It’s a Wonderful (Financial) Life
A Financial Review of an American Christmas classic.
Merry Christmas!
I couldn’t help but to watch the movie ‘It’s a Wonderful Life’ twice this year as a reminder of God’s blessings within a united community. Though a fiction, it has great insight into the lives of people during that time. Including the American financial system.
This article will go through the plot of the movie while addressing specific financial details to reflect on our current financial situation for individual application.
The Story
On Christmas Eve 1945, in Bedford Falls, New York, George Bailey contemplates suicide. The prayers of his family and friends reached Heaven, where Angel 2nd class Clarence Odbody is assigned to save George in order to earn his wings. Clarence is shown flashbacks of George’s life. He watches 12-year-old George save his younger brother, Harry, from drowning, but lose hearing in his left ear. George later prevents the distraught town druggist, Mr. Gower, from accidentally poisoning a child’s prescription.
George has had the lifelong dreams of traveling the world to build things like skyscrapers and bridges, but inherited his father’s knack for helping people in his community. He plans a world tour before college and is reintroduced to Mary Hatch, who has a crush on him. The attraction is now mutual. When his father dies from a stroke, George postpones his travel to settle the family business, Bailey Brothers Building & Loan, which avaricious board member Henry Potter, who controls most of the town, seeks to dissolve.
Henry F. Potter was considered the meanest and wealthiest man in town. We don’t know how he became wealthy, but we do know that he owns rental houses, department stores, the bus line in the town, and eventually the bank. Georges father, Peter Bailey, explains that he allowed Mr. Potter to be on the board wishing that he wouldn’t be so difficult to deal with. Before this though, we discovered when George was a boy, the Bailey Building & Loan owed Mr. Potter $5000, making Mr. Potter an investor and stockholder in the Building & Loan. As an investor, he was solely concerned about his profits and considered the Building & Loan arbiters of bad business, therefore desiring it to close.
The board members vote to keep the Building & Loan open if George runs it. George reluctantly accepts and works alongside his uncle, Billy, giving his tuition to Harry with the understanding that Harry will run the business when he graduates. But Harry returns from college married and with a job offer from his father-in-law. George, again, reluctantly resigns himself to running the Building & Loan.
Following their wedding, George and Mary witness a run on the bank, and use their honeymoon savings to keep the Building & Loan solvent. They had to use their personal savings because the bank was calling outstanding notes to maintain solvency itself, including the note of the Building & Loan. Uncle Billy explains that he had to give the bank all of their cash deposits and it still was not enough to completely pay it off.
Mr. Potter was most likely a current stockholder of the bank, but he took over ownership of it when the bank run threatened to wipe it out. Mr. Potter used his wealth to guarantee the depositors money 50 cents on the dollar (what a bargain to buy an asset at a 50% discount).
Murray Rothbard, an Austrian economist, explained what a “bank run” is in his book ‘What Has Government Done to Our Money?’:
The bank creates new money out of thin air (fractional reserve banking), and does not, like everyone else, have to acquire money by producing and selling its services. In short, the bank is already and at all times bankrupt; but its bankruptcy is only revealed when customers get suspicious and precipitate “bank runs.” No other business experiences a phenomenon like a “run.” No other business can be plunged into bankruptcy overnight simply because its customers decide to repossess their own property. No other business creates fictitious new money, which will evaporate when truly gauged.
He provides further details about bank runs in his book ‘The Case Against the Fed’:
…the fractional-reserve banker, even if he violates his contract (to pay out all deposits on demand), cannot be treated as an embezzler and a criminal; but the banker must still face the lesser, but still unwelcome fact of insolvency… [One way insolvency happens, which] could happen at any time, is if the bank’s customers, those who hold the warehouse receipts or receive it in payment, lose confidence in the chances of the bank’s repayment of the receipts and decide, en masse, to cash them in. This loss of confidence, if it spreads from a few to a large number of bank depositors, is devastating because it is always fatal. It is fatal because, by the very nature of fractional-reserve banking, the bank cannot honor all of its contracts. Hence the overwhelming nature of the dread process known as a “bank run,” a process by which a large number of bank customers get the wind up, sniff trouble, and demand their money. The “bank run,” which shivers the timbers of every banker, is essentially a “populist” uprising by which the duped public, the depositors, demand the right to their own money. This process can and will break any bank subject to its power.
He further explains the underlying cause of old-fashioned bank runs:
We have so far emphasized that bank credit expansion under fractional-reserve banking (or “creation of counterfeit warehouse receipts”) creates price inflation, loss of purchasing power of the currency unit, and redistribution of wealth and income. Euphoria caused by a pouring of new money into the economy is followed by grumbling as price inflation sets in, and some people benefit while others lose. But inflationary booms are not the only consequence of fractional-reserve counterfeiting. For at some point in the process, a reaction sets in. An actual bank run might set in, sweeping across the banking system; or banks, in fear of such a run, might suddenly contract their credit, call in and not renew their loans, and sell securities they own, in order to stay solvent. This sudden contraction will also swiftly contract the amount of warehouse receipts, or money, in circulation. In short, as the fractional-reserve system is either found out or in danger of being found out, swift credit contraction leads to a financial and business crisis and recession. There is no space here to go into a full analysis of business cycles, but it is clear that the credit-creation process by the banks habitually generates destructive boom-bust cycles.
Rothbard explains how The Federal Reserve Act of 1913 nationalized the banking system supposedly to eliminate bank runs and the implications of it:
The Central Bank (The Federal Reserve) was privately owned, at least until it was generally nationalized after the mid-twentieth century. But it has always been in close cahoots with the central government. The Central Bank has always had two major roles: (1) to help finance the government’s deficit; and (2) to cartelize the private commercial banks in the country, so as to help remove the two great market limits on their expansion of credit, on their propensity to counterfeit: a possible loss of confidence leading to bank runs; and the loss of reserves should any one bank expand its own credit. For cartels on the market, even if they are to each firm’s advantage, are very difficult to sustain unless government enforces the cartel. In the area of fractional-reserve banking, the Central Bank can assist cartelization by removing or alleviating these two basic free-market limits on banks’ inflationary expansion credit.
If the Fed was created to eliminate bank runs, why do we still have them during recessionary times, like the Great Depression and the 2008 Financial Crisis? Banks fail regularly due to their inability to meet their obligations to their customers. The favored ones get bailed out while the unfavored ones don’t.
Are these booms and bust really unintentional? Mr. Potter, whether intentional or not, was in a position to prosper while everyone else was panicking.
Why do we as the customers put so much faith in our current financial system? Is there no alternative?
Anyway, under George’s leadership, the Bailey Building & Loan rebounds from the bank run and establishes Bailey Park, a modern housing development rivaling Potter’s “overpriced slums”. The Building & Loan was prideful throughout the movie as the better means for people to move out of low-quality rentals into their own high-quality homes. According to Mr. Potter’s assistant, every home built by the Building & Loan was worth twice what it cost them to build, and the homes were 90% owned by the people who used to pay rent to Mr. Potter; meaning only about 10% of the overall value of the entire development was mortgaged. Mr. Potter also reveals in the conversation that the Bailey’s ability to do this was partially due to reducing their own potential profits in the deals. Also, earlier in the movie, George speaking to his father before he passed, reveals that the Building & Loan works tirelessly to “save three cents on a length of pipe” to reduce costs as much as possible.
Because of George’s success, though with a modest $45/week salary ($2,340/year), Mr. Potter offers George $20,000/year salary ($352,000 today) to be his assistant. After the initial shock and excitement, George realized Potter’s true intent to eliminate competition and turned it down.
During World War II, George is ineligible for service because of his deaf ear. Harry becomes a Navy pilot and is awarded the Medal of Honor for shooting down fifteen planes, two of which were kamikazes heading for a troop transport.
On Christmas Eve 1945, as the town prepares a hero’s welcome for Harry, Uncle Billy goes to the bank to deposit $8,000 of the Building & Loan’s cash. Billy taunts Potter with a newspaper headline about Harry, but unintentionally wraps the envelope of cash in Potter’s newspaper. Potter finds the money but says nothing, while Billy cannot recall how he misplaced it. With a bank examiner reviewing the company’s records, George realizes scandal and criminal charges will follow. Fruitlessly retracing Billy’s steps, George berates him and takes out his frustration on his family.
George appeals to Potter for a loan, offering his life insurance policy as collateral. The policy has a death benefit of $15,000 and a cash value (equity) of $500. He admits that he has no other valuable assets to use as collateral. Why was an ordinary whole life insurance policy the only valuable asset George owned? Basic whole life policies seemed to have been a standard savings vehicle for many families during this time. The equity of the policy is 100% accessible from the insurance company anytime George wanted it, it isn’t subject to inflation and the boom-bust cycles of the fractional reserve banking system, and it earns a consistent savings return. If only he had more cash value to aid him in his current predicament.
Mr. Potter taunts George to turn to the “riffraff”, he has been helping for so many years, to help him. He also says George is worth more dead than alive, and phones the police to arrest him. George flees, gets drunk at a bar owned by his friend Martini and prays for help. Suicidal after Potter’s remarks, he goes to a nearby bridge, but before he can jump, Clarence dives into the river. Generous George of course rescues him.
When George wishes he had never been born, Clarence shows him a timeline in which George never existed. Bedford Falls is now Pottersville, an unsavory town occupied by sleazy entertainment venues, crime, and amoral people. The druggist, Mr. Gower, was imprisoned for manslaughter since George did not prevent him from poisoning the pills. George’s mother reveals that Billy was institutionalized after the Building & Loan failed many years ago. Bailey Park is a cemetery, where George discovers Harry’s grave. Since George did not save Harry when they were kids, Harry did not save the soldiers on the transport. George finds that Mary is a spinster librarian. When he claims to be her husband, she screams for the police and George runs away.
Now convinced that Clarence is his guardian angel, George begs for his life back. The original reality is restored, and a grateful George rushes home to accept the consequences of his uncle’s accident. However, during George’s time of absence, Mary and Billy have rallied the townspeople, who donate more than enough to cover the missing $8,000. It turned out that George’s answer to his problem was the “riffraff” all along. Harry arrives and toasts George as “the richest man in town.”
This movie is one of my favorites because it is a reminder of powerful biblical examples to invest in people first and profits can follow, though sometimes not in the way we think (see Luke 16:1–15). It also reveals real problems with our current financial system, as well as the solution, though subtly.
If George would have known that he could become his own banker by maximizing the cash value portion of his whole life insurance policy, he would have been set free from the chaos of the financial reserve banking system and become very profitable as the owner of his own banking system. Then he could have helped others do the same for themselves. After all, this ability has been available to people for over 200 years today. Why didn’t he know about it? Why didn’t his insurance agent teach him? Why didn’t the life insurance company teach the agent? Everyone is conditioned to focus on the death benefit with the cash value as a bonus, rather than the other way around.
R. Nelson Nash discovered this in his own life through a financial crisis of his own (though Nelson never mentions contemplating suicide). Since that time, he spent decades teaching people the power and ease of the Infinite Banking Concept, as he coined it. He eventually wrote a book based on his seminars titled ‘Becoming Your Own Banker’ so that people could read and discover IBC for themselves.
Banking, controlled by others, has ALWAYS been the reason for our financial problems.
Banking controlled by you and me has ALWAYS been the solution.
