Stagecoach to Lordsburgh and the last chance saloon

September 14, 2012

Banks have always been a problem. This is because of the business models that they use and the never ending difficulty of liquidity – that is, how easily can assets be converted in to cash. In more modern times that difficulty became less difficult when currency notes no longer had to be backed by gold. The original bankers trick was to persuade people to deposit their heavy precious metal coins and bullion with them and in return to accept promissory notes that were light and more convenient for transactions. When that link between paper money – which is no more than a token – and the actual amount of gold held at the bank was broken, the bankers had ample scope to run amok. Now, with the ability to create electronic credit, which is really debt, they have the ability and scope to do serious damage. To paraphrase; ‘to err is human, if you want to cause chaos use a computer’.

Banks rely on the trust and confidence of their customers to carry on with their business of savings and loans. Once that evaporates and customers believe that the bank cannot repay their savings, this results in a run on the bank. This remained as true in 2007 when Northern Rock collapsed as it did in1931 when over 2,000 small US banks closed due to their failure to return depositors money. Bank runs in the US go back as far as the creation of banking.

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