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A "run on the banks": U.S.’ ingenious strategy to destroy Putin goes back to 1929

The 1929 Stock Market Crash in America led to a run on the banks,

which is now being felt in Russia

… crashing the economic system by forcing people to withdraw money

The brutality of the Great Depression started in the 1920s after the laissez-faire policies during eight years led to the Stock Market Crash of October 1929.

One of the most unfortunate aspects of this crash resulted in a “run on the banks.” That meant that people were so frightened by losing everything that they had saved that they immediately lined up to take the money out of the banks.

This brutal period and the greedy bankers were portrayed in the Christmas movie “It’s a Wonderful Life” starring Indiana, Pa.’s Jimmy Stewart. So many banks failed because of this, and it was not until a new president came in during 1933 that they began to insure that the deposits of everyone would be guaranteed by the government (FDIC).

However, an interesting phenomenon is occurring right now in Russia after its dictator, Vladimir Putin, invaded the Ukraine, and almost every country in the world has issued intense sanctions against it. That has led the people in that country, many of whom disagree with Putin’s action, to line up and do what Americans did in 1929 and 1930.

Stock Market Crash

How did this happen in 1929?

The stock market crash of October 1929 left the American public highly nervous and extremely susceptible to rumors of impending financial disaster. Consumer spending and investment began to decrease, which would in turn lead to a decline in production and employment. Another phenomenon that compounded the nation’s economic woes during the Great Depression was a wave of banking panics or “bank runs,” during which large numbers of anxious people withdrew their deposits in cash, forcing banks to liquidate loans and often leading to bank failure …

In the wake of the stock market crash of October 1929, people were growing increasingly anxious about the security of their money. Wealthy people were pulling their investment assets out of the economy, and consumers overall were spending less and less money. Bankruptcies were becoming more common, and peoples’ confidence in financial institutions such as banks was being rapidly eroded. Some 650 banks failed in 1929; the number would rise to more than 1,300 the following year.

“Bank Run,”, April 23, 2010

When the banks failed, the economy collapsed, and disaster ensued.

How is this starting to take place in Russia?

Lining up on Sunday

The people in Russia are very worried. While the people overall do not make large amounts of money compared to the rest of the world, they have enough to live on in normal times.

These are not normal times, and the run on the banks along with the drop in the value of a ruble, the Russian currency, illustrates that,

In Russian cities, anxious customers started lining up on Sunday in front of A.T.M.s, hoping to withdraw the money they had deposited in banks, fearful it would run out. The panic spread on Monday. To try to restore calm, the Bank of Russia posted a notice on its website: “The volume of bank notes ready for loading into A.T.M.s is more than sufficient. All customer funds on bank accounts are fully preserved and available for any transactions.”

In Russia today, as the purchasing power of the ruble drops sharply, consumers who hold it are finding that they can buy less with their money. In real terms, they become poorer. Such economic instability could stoke popular unhappiness and even unrest.

“If people trust the currency, the country exists,” Michael S. Bernstam, a research fellow at the Hoover Institution at Stanford University, said. “If they don’t, then it goes up in smoke.”

Patricia Cohen and Jeanna Smialek, “The West Plan to Isolate Putin:

Undermine the Ruble,” New York Times, February 28, 2022

Making it impossible for bank to liquidate assets

So, the Russian government believes that it has sufficient cash for now even as its citizens line up to take out their money, but the sanctions against the banks mean that they will not be able to access their international funding, which has been frozen by the U.S., the European Union, and others,

The sanctions aimed at the banking system were announced during a tense weekend in which Mr. Putin put his nuclear forces on a higher level of alert. The United States, the European Commission, Britain and Canada agreed to remove some Russian banks from the international system of payments known as SWIFT and to restrict Russia’s central bank from using its storehouse of hundreds of billions of dollars’ worth international reserves to undermine the sanctions.

Kicking banks out of SWIFT has gotten the most public attention, but the measures taken against the central bank are potentially the most devastating. Ursula von der Leyen, the president of the European Commission, said it would “freeze its transactions” and “make it impossible for the Central Bank to liquidate its assets.”

On Monday, the U.S. Treasury Department offered more details on how the sanctions would work, saying they would paralyze the Bank of Russia’s assets in the United States and stop Americans from engaging in transactions involving the central bank, Russia’s National Wealth Fund or the Russian Ministry of Finance. As expected, there are exemptions for transactions related to energy exports, on which Europe relies …

At the heart of the move to sanction the Bank of Russia are its foreign exchange reserves. These are the massive haul of convertible assets — other nations’ currencies and gold — that Russia has built up, financed in large part through the money it earns selling oil and gas to Europe and other energy importers …

As Mr. Bernstam explained, the Bank of Russia has roughly $640 billion in foreign exchange reserves on paper — or rather as electronic entries. But a big chunk of that money is not located in Russian vaults or financial institutions. Rather, it is held by central and commercial banks in New York, London, Berlin, Paris, Tokyo and elsewhere around the world.

Patricia Cohen and Jeanna Smialek, New York Times, February 28, 2022

In essence, if banks cannot liquidate their assets, they are essentially are impotent as the American banks were in 1929 and 1930.

It is an ingenious strategy, but whether it will be as effective as the Naval blockade imposed on the Soviets by President John F. Kennedy in 1962 in the Cuban Missile Crisis remains to be seen.

There, money was not the target. Isolation of the country on a world stage, though, definitely was.

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