Praying for Euro

Panic over the potential break-up of the Euro is at its highest point. People are withdrawing wads of Euro cash from Spanish and Greek banks, hiding it under the mattress and bracing for the fallout. In the Strictly Monetary Series (Part V), I told the story of how an American bank averted crisis during the panic of the Great Depression. It’s a textbook example of how banks can survive the shock of everyone demanding their money at once (bank-run) if they can secure additional cash to appease the frantic public. You don’t beat panic with prayer; you beat it with action.

Strictly Monetary V: Run on the bank

This story was originally reported by Milton Friedman. While he was renowned for his theoretical accomplishments in economics, I admired him most for his ability to reach the general public through stories. A bank run, inspired by people demanding their money all at once, demonstrates the original purpose of the Federal Reserve and also serves to provide insights into the anatomy of crisis. While most bank run stories end poorly, this is my favourite example of how to successfully avert crisis.