History may not repeat itself, but it’s quite likely that it paraphrases itself instead:
So, this is going to be a very sour reading of what has happened in Cyprus this weekend. It will also be a very partisan one, possibly even a partial one. But if Milton Friedman and Anna Schwartz were right in their insistence that it was actually the Federal Reserve that caused the Great Depression (which is something that Ben Bernanke himself has insisted that the Fed will not repeat) then one way of interpreting what has happened is that the European Central Bank has just set us all up for another Depression. The trigger is that “tax” of a little over 6% on all depositors.
This isn’t an analysis that you’ll be able to get all economists to sign up to. But the basic story told by Friedman and Schwartz in A Monetary History of the United States was that the 1929 crash was indeed a serious crash. But it would not have led to the Great Depression without the Federal Reserve making some serious mistakes. Two of which were to allow the intertwined collapses of both the money supply and the banking system. Given that it is the banks that create credit and thus the wider money supply they are, to a great extent, the same thing.
[. . .]
But please note the central part of Friedman’s argument. Yes, there was the crash. Yes, there would have been a deep and painful recession as a result. But the tipping of that recession into depression was a result of the cascading series of bank failures in the absence of deposit insurance: that led to the calamitous shrinking of credit and the money supply.
So let us now look at Europe and the eurozone. Certainly there’s been a crash (or even a Crash). We’ve so far avoided the depression part (although not everywhere. Greece is certainly in one, Spain possibly and looking out my window at rural Portugal I see certain signs of a reversion to a non-cash economy.) but the important question is whether we manage to continue to do so?
[. . .]
Yes, I do know, they’ve called it a tax: but here we’ve got to make reference to that duck thing. The difference between a 6% or more “tax” on your bank deposit and a failure of the previously agreed deposit insurance to protect your deposit is quackery enough that it’s a duck.
As I’ve said before the importance of this is moot at present. It depends on who believes what. If the citizenry believe that they don’t have deposit insurance any more (whether we call this a tax or a duck) then we will see more mass withdrawals from banks and we will see more bank failures. And cascading bank failures are exactly the thing that will tumble us into a new depression.
