George Bailey's Road to Monetary Perdition

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It
happened to me again. I didn’t plan for it. I got hooked once again
by It’s
a Wonderful Life
.

It
wasn’t in my plan. In fact, it was specifically out of my plan.
I tell myself every year, "I won’t watch it again." But
it seems like I always do. And so do millions of others.

I
tuned in randomly at close to the beginning, when the screen had
a fixed-frame image of Jimmy Stewart, arms wide apart, as if he
were describing a huge fish that got away. In fact, he was describing
a huge dream that would get away from him, again and again, until
the very end of the movie, when he quit chasing it.

Answer:
because it was not a Christmas classic in 1974. Now it is.

Why?

THREE
MOVIES, ONE THEME

Americans
watch seasonal Christmas movies. We watch A
Christmas Carol
. I prefer the version I saw in my youth:
Alastair
Sim’s 1951 masterpiece.

We
watch A
Christmas Story
. It is a compilation of Jean Shepherd stories,
so it hooked me from the day I saw it 20 years ago. I have loved
Jean Shepherd since 1963. My family even adopted the movie’s culminating
practice: going to a Chinese restaurant on Christmas.

Despite
the fact that Americans own these movies or can rent them, we watch
them on TV, despite the ads.

Why?
Because we know that millions of other people are watching. In the
social cocoons of our living rooms, we share an experience with
millions of others. We know we are sharing the experience, which
somehow makes it more meaningful. What Passover is to Jews, so is
watching a prime-time network Christmas TV movie for America’s gentiles.
The advertisers love it.

Seasonal
movies aside, two other movies serve as prime-time national celebrations:

The Wizard of Oz
(1939) and Gone
With the Wind
(1939). They always draw an audience.

I
believe that It’s a Wonderful Life, The Wizard of Oz,
and Gone With the Wind are united by one theme: "There’s
no place like home." Each tells a different version of the
story. Each conveys this truth in a unique way. But it’s the same
theme.

Dorothy
runs away from home for the sake of her dog, Toto, and because nobody
seems to appreciate her on the Kansas farm. A broken-down showman
in a broken-down rig on the road convinces her to go home. She heads
home. Then the tornado intervenes. The movie’s move from black &
white to Technicolor shows the discontinuous nature of the movie.
"We aren’t in Kansas any more, Toto." She still wants
to go home. All of the miracles and spells, and all of the Wizard’s
theatrics, can’t get her home. But clicking the slippers three times
does. Message: "Home
is where your family is."

For
Scarlett, not being hungry again is her stated goal, but the lesson
she learns is that there’s no place like home. Money, travel, and
Rhett are temporary substitutes for home. She finally goes back
to Tara when everything else turns sour. The movie’s theme song
is "Tara’s Theme." Message: "Home is where your land
is."

In
It’s a Wonderful Life, George never leaves home. But he wants
out. From the beginning to the end, the story is about a man who
struggles with finding home. He wants to travel and do great things.
He doesn’t travel, nor does he do great things. But at the end,
he discovers that he did do a great thing. It is this discovery
that is the heart of his redemption. He discovers a world of miracles
at the margin. But he discovers it in his drafty home. The movie
conveys a fundamental message: "Home is where your mortgage
is."

All
three movies are wrong. Home is where your rest is — above
all, your eternal rest. But this theme is rarely seen in Hollywood
movies. A
Man Called Peter
(1955) is one of the few.

A
CONFLICT OF VISIONS

It’s
a Wonderful Life is about a conflict of visions: Potter’s
vs. Bailey’s, the bank vs. the building & loan, rentals vs.
mortgages. Ultimately, though never said, it’s about the FDIC vs.
the FSLIC. (Federal Deposit Insurance Corporation vs. the Federal
Savings and Loan Insurance Corporation.)

This
same conflict is with us still. It is driving the price of housing
to unsustainable levels in California, Boston, and other coastal
centers. Rental income is not keeping pace with the rise in home
prices: the classic sign of a housing bubble.

We
have all bought homes in Bailey Park rather than renting in Pottersville.
"Home is where your mortgage is."

In
1946, this was the most important socially important issue facing
America: "Would Americans rent or own their own homes?"
The movie opened in December. Within months, Levittown went into
operation. The suburbs were about to come into being, sustained
by government-funded highways and mass-produced automobiles. The
returning vets wanted to own their own homes, and if that meant
moving away from small town life, so be it.

It’s
a Wonderful Life is an exercise in nostalgia today because Levittown
and the FSLIC guaranteed the replacement of small-town life, where
there are few jobs and few new homes. The movie in 1946 identified
the future: Bailey Park, a subdivision where the Martinis could
buy a piece of America, and even bring their goat, as though zoning
and restrictive covenants would not keep that world out.

The
movie is amazingly subtle, despite its unsubtle script. It’s about
a conflict of visions. It seems to be about Potter’s thwarted vision
vs. George Bailey’s thwarted vision. But there is a third vision,
which turns out to be the triumphant vision. The third vision is
rarely discussed and barely perceived, yet it is the movie’s core
vision. It is presented in a far more subtle way. It’s the vision
that turned It’s a Wonderful Life into a classic, four decades
after it was filmed.

Therein
lies the secret of its popularity.

The
third vision is Mary Bailey’s vision. She wishes for the old home
in the rock-throwing sequence. She wants to build a home out of
an abandoned, falling-down mansion with broken windows. She wants
to buy a money pit and have George pay for it. George promises to
lasso the moon for her. She lassos him instead. She does it with
a phone cord.

Every
man who sees the opening of that scene knows what’s going to happen.
So does every woman. Mary’s mom, on the upstairs extension, who
is mentally adding up the rival balance sheets, sees it coming and
cannot stop it.

Mary
wants that house. Sam Wainright can only offer riches out of town.
That will not give her the chance to fulfill her vision: turning
a sow’s ear into a silk purse.

In
that movie, the only person I have ever personally identified with
is Sam Wainright. Plastics, baby, plastics! Get in on the ground
floor while you can. He stuck his thumbs in his ears, wiggled his
fingers, and said "Hee, haw!" to the whole risk-aversive
world. Thank God for the Sam Wainrights of the world. Thank Him
also for the free market, which lets them get rich by making us
more productive and our world better.

The
movie’s symbolic key to the fundamental conflict of visions —
Mary’s vs. George’s — is that loose knob on the bannister.
It never gets fixed. There is always something else to fix, but
never enough time to fix that knob. George keeps grabbing the knob
and running up the stairs. Then he puts it back. He will not glue
it.

The
question I asked from the first time I ever saw the movie until
the latest, is this: "Why doesn’t somebody glue that knob?"

I
have finally figured it out. It took me 20 years. I’m sure other
film reviewers have figured it out, but I’m a slow learner. That
loose knob symbolizes the conflict of visions between the Baileys.

George
wants out — out of Bedford falls, out of the lending business,
out of that drafty house, and ultimately out of life. The movie
never says it explicitly, but he wants out of his marriage —
a decidedly non-Jimmy Stewart theme. He wants the freedom to get
out. Glue that knob, and he’s trapped. The knob is the symbol of
his moral battle. Will he finally settle down mentally? He has settled
down economically and geographically, but he has not settled down
mentally. Will that knob ever be glued?

Mary
won’t fix it. She knows that George has to, as a symbol of his acceptance
of his life. George won’t fix it for the same reason.

Will
Mary Bailey win the battle of the conflicting visions?

It’s
obvious from the final scene that she wins. George is at last locked
in, grinning. He will not go to jail. Uncle Billy will not go to
a mental institution. (Uncle Billy needed to join AA, and George
should have fired him back in 1930.) The building & loan is
saved. Bailey Park is saved. Potter is once again thwarted. Clarence
gets his wings. All’s well that ends well.

Conclusion:
let’s all go out and buy a home with a 30-year fixed-interest-rate
mortgage. Let’s all move to Bailey Park.

And
so we have.

BAD
ECONOMICS

The
movie seems to be about slums vs. new subdivisions. In the miracle
sequence, Pottersville is a downtown jungle of bars, lewd stage
shows, pawnshops, and prostitutes. It’s Potter’s vision in neon.
Message: only mortgage money can save Bedford Falls from becoming
Pottersville.

Economically,
this is nonsense. Fractional reserve banking is the road to monetary
perdition, but fractional reserve savings & loans are not the
road to heaven. That both roads are today protected by the government-subsidized
FDIC is symbolic.

The
FSLIC went bust in the 1980s, and this event threatened to take
the American economy with it. Borrowing short and lending long for
mortgages was the heart of that crisis, and taxpayers’ money by
the hundreds of billions was necessary to keep us from the path
of redemption paved by George Bailey.

I
have never seen a reviewer mention what should be obvious: the
movie achieved classic status after 1974. This was an inflationary
era in which housing prices soared, with three recessions (1974,
1981, 1982), with high interest rates in 1980—85, producing
an outflow of funds from savings & loans to the newly invented
money-market funds, which produced the savings & loan crisis,
which were borrowed short and lent long. The collapsing S&L
industry threatened to bring down the American dream — home
ownership — by ending government-guaranteed mortgages. That
would have meant the end of the wonderful life, circa 1985.

In
1946, the movie barely broke even.

ZU
ZU’S GENERATION

Each
generation gets trapped in its own house, which reflects its vision.

In
1946, the big old house, still drafty, was pictured as the American
dream come true. A woman with a vision lassos a husband to fund
her personal reclamation project. He sacrifices his vision for hers
and every other wife’s in Bedford Falls. Even Violet gives up her
vision of an escape to the big city.

The
fact is, Zu Zu’s generation left Bedford Falls no later than 1960,
returning for Thanksgiving and Christmas to visit the old folks.
The FSLIC secured the subsidized funding for this move: the Levittowns
of America, the suburbs. Almost nobody under 70 lives in Bedford
Falls any more. We may dream of moving back in our old age, but
it’s just a dream. We work in cities, and we commute to the suburbs.
So do our children.

There
are no more neighborhoods. There are only subdivisions. When the
building & loans went bust in the mid-1980s, nobody collected
a basket full of cash to bring to the founders’ sons. Instead, voters
called on Congress to bail out the system, and Congress obliged.
Zu Zu’s kids and grandkids will be paying for that bail-out.

Call
the whole process "from Bailey to bailout."

THE
BAILOUT

A
major crisis of the movie is the run on the building & loan.
Why it could be solved in one day, Capra’s script did not say. How
the newlywed Baileys scraped together $2,000 — worth almost
$28,000 today (www.bls.gov) —
for a honeymoon in 1932, the bottom of the depression, was never
made clear. Some honeymoon!

It
was that fear of depression and bank runs in 1946 that still paralyzed
millions of members of the older generation. The head of Montgomery
Ward, Sewell Avery, was convinced that another depression was imminent.
He had the company hoard cash. He refused to go into debt to expand.
Sears did, building stores in the newly invented shopping malls
of the suburbs. Montgomery Ward never recovered.

The
Full Employment Act of 1946 was signed into law, guaranteeing government
intervention to insure full employment without inflation. The Federal
Reserve System in turn guaranteed that law. That fact guaranteed
inflation. Today, it takes almost $9,800 to match the purchasing
power of $1,000 in 1946.

The
federal government’s mortgage loan guarantees have now trapped generations
of Americans in long-term mortgage debt to pay off the Bailey Park
homes that we all believe is the fulfillment of the American dream.
Pottersville is confined to central cities, where residents’ credit
ratings are low. Only the down-and-outers live there — and
Latinos, who move two or three families into a home to make the
mortgage payments. They are the up-and-comers in the Southwest and
Miami. They are making the American dream work for them, changing
it as they do.

SOCIAL
MIRACLES AT THE MARGIN

The
movie’s surface theme is that miracles occur at the margin. George
Bailey makes loans to borrowers who buy homes. One by one, the community
changes. Old homes are restored. George lives in one. New homes
go up. Potter’s rental income falls when families move to Bailey
Park. Loan by loan, everyone with character can buy a piece of the
American dream. This keeps Bedford Falls from turning into Pottersville.

This
is a fairy tale for grown-ups. Potter would have had competition
from other banks. If Bailey’s building & loan survived the Great
Depression, it would have had imitators. But the basic theme of
the movie is this: greed thwarts the good life, but self-sacrifice
builds a decent place to live. This theme resonates with Americans.
Indeed, it’s a fundamental theme of the Bible.

The
problem is, we have all bought into the 1946 vision of the crucial
arena of greed vs. self-sacrifice: the mortgage market. Anything
that undermines cheap mortgage money is seen as Potterism. Cheap
mortgage money is seen as the American’s birthright. It wasn’t in
1930, when people had to pay 40% down to buy a house, just as they
do today in most European nations. In 1947, Levittown
began to change all that
, with help from the FSLIC: a new home
in a suburb for $10,990, $67 a month.

"Buy
now, pay later" is paralleled by "borrow short, lend long."
The first slogan governs the borrowers. The second governs the lenders.
It’s a symbiotic system. It rests on fractional reserve banking
and central banking, which insures the commercial banks by guaranteeing
permanent monetary inflation.

The
miracle of the free market is the idea of miracles at the margin.
The West’s economy has grown at 2% to 3% per year, compounded, despite
wars, for 250 years. We live more comfortably than kings lived in
1850. As P. J. O’Rourke says, when you think "good old days,"
think "dentistry." The miracle is the compounding process.

The
fly in the ointment is fiat money and the expansion of debt that
it subsidizes. Everywhere we turn, we are caught in a massive web
of debt. This debt is denominated in currency units, mostly dollars.
The web holds because central banks keeps buying government debt,
which expands the monetary bases, which multiplies through the fractional
reserve process. The purchasing power of money falls, marginally,
year after year.

The
terror of this system is the terror of It’s a Wonderful Life:
the bank run. It’s the terror of banks’ being borrowed short and
lent long. As voters, we are willing to accept anything defers this
threat. Today, there are $140 trillion in unsecured, high-leverage
debt/credit agreements, over 80% of which are tied to shifts in
interest rates. This is the derivatives market. A few of us worry
that the system is being managed by Uncle Billy. But most people
don’t know about it.

The
more I look at photos of Alan Greenspan, the more resemblance I
see to Thomas Mitchell.

THE
HOUSING BUBBLE

We
are in the midst of a housing bubble in the cities, i.e., blue America.
A housing bubble is easy to define: where the monthly mortgage payment
for new buyers after taxes is higher than a rental payment for a
comparable property. This is George Bailey’s legacy to America.

The
bad guy in the movie is Potter. He is a slum lord. The hero is George
Bailey. He lends depositors’ money to home buyers. So ingrained
is this vision that, today, almost 70% of Americans are home owners,
meaning mortgage signers. The younger ones are leveraged to the
hilt. They expect the government to keep the boom going, so that
they can pay off their debt. They want an appreciating asset —
a home — despite the fact that the price of this appreciating
asset is a depreciating dollar. The government turns to the Federal
Reserve System to sustain the boom — and also to the central
banks of Japan and China. Inflation is consuming the voters’ meager
retirement portfolios’ purchasing power.

We
love the movie’s message: "Home is where your mortgage is."
We still believe it. We still feel warm and bubbly when George gets
that basket full of money, which seals his fate, and ours.

Clarence
got his wings. So did the purchasing power of the dollar, which
flew away.

I
know exactly what happened the next day. George went to the tool
chest, got out some glue, and fixed that knob. He was done. So was
his dream of escaping Bedford Falls.

So
is the dollar.

CONCLUSION

There
is a conflict of visions in this life. There is a war between self-sacrifice
and greed. The genius of the free market is that it converts greed
into consumer-satisfying productivity.

As
Adam Smith wrote in 1776:

But
man has almost constant occasion for the help of his brethren,
and it is in vain for him to expect it from their benevolence
only. He will be more likely to prevail if he can interest their
self-love in his favour, and show them that it is for their own
advantage to do for him what he requires of them. Whoever offers
to another a bargain of any kind, proposes to do this. Give me
that which I want, and you shall have this which you want, is
the meaning of every such offer; and it is in this manner that
we obtain from one another the far greater part of those good
offices which we stand in need of. It is not from the benevolence
of the butcher, the brewer, or the baker, that we expect our dinner,
but from their regard to their own interest.

Potter
vs. Bailey would have produced much the same outcome. This is because
people finance their dreams in a competitive market. They don’t
care whether Potter is a grasper or Bailey is generous. They deposit
their money in the institution that gives them the best rate of
return consistent with risk. They borrow money from the institution
that offers them the best terms. It’s lenders vs. lenders and borrowers
vs. borrowers. It’s not greed vs. generosity. This is the socially
and ethically revolutionary aspect of free market capitalism.

Sam
Walton was a nice man, but his heirs are not worth $100 billion
today because he was nice. Sewell Avery was a vocal defender of
the free market, but he lost out to Sears because he did not understand
the economic implications of It’s a Wonderful Life: the FSLIC,
in conjunction with the Federal Reserve System, was creating a new
society with new institutions, the suburb and the shopping mall.

We
now live in George Bailey’s world. We have substituted government
loan guarantees for bank runs, fiat money for the gold standard,
and 30-year fixed rate mortgages with 5% down for 5-year balloon
payment loans with 40% down. We live in a world where most Americans
are in debt all of their lives, dreaming of winning the lottery
and having the government guarantee their pensions, their old age,
and their health care expenses.

The
buffalo gals have come out at night to vote by the light of the
moon. We have become a nation of lunatics.

That’s
why we watch It’s a Wonderful Life, year after year. It comforts
us in our lunacy.

It’s
a good-hearted movie. It’s about family values and hard work. I’ve
written about it before.

But
underlying the good is an assumption: "Home is where the mortgage
is." This assumption is false. It is more widely believed than
it was in 1946.

December
2, 2004

Gary
North [send him mail] is the
author of Mises
on Money
. Visit http://www.freebooks.com.

Gary
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