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America’s Great Depression Quotes of the Week: Bank Failures and Real Monetary Reform

March 28, 2013 in Economics

By John P. Cochran

The Road Not Taken in 1933 and its Modern Consequences

           The crisis in Cyprus is awakening some to the true nature of fractional reserve banking as evidenced by  headlines such as this (from the Drudge Report March 28, 2013) ‘THEY HAVE STOLEN OUR MONEY’… . Compared to responses to previous crises and applications of too big to fail, at least this response has moved away from tax payer financed bailouts of bank creditors. See for example: 1. In today’s Wall Street Journal Luskin and Roche Kelly, “Regime Change Comes to Euro Policy who argue, “The banking crisis in Cyprus prompted an overdue financial reckoning that, with luck, will spell the end of ‘too big to fail.’; and 2. From yesterday’s WSJ “Shocked About Cyprus”, with its subtitle, “How dare a European bank rescue not hit taxpayers.”

            This should be a great time to re-awaken the public again to the true risks of money substitutes and fiduciary media and begin a focus of meaningful banking reform as a beginning of true recovery and sustainable prosperity.

            Rothbard (AGD, 21) provides an strong argument for the bebefical aspects of bank failures:

Banks should no more be exempt from paying their obligations than is any other business. Any interference with their comeuppance via bank runs will establish banks as a specially privileged group, not obligated to pay their debts, and will lead to later inflations, credit expansions, and depressions. And if, as we contend, banks are inherently bankrupt and “runs” simply reveal that bankruptcy, it is beneficial for the economy for the banking system to be reformed, once and for all, by a thorough purge of the fractional-reserve banking system. Such a purge would bring home forcefully to the public the dangers of fractional-reserve banking, and, more than any academic theorizing, insure against such banking evils in the future.

And later in the same work, Rothbard commenting on the bank panic-bank holidays of late 1932 and early 1933 (AGD 329) provides a template for handling a bank failure in line with protecting property rights and the rule of law in a way that could ultimately end the boom-bust cycle:

The laissez-faire method would have permitted the banks of the nation to close—as they probably would have done without governmental intervention. The bankrupt banks could then have been transferred to the ownership of their depositors, who would have taken charge of the invested, frozen …read more
Source: MISES INSTITUTE

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