The decision of the government in Cyprus to simply take money out of people’s bank accounts there sent shock waves around the world. People far removed from that small nation had to wonder: “Can this happen here?”
The economic repercussions of having people feel that their money is not safe in banks can be catastrophic. Banks are crucial institutions for gathering individually modest amounts of money from people and transferring that money to strangers whom those people would not directly entrust it to. Corporations, whose economies of scale can bring down the prices of goods and services — thereby raising our standard of living — are seldom financed by a few billionaires. Far more often, they are financed by millions of people, who have neither the specific knowledge nor the economic expertise to risk their savings by investing directly in those enterprises. Banks are crucial intermediaries, which provide the financial expertise without which these transfers of money are too risky.
There are poor nations with rich natural resources, which are not developed because they lack either the sophisticated financial institutions necessary to make these key transfers of money or because their legal or political systems are too unreliable for people to put their money into these financial intermediaries. Whether in Cyprus or in other countries, politicians tend to think in short-run terms, if only because elections are held in the short run. Therefore, there is always a temptation to do reckless and shortsighted things to get over some current problem, even if that creates far worse problems in the long run. Seizing money that people put in the bank would be a classic example of such shortsighted policies.
Cyprus. Can it happen here?
After thousands of American banks failed during the Great Depression of the 1930s, there were people who would never put their money in a bank again, even after the Federal Deposit Insurance Corporation was created to allow the federal government to guarantee individual bank accounts when the bank itself failed.