The decision of the government in Cyprus to simply take money out of people's bank accounts there sent shock waves around the world. People far removed from that nation had to wonder: "Can this happen here?"

The economic repercussions of having people feel their money isn't safe in banks can be catastrophic. Banks are crucial for gathering money from millions of people and transferring it to strangers whom those people wouldn't directly entrust it to.

Multibillion dollar corporations, whose economies of scale can bring down the prices of goods and services -- thereby raising our standard of living -- are seldom financed by a few billionaires.

Far more often they are financed by millions of people, who have neither the knowledge nor expertise to directly invest. Banks provide the financial expertise without which these transfers are too risky.

There are poor nations with rich natural resources, which are not developed because they lack either the sophisticated financial institutions necessary to make these key transfers of money or because their legal or political systems are too unreliable for people to put their money into these financial intermediaries.

Whether in Cyprus or elsewhere, politicians tend to think in short-run terms, if only because elections are held in the short run. Therefore, there is a temptation to do short-sighted things to get over a problem, even if that creates worse problems later.


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Seizing money that people put in the bank would be a classic example of such policies.

After thousands of American banks failed during the Great Depression, there were people who would never put their money in a bank again, even after the Federal Deposit Insurance Corporation was created.

After going back and forth, the government of Cyprus ultimately decided, under international pressure, to go ahead with its plan to raid people's bank accounts. But could similar policies be imposed in other countries, including the U.S.?

One of the big differences between the U.S. and Cyprus is that the U.S. government can print more money to get out of a financial crisis. But Cyprus can't print more euros, which are controlled by international institutions.

Does that mean Americans' money is safe in banks? Yes and no.

The U.S. government is unlikely to just seize money from people's bank accounts. Does that mean your money is safe?

No. There are more sophisticated ways for governments to take what you have put aside for yourself. If they do it slowly but steadily, they can take a big chunk of what you have saved.

That's already happening. When officials of the Federal Reserve System speak about "quantitative easing," what they are talking about is creating more money out of thin air.

When the federal government spends far beyond the tax revenues it has, it gets the extra money by selling bonds. The Federal Reserve has become the biggest buyer of these bonds, since it costs them nothing to create more money.

This new money buys just as much as the money you sacrificed to save for years. More money in circulation, without an increase in output, means rising prices. The numbers in your bank book may remain the same, but part of the purchasing power of your money is transferred to the government. Is that different from what Cyprus has done?

Thomas Sowell is a senior fellow at the Hoover Institution, Stanford University.