Deposit Insurance
We have not yet examined another important change wrought in the U.S. financial system by the New Deal.
In 1933, it proclaimed assurance against the rash of bank failures that had plagued the country during the Depression.
By the advent of Franklin Roosevelt, the fractional reserve banking system had collapsed, revealing its inherent insolvency.
The time was ripe for total and genuine reform, for cleansing of the American monetary system by putting an end at long last to the mendacities and the seductive evils of fractional reserve banking.
Instead, the Roosevelt administration unsurprisingly went in the opposite direction, plunging into massive fraud upon the American public by claiming to rescue the nation from unsound banking through the new Federal Deposit Insurance Corporation, FDIC.
The FDIC, the administration proclaimed, had now insured all bank depositors against losses, thereby propping up the banking system by a massive bailout guaranteed in advance.
But of course, it's all done with smoke and mirrors. For one thing, the FDIC only has in its assets a tiny fraction, one or two percent, of the deposits it claims to insure.
The validity of such governmental insurance may be quickly gauged by noting the late 1980s catastrophe of the savings and loan industry.
The deposits of those fractional reserve banks had supposedly nestled securely in the insurance provided by another Federal agency, the now defunct once lauded Federal Savings and Loan Insurance Corporation.
One crucial problem of deposit insurance is the fraudulent application of the honorific term insurance to schemes such as deposit guarantees.
Genuine insurance gained its benevolent connotations in the public mind from the fact that, when applied properly, it works very well.
Insurance properly applies to risks of future calamity that are not readily subject to the control of the individual beneficiary and where the incidents can be predicted accurately in advance.
Insurable risks are those where we can predict an incidence of calamities in large numbers but not in individual cases.
That is, we know nothing of the individual case except that he or it is a member of a certain class.
Thus, we may be able to predict accurately how many people aged 65 will die within the next year.
In that case, individuals aged 65 can pool annual premiums, with the pool of premiums
being granted as benefits to the survivors of the unlucky deceased.
The more, however, that may be known about the individual cases, the more these cases
need to be segregated into separate classes.
Thus, if men and women aged 65 have different average death rates, or those with different
When health conditions have varying death rates, they must be divided into separate classes, for if they are not, and say the healthy and the diseased are forced into paying the same premiums in the name of egalitarianism, then what we have is no longer genuine life insurance, but rather a coerced redistribution of income and wealth.
Similarly, to be insurable, the calamity has to be outside the control of the individual
beneficiary.
Otherwise, we encounter the fatal flaw of moral hazard, which again takes the plan out
of genuine insurance.
Thus, if there is fire insurance in a certain city, based on the average incidence of fire
in different kinds of buildings, but the insured are allowed to set the fires to collect the
without discovery or penalty, then again genuine insurance is given away to a redistributive racket.
Similarly, in medicine, specific diseases such as appendicitis may be predictable in large classes
and therefore genuinely insurable, but simply going to the doctor for a checkup or for vague ills is not insurable
are not insurable since this action is totally under the control of the insured and therefore cannot be predicted by insurance firms.
There are many reasons why business firms on the market can in no way be insured and why the very concept applied to a firm is absurd and fraudulent.
The very essence of the risks or uncertainty faced by the business entrepreneur is the
precise opposite of the measurable risk that can be alleviated by insurance. Insurable
risks such as death, fire, if not set by the insured, accident or appendicitis are homogeneous,
replicable, random events that can therefore be grouped into homogeneous classes which
which can be predicted in large numbers, but actions and events on the market, while often similar, are inherently unique, heterogeneous, and are not random, but influencing each other, and are therefore inherently uninsurable, and not subject to grouping into homogeneous classes measurable in advance.
Every event in human action on the market is unique and unmeasurable.
The entrepreneur is precisely the person who faces and bears the inherently uninsurable
risks of the marketplace.
But if no business firm can ever be insured, how much more is this true of a fractional
reserve bank?
Well, the very essence of fractional reserve banking is that the bank is inherently insolvent
and that its insolvency will be revealed as soon as the deluded public realizes what is
going on and insists on repossessing the money which it mistakenly thinks is being safeguarded
in its trusted neighborhood bank. If no business firm can be insured, then an industry consisting
Banking of hundreds of insolvent firms is surely the last institution about which anyone
can mention insurance with a straight face.
Deposit insurance is simply a fraudulent racket and a cruel one at that since it may plunder
Consider the life savings and the money stock of the entire public.