Monopoly Game Banking Versus Gold Insurance – Who Will Win?

The Monopoly game has been around since 1934. Ironically, the game of Monopoly came out at a time when the year before multiple banks had already failed and President Franklin Delano Roosevelt had declared a nationwide bank holiday to keep people from withdrawing their cash from the banks and hoarding it. How convenient was it then for the banking elite to have a game come out that people could enjoy with the following rule;  ” The Bank never “goes broke.””

Yes, that’s right…if you read the Monopoly game rules, it says the following;

“The Bank never “goes broke.” If the Bank runs out of money, the Banker may issue as much more as may be needed by writing on any ordinary paper.”

(This is the part where one just has to snicker at that rule)….

1933 Banking Revisited

This is what the Fed actually did in March of 1933. They promised unlimited amounts of cash to the banks after FDR’s bank holiday and the passing of the Emergency Banking Act. The Act even established deposit insurance known as the FDIC. However, it wasn’t FDR that should be credited with the idea of a bank holiday. According to a New York Fed report by  William L. Silber, “Why Did FDR’s Bank Holiday  Succeed?”

“As of the close of business on March 4, 1933, reveals  that “Banks in 28 states are ‘closed’; Banks in 10 states are ‘some  or mostly closed’; Banks in 11 states have deposits that are  ‘restricted to withdrawals of 5 (or some unspecified)  percent.’”

But what FDR should get credit for was the following statement from Silber’s article;

Roosevelt recognized that the  restoration of confidence was the most  important ingredient for a successful  reopening [of banks].

Part of this confidence of course was FDR’s executive order confiscating gold. It didn’t hurt the Fed when they artificially raised the price of gold from $20 to $35 an ounce the following year, giving them an immediate windfall, but devaluing all those Federal Reserve Notes held by all the citizens who handed over their gold.

Confidence Game

Roosevelt’s bank holiday and Emergency Banking Act didn’t really save the banks. The FDIC didn’t save the banks. It was the people’s confidence in the system that saved the banks. They stood in line after the banks reopened their doors so they could redeposit the funds they had taken out in the weeks, months and years prior. Yes, mass psychology is an important part in determining value or worth. It was in 1933/1934 and it is today.

Murray Rothbard explains this confidence game well in his book, The Mystery of Banking;

CONFIDENCE IN THE MONEY

An intangible, but highly important determinant of the demand for money, is the basic confidence that the public or market has in the money itself. Thus, an attempt by the Mongols to introduce paper money in Persia in the twelfth and thirteenth centuries flopped, because no one would accept it. The public had no confidence in the paper money, despite the awesomely coercive decrees that always marked Mongol rule. Hence, the public’s demand for the money was zero. It takes many years – in China it took two to three centuries – for the public to gain enough confidence in the money, so that its demand for the money will rise from near zero to a degree great enough to circulate throughout the kingdom.

Public confidence in the country’s money can be lost as well as gained. Thus, suppose that a money is King Henry’s paper, and King Henry has entered a war with another state which he seems about to lose. King Henry’s money is going to drop in public esteem and its demand can suddenly collapse.

It should be clear then, that the demand for paper money, in contrast to gold, is potentially highly volatile. Gold and silver are always in demand, regardless of clime, century, or government in power. But public confidence in, and hence demand for, paper money depends on the ultimate confidence – or lack thereof – of the public in the viability of the issuing government.

Flash Forward 2008 Financial Crisis

Leading up to the passing of TARP by a bipartisan Congress in 2008, Treasury Secretary John Snow was warning of the coming bank failures, saying it would surpass that of the Savings and Loan Crisis of the 80’s and 90’s.

I fully expect to see a lot more bank losses and a lot of turmoil in the banking business. We’ve had a relatively small number of banks turn upside down, relative to the 200 or so banks we saw in the savings-and-loan crisis. This is likely to be at least as big. We’re still a good distance from having this behind us. 

Indeed TARP was passed by Congress to help buy the toxic assets of the banks and shore up their balance sheets so they could start lending again, but instead, a Capital Purchase Program was instituted, directing that $250 billion of the $700 billion be given to the banks to “pay down debt, acquire other businesses or invest for the future.” 

Banks were hard up for cash at that time. I remember walking into my bank Washington Mutual just before they were taken over by Chase and hearing solicitors on the phone offering out of market interest rates as an enticement to raise capital. My question to the teller was “how can they be offering that high of interest rates when the market is paying much less?” Of course it was a rhetorical question as I’ve never met too many tellers who could answer such a question. I knew however, that something didn’t smell right.

So as Secretary Snow directed the $250 billion to the many banks who were happy to get the windfall, the U.S. citizens were the ones who footed the bill. Wouldn’t it be nice if all small businesses in America got the same opportunity to get free money to help their own businesses out?

But banks still kept failing, and they also received another windfall when the Financial Accounting Standards Board (FASB) decided they no longer needed to mark to market their assets. They instead could take the real estate that had lost so much value and keep it on their books at the 2006/2007 price level, with the assumption of course that as the economy picked up steam again, their balance sheets would be made whole. I guess they never thought that the U.S. could go the way of Japanwhich saw their real estate prices fall 75%.

While we haven’t seen real estate prices fall 75% in the U.S., as of yet, we have seen the prices continue to fall and the economy falter, despite the two rounds of Quantitative Easing by the Fed and the most recent Twist action whereby they are purchasing $4 billion of long dated Treasuries and selling an equivalent amount of short term securities. How long can the confidence last when nothing is working to stimulate the economy?

Flash Forward 2011

One has to wonder whether a banking system that is wrought with fraud, deception, political favors, big bonuses, TARP funding, Fed intervention, debt, an FDIC that is currently $8 billion in the hole, sub-investment grade derivatives of over $4 trillion, and a lack of demand for real estate can out-think, outlast and outwit the general public who buys gold. The fact that gold and silver prices have moved higher each of the last 10 years goes to show where the aware investor would rather put their hard earned dollars. Or, at a minimum, secure insurance against the fact that the whole banking system could implode.

But what about the balance sheets of banks today? Have they become stronger? Well, they are still cheating by not marking to market their assets so whatever financial data you see is tainted (thank you FASB). Banks play games with short sales allowing non-mortgage payers to squat in their houses by putting sale prices on the homes that are priced out of market as well. They simply still cannot afford the write down on their balance sheet.

I’ve written about the problems with Bank of America last October claiming they were basically broke when its share price was trading at $13.20. Today Bank of America stock sits at $5.76 a share, a 56% drop. Until banks start marking to market their assets again, I wouldn’t expect a return to health, let alone the glory years. But you can bet the Fed (or will it be a bipartisan Congress collusion again to “save the nation?”) will be their lender of last resort till the very end. It doesn’t matter. In the end, we all will pay for the decisions made by the Fed, Congress and those who run the banks. In the end, there will only be one player left in the game who is a winner.

Which do you have more confidence in, a monetary system that is based on 40 years of the fiat experiment that has done nothing but increase as we approach $15 trillion of debt, or what that monetary system was based on 40 years ago; gold? How have we done in the 40 years we have allowed Congress and the Fed to play their fiat Monopoly game?

Who Will Be the Last Player Left – Who Will Win the Game?

The winner of the Monopoly game, according to the rules is ” The last player left in the game wins.”

So who will be the last player left in the game? Who will win the game,  banks or honest money; gold and silver.

Well, there won’t be any confiscation of gold this time around despite the pitches by various gold dealers to sell investors high commission gold coins with the assumption they wouldn’t be confiscated. Bullion coins, such as the American Eagle one ounce coins, or bullion bars are all you need to insure your portfolio from any banking troubles.

There are still way too many problems for the banks to overcome and unfortunately, despite Warren Buffets best intentions in claiming we won’t have a recession, our economy is not poised for a recovery anytime soon. Will what the Fed and the banks do next put us in a depression? That’s the only unanswered question. That and do you have the insurance that only gold will provide when/if the banking system implodes?

The current pullback in price for gold and silver is offering you the perfect opportunity right now to “buy low.” No, there is no gold bubble but you’ll hear more and more rhetoric against gold as the prices continue to pull back as the dollar continues its rise (thank you Europe). Dollar cost averaging into a position is the best way to play this current pullback. You actually buy some now, and hope the price pulls back further so you can get an overall better price. The Fed, banks and Congress will, unfortunately for many who are not prepared, see to the future appreciation of the price of gold and silver as they continually prescribe the wrong medicine to the economy.