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The Effect of Deposit Insurance (or Lack Thereof) on Gold and Silver as Money

Ben Bernanke says gold isn't money.  Most Americans, lulled by a false sense of security provided by the FDIC, choose to trust Bernanke over their own  common sense.

Very few countries offer adequate deposit insurance, and many countries (like Thailand) are in the process of reducing the deposit insurance they historically provided.  The theory is that offering deposit insurance creates a "moral hazard" because depositors no longer act as watchdogs over financial institutions.  It doesn't matter whether you place your deposits in a good bank or a bad bank - you get your money back regardless.  And bankers don't have to worry about that pesky little thing called fiduciary duty - they can take all sorts of risks without their conscience bothering them.

Recent studies show that the depth of any given country's financial crisis is directly proportional to the degree of deposit insurance it provides.  In other words, the greater the insurance coverage, the worse the financial collapse.  For countries with full deposit coverage, systemic banking failures historically occurred almost half the time.   And the problem with systemic banking failures, as Iceland found out, is that deposit insurance becomes irrelevant when the entire system collapses.

People in China and India are huge buyers of gold and silver.  China offers no deposit insurance and India offers 100,000 rupees (about $2,000).  It is cultural in these countries to not trust banks, and there is insufficient reason provided by the governments to do so.

And so, as long as deposit insurance continues to be either nonexistent, inadequate, or morally hazardous, gold and silver will be considered money by the vast majority of people in the world.


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