Gary North's REALITY CHECK
Issue 400 November 30, 2004
GEORGE BAILEY'S ROAD TO MONETARY PERDITION
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.
Why do we watch it? What is it about this movie that makes
it prime-time fare every year, sometime between Thanksgiving and
Christmas? For years, it was on cable TV and local TV almost
every night, Thanksgiving to Christmas, until NBC bought
exclusive rights in 1994. Everyone ran it because its copyright
had lapsed in 1974, and only after a 1990 Supreme Court case
involving Jimmy Stewart did the movie's copyright come back into
force. The movie was sold everywhere on videotape in the mid-
1980s. You could buy it for under $10.
Why hadn't the copyright been renewed? It had to be renewed
28 years after its release, which meant 1974. All it would have
taken was a letter to the Copyright Office of the Library of
Congress. The copyright's holder forgot. Why? How?
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:
Alistair 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?
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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.
(http://snipurl.com/ayi6)
"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 a 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.
He really didn't need the basket full of money. George was
short $8,000. Sam Wainright promised to underwrite George to the
tune of $27,000. But it was a nice gesture on the part of the
neighbors.
Clarence got his wings. So did the purchasing power of the
dollar.
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.
http://www.lewrockwell.com/north/north143.html
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.
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