Home
/
RELIGION & LIBERTY ONLINE
/
The economics of Bedford Falls (Part 1 of 3)
The economics of Bedford Falls (Part 1 of 3)
Apr 4, 2025 3:45 AM

Upon it’s initial release in 1946, Frank Capra’s It’s a Wonderful Life was something of a financial flop,failing to reach the break-even point of $6.3 million. Although it was nominated for Best Picture at the Academy Awards, it wasn’t until subsequent decades that it became recognized as one of the greatest Christmas films ever made.*

The movie is long overdue for another reappraisal, for it’s also one of the best films ever created about economics and financial services.

In a series of three posts (to be posted today, Wednesday, and Thursday), I’ll highlight some of the financial aspects of the film (the first two posts) and a few of the broad economic lessons from one of my all-time favorite films.

The Value of a Dollar

One dollar may always be equal to four quarters, ten dimes, 20 nickels, or 100 pennies. But what that dollar can buy varies based on the rate of inflation.

Because of inflation, the value of a dollar varies not only from the time of the movie till today, but also within the movie. For example, when George is 12 years old and working in Mr. Gower’s drugstore (1919), he sells Violet “2 cents worth of shoelaces (candy).” Since $1 in 1919 is the equivalent of $13.75 in 2015, that two pennies worth of candy would cost about 28 cents today but only 2.08 cents in 1945, when George is an adult.

Also in 1919, George’s father, Peter “Pop” Bailey owes the banker, Mr. Potter, a total of $5,000. That may not sound like much of a loan, but in 2015 dollars that would be the equivalent of $68,739. Similarly, when Uncle Billy loses $8,000 of the Building and Loan’s cash (in 1945), he has lost the equivalent of $105,705 in 2015 dollars, but only $7,689 worth of buying power in 1919.

(At the end of this post I’ve calculated some of the monetary figures mentioned in the film into 2015 dollars.)

Banks vs. Building and Loans

The Bailey Bros. Building and Loan Association plays a prominent role throughout the film. But what exactly is a Building and Loan? And how does it differ from a bank?

A Building and Loan Association (BLA) is a depository financial institution that specializes in collecting savings deposits from customers and investing it in residential mortgage loans. BLAs are usually mutually held, meaning that depositors and borrowers have the ability to direct the financial goals of the organization.

The difference between a bank and a BLA is that savings banks generally concentrate mercial lending to help businesses and finance ventures or lending that is secured by other items like credit cards. Building and loan associations, on the other hand, tend to focus on residential mortgage lending and promoting home ownership. In the film, home ownership is disparaged by Mr. Potter (the city’s biggest landlord) but is championed by the Baileys (“Doesn’t [home ownership] make them better citizens? Doesn’t it make them better customers?” asks George).

Uncle Billy’s Big Banking Blunder

The central crisis of IAWL is caused when Uncle Billy goes to Potter’s bank to deposit $8,000 for the Building and Loan and absentmindedly leaves the money behind. As George tells Uncle Billy after hearing about the lost deposit, “Do you realize what this means? It means bankruptcy and scandal, and prison!”

Why exactly did Uncle Billy need to take the money from one financial institution (the BLA) and deposit it at another financial institution (Potter’s bank)? The reason, explains law professor Marie T. Reilly is because, “State regulation prohibited savings and loans from maintaining their own deposit accounts (an odd feature of savings and loan law that persisted through the S&L debacle in the late 20th century).”

Since the money was missing, the bank examiner would presume the money was stolen (and possibly even given to Violet, who the examiner saw kissing George goodbye). George or Uncle Bailey could have gone to jail for embezzlement.

The real thief, of course, was Mr. Potter, who knew the $8,000 belonged to Uncle Billy and yet kept it for himself. He took a significant risk in pocketing the money since, if his assistant reported the fraud, Potter would have lost everything and been thrown in prison.

The Bank Run of Bedford Falls

As George and Mary are leaving town on their honeymoon in Ernie’s cab, a passerby says, “Hey, Ernie, if you got any money in the bank, you better hurry.” Why was everyone wanting to get money out of the bank and the building and loan? The event is called a bank run or a “run on the bank.”

To understand bank runs, we must first understand the fractional-reserve banking system. As Wikipedia explains, the funds deposited in a bank are no longer the property of the customer.

The funds e the property of the bank, and the customer in turn receives an asset called a deposit account (a checking or savings account). That deposit account is a liability on the balance sheet of the bank. Each bank is legally authorized to issue credit up to a specified multiple of its reserves, so reserves available to satisfy payment of deposit liabilities are less than the total amount which the bank is obligated to pay in satisfaction of demand deposits.

On most days, people don’t want their money in cash and are content with keeping it in the bank deposit. This means banks have to have a relatively small amount of cash on hand for day-to-day withdrawals. But in times of financial panic, large numbers of depositors may make a “run on the bank” out of fear their bank will e insolvent and they’ll not be able to get their money back.

Ordinarily, this wouldn’t be a concern. As George G. Kaufman says, “a run is highly unlikely to make a solvent bank insolvent.” But in the case of the Bailey Bros. Building and Loan the fears may have been somewhat warranted.

For starters, as Uncle Billy says, “The bank called our loan. . . . I had to hand over all our cash. … Every cent of it, and it still was less than we owe.” The B&L now had no cash at all to give their panicked depositors. And they still owed even more money to Potter’s bank.

Potter had covered the bank’s funds out of his own fortune and offers to do the same for the B&L customers. But there’s a catch: the deposit account at the B&L is like a “share” of stock (in this case, mortgages, which would make the share a “mortgage-backed security”), and Potter is offering them 50 cents on the dollar. For every dollar they withdraw in cash, Potter keeps a dollar of their shares (which are in the mortgages that are owned throughout Bedford Falls). Presumably, those shares came with voting rights which Potter could use to vote himself as head of the B&L. By controlling the B&L, he could also foreclose on the houses in Bailey Park, forcing people back to renting in Potter’s Field (more on this in the next post).

Potter also cryptically adds, “If you close your doors before six P.M. you will never reopen.” It’s not clear what this means, but it certainly adds to the impetus for George to make a quick decision about how to remain solvent.

Fortunately for him and the citizen’s of Bedford Falls, his wife es through with a solution: She has $2,000 in cash (about $27,800 in 2015 dollars) out of their personal money. They give the money to their depositors and at the end of the day all they have left is $2 ($27.82).

(As a response to these types of bank runs, the federal government created the Federal Deposit Insurance Corporation (FDIC), an independent agency of the United States government that protects depositors against the loss of their insured deposits if an FDIC-insured bank or savings association fails. FDIC insurance is backed by the full faith and credit of the United States government.)

*In one scene near the end of the film, George is seen running past a theater marquee advertising The Bells of St. Mary’s. That Christmas film, starring Bing Crosby and Ingrid Bergman, was a financial hit yet is relatively pared to Capra’s “flop.”

Addendum:

The money given out during the bank run (1932): To Tom, $242 ($4,201); Mrs. Davis, $17.50 ($303.81).

George’s salary as head of the B&L (1933): $45 a week ($823), $2,340 a year ($42,796).

Potter offers George a three-year salary contract of $20,000 a year ($365,904). This is an increase of $323,108 dollars over his current salary—and George turns it down.

At the film’s conclusion, Sam Wainwright offers to advance George a loan of $25,000 ($330,330).

Comments
Welcome to mreligion comments! Please keep conversations courteous and on-topic. To fosterproductive and respectful conversations, you may see comments from our Community Managers.
Sign up to post
Sort by
Show More Comments
RELIGION & LIBERTY ONLINE
Gregg’s Take on Labor Day Debate
Yesterday, five leading Republican candidates participated in the Palmetto Freedom Forum, a serious debate on constitutional principles. Mitt Romney, Michelle Bachmann, Newt Gingrich, Ron Paul, and Herman Cain answered questions from Tea Party congressmen Jim DeMint and Steve King, and Princeton professor Robert P. George. National Review Online has gathered reactions to the debate from notable conservatives; Acton director of research Samuel Gregg and senior fellow Marvin Olasky are among them. Gregg’s take-away is that American politics is shifting in...
Prerequisite for Life: The Man Class
Writing in the Detroit News about the latest rash of shootings in the city (nine dead and 20 injured), Luther Keith asks, “Haven’t we been around this track before?” Yes, actually. He lays out a list of measures to address the crime problem including some predictable (police, gun buybacks, recreational programs) and, refreshingly, something more promising, more powerful: “Emphasize personal responsibility. It es down to choices — right ones and wrong ones, good ones and bad ones and the willingness...
Rep. Justin Amash on Government Dysfunction
Last week I wrote mentary titled the “The Folly of More Centralized Power,” making the case against ceding anymore power to Washington and returning back to the fundamental principles of federalism. Rep. Amash (R-Mich.), a member of the freshmen class in Congress, made that case as well. Amash was asked about his Washington experience so far in an interview and declared, When I was in the state government, I thought things were dysfunctional there in my opinion. Now I’ve discovered...
Jumping the Shark: Hoffa’s Rant and Rerum Novarum
James Hoffa put on quite a performance this weekend—first on CNN’s “State of the Union,” and then in Detroit at a Labor rally with President Obama. Also this weekend, President Biden revealed that the White House seems to have given up and decided America is already a “house divided,” with “barbarians at the gate” in the form of the Tea Party. Coverage of these incidents is available from whichever news outlet you trust, but there is one thing that CNN...
Doug Bandow: Troubling News for Religious Liberty
The state of religious liberty around the world is poor, according a new study by the Pew Forum on Religion. Doug Bandow breaks down the report over at The American Spectator—his piece is titled “A World Spinning Backward.” Two years ago, Pew reported that 70 percent of humanity suffered from either government persecution of or social hostility to religion. That trend is growing. According to Pew’s new study, “more than 2.2 billion people—about a third of the world’s population—live in...
Billboards, Hope, and God’s Highway
Yesterday I was interviewed by WoodTV8 on a story about a controversial billboard near downtown Grand Rapids that reads, “You don’t need God – to hope, to care, to love, to live.” The billboard is sponsored by the Center for Inquiry. My reaction is that the billboard can be a positive because it serves as a conversation starter about a relationship with the Lord and what the meaning of true love and true hope is all about. When I was...
CFP: Orthodox Christian Economic Thought
Since its inception, the Journal of Markets & Morality has encouraged critical engagement between the disciplines of moral theology and economics. In the past, the vast majority of our contributors have focused on Protestant and Roman Catholic social thought applied to economics, with a few significant exceptions. Among the traditions often underrepresented, Orthodox Christianity has received meager attention despite its ever-growing presence and ever-increasing interest in the West. This call for publication is an effort to address this lacuna by...
A Thought for Labor Day Weekend
“Work gives meaning to life: It is the form in which we make ourselves useful to others, and thus to God.” –Lester DeKoster, Work: The Meaning of Your Life—A Christian Perspective, 2d ed. (Christian’s Library Press, 2010). ...
How to Deliver a Recession: Cut Brake Lines, Accelerate Toward Cliff
Economic historian Brian Domitrovic has an interesting post up at his Forbes blog, Past & Present, on the proximate causes of the 2008 meltdown. According to Domitrovic, uncoordinated, even “weird” fiscal and budgetary policy in the early 2000s kept investors on the sidelines, and then flooded the system with easy money. The chickens came home to roost in 2008 (and they’re still perched in the coop). In 2000, as the stock market was treading water in the context of the...
Acton Commentary: School Choice Gains Traction
Political discourse and news media have been consumed of late by talk of debt, spending, and recession, but meanwhile the educational freedom movement has been making real progress. State legislatures across the country are giving a green light to vouchers and tax incentives that will in the future pay impressive dividends in the form of better educated students and more efficient schools. Read the rest of mentary here. ...
Related Classification
Copyright 2023-2025 - www.mreligion.com All Rights Reserved