A run on the bank?

Just read "Greece Deputy PM Warns Of Tanks In The Streets, Mass Suicides, If Second Bailout Voted Down By Greek Parliament" on Zero Hedge [yes, I am indeed about a month behind — those people post far too often], which quotes one Theodoros Pangalos as saying that "Returning to the drachma would mean that on the following day banks would be surrounded by terrified people trying to withdraw their money, the army would have to protect them with tanks because there would not be enough police".

I can't see that there's any excuse in a "modern", fiat currency system, for a run on the banks. Perhaps Mr Pangalos doesn't get it, but here's Gerard's Patented Method For Dumping The Euro And Going Back To The Drachma Without Having A Run On The Banks™ — no honestly, thank me later.

First of all, coin and print drachma equivalents for the amount of euro-denominated cash currently in circulation. Just for fun, assume that you are going to announce a drachma that's worth ten euros. (Trust me, that's going to increase the amount of fun almost exponentially once you've got an exchange rate.) "But," you will say, "that's only a minute fraction of the amount of money in bank accounts! How will we avoid people queueing up at the banks for cash that isn't there?"

Simples! As well as the 1, 5, 10, 20, 50, 100 and 1,000 drachma notes that you were expecting, you will also get your central bank to print 10,000, 100,000, 1,000,000, 10,000,000 and 100,000,000 drachma notes. Remember you are going to be swapping euros for new drachmas at 10 to 1, so a 100,000,000 new drachma note will be "worth" ONE BILLION EUROS! And you really can't have too many of them, so print a few more to be on the safe side.

Now, when multi-billionaire shipping-line owners queue up outside the banks for their cash, they can leave with just a few notes tucked discreetly into their slimline wallets! No need to spoil the hang of their suits with over-stuffed wallets or money belts! No need for a firm of private security guards to accompany dozens of boxes as they shuttle between the Bank of Greece and the nearest Citibank!

And the best bit will be the psychological effect on the masses. Once people see the rich entering the banks and leaving, only moments later, their valuable 1,000,000 new drachma bills tucked safely away, they will realise that there's absolutely no point taking need to take any money out themselves. Such is the power of the fiat money system when handled wisely.

What's that you say, Mr Pangalos? Inflation? Not a bit of it! You laid the groundwork for inflation when you allowed your banks to create credit out of thin air. That's the nature of a fractional reserve banking system. After that it's a balancing act. People mustn't take their cash out of the banks and hide it under their beds, or the economy will implode with massive deflation. Likewise, the velocity of circulation and the amount of credit mustn't rise too fast otherwise you'll get inflation. The beauty of my plan is that you won't have a deflationary scenario because there will always be enough cash circulating, while should only get a modest boost to inflation because most of the people taking money out of the banks will be stashing it away abroad.

What's that? What will it do to the exchange rate? Well isn't that the whole point of leaving the euro in the first place?