (And could you blame them? The Europe Union has a majority of countries in deep economic and political decline, and the United States government only knows how to borrow and spend trillions of dollars a year. It’s only a matter of time before everything falls apart.)

Incidentally, “confidence” is a word central bankers love to use. They are always talking about “renewing,” “rebuilding” or even “restoring” confidence. If they could only “boost confidence,” the economy would be much, much better.

This notion that it is simply a lack of confidence that is causing our economic problems is nonsense. It confuses an “effect” with a “cause”; it emphasises a superficial reason over fundamental one. Simply put, it is one helluva silly economic argument.

The late Murray Rothbard (one of the greatest economists of the 20th Century) recognised the absurdity of this banking confidence game:

“The banking system is the only industry in the United States that I know which rests only on public confidence. [For example,] [the bankers] are always talking about confidence: “Hey, we can’t tell the public the [banks] are collapsing because it would ruin the confidence of the public.

“[But] you never see that applied to anyplace else. No one ever talks about the importance of confidence in the computer industry or confidence in the TV industry [because] they have TVs to sell, and they have computers that are good and that work. Confidence rests on the soundness of the product; not on flim-flam and smoke and mirrors, which it does in the fractional reserve banking system. That is why confidence is all important.

“Why? Because [the banks] ain’t got the money, folks; they ain’t got the money.”

And it is completely true: the banks simply do not have your money. For according to the rules of fractional reserve banking, a bank is legally allowed to lend out its depositors’ funds but need only keep a fraction – sometimes only 1/10th – of said funds “on hand” and in cash for those that demand it. Sure, the bank insists that there is no problem with such a practice because you (the depositor) can always come and demand your money at anytime you wish. But in reality, this cannot be true if all depositors demand their money at the same time. If that happens, the bank will not be able to fulfill its contractual obligations with its depositors and, as result, will either have to call-in its loans, sell assets, or seek funding from the Federal Deposit Insurance Corporation (i.e., from the taxpayers or the money-printing Federal Reserve). Such a bank-run would shock the system and, depending on the size of the bank, greatly affect the financial and credit sectors.

This is why banks demand our undying and uncritical confidence in their system: it is unsound at its core. To have confidence in the system means you willingly believe the lie that your money is not just safe at the bank, but actually in the bank. Nothing could be further from the truth.

Those of us who purchase gold and silver have already lost “confidence” in the banking system. We see the absurdity of fractional reserve banking and the macroeconomic confusion it breeds; we understand the dubious nature of fiat currency and its inevitable end; and that deficit spending and debt accumulation can only go on for so long before it ends in chaos. Simply put, metals buyers are not fools.

Who can blame more and more German for asking the Bundesbank more and more awkward questions about their gold?