The Morality of Banking in It’s a Wonderful Life

Seventy years after its release, Frank Capra’s It’s a Wonderful Life remains a holiday classic, with warm and fuzzy messages about the importance of love and family. But the movie’s plot also touches on some still-relevant financial topics, including the nature of banking, the philosophical calculus behind issuing loans, and the way American families’ financial fates are intertwined (and, we swear, we aren’t just saying that because we both happen to report on business and economics at The Atlantic).

The film’s protagonist, George Bailey, gives up his dreams of traveling the world to run Bailey Building and Loan, a small community bank with a mortgage business. But all is not well in Bedford Falls. The decisions of the well-intentioned Bailey as he faces an unfortunate deposit-envelope mix-up and tries to fend off an aggressive tycoon make for a clear-cut narrative set piece, but also, whether Capra intended to or not, make the movie financially instructive all these years later.

Below is a conversation we had after (re-)watching the film about the various questions it raises about mortgages, banking, and financial solvency.

Gillian B. White: I forgot how much commentary there is in this movie about the economics of how banks and loans work. I want an audio file of George Bailey saying “The money’s not there!” as he tries to explain how deposits get rolled into other products, not just stacks of bills tucked away in a vault. But I love that speech for another reason, too: It helps explain, at a pretty simple level, how deeply interwoven America’s banking structure and finances can be—so when a bank, big or small, fails, lots of people wind up feeling the impact. As a whole, the movie raises some critical questions about the purpose of banks: What are they meant to do and who are they meant to serve?

Bourree Lam: That scene has always really stuck out to me. It’s an important plot point, but I also think it speaks to how much people don’t know about how banks actually work. It’s really not clear to the people of Bedford Falls how credit and loans work, to the point that people cause a bank run and George has to use his own money to stop the institution from dissolving. They really think all their money is sitting there in the safe, but never question how the bank is then able to distribute so much money, such as loans for their homes.

White: Let’s talk about the bank run(s) because that used to be a real thing, when people would rush to pull money out of failing institutions during the Great Depression. To some extent—though less literal now—whenever there’s a big looming financial crisis, there’s fear of a “bank run,” which now looks more like long lines at ATMs as customers try to pull their money out while they still can. The initial run on Bailey Building and Loan is at the very beginning of the movie and it sets George on this path of being a banker. As you might remember, he uses the money for his honeymoon to tide over bank customers to keep them from withdrawing everything. But then the second run, when his uncle misplaces the deposits and the amount is too big for George to cover, kind of hints at a concept that’s still up for discussion today: what it means to be over-leveraged.

The fear of too much leverage—that one big loss could take down an entire bank, an entire system, or wipe out the life savings of many—is still a big issue, especially after the Great Recession. It’s why there’s been a big push to make banks hold more cash on hand.

Lam: I know that there was a bank examiner in the movie, but I guess there weren’t capital requirements in Bedford Falls. It’s also worth adding that bank failures these days are more serious than Depression-era failures since so many banks are national entities. The collapse of Washington Mutual in 2008, triggered by deposit withdrawals, was the largest failure in U.S. banking history.

During the first bank run, George was able to convince people not to pull all of their money out and instead take out only what they needed in the short term so the bank could stay afloat. Instead of George Bailey, Americans have the Federal Deposit Insurance Corporation (FDIC), which was created to insure bank deposits precisely so people wouldn’t fear losing everything and pull cash out of the financial system in a panic, triggering bank failures.

I actually think the movie does a good job of portraying the downsides of what it means to be both a “good” bank (one that lends to people who need it, but is likely over-leveraged) and a “bad” bank (a more profitable one that loans at high interest rates and only provides credit to people who already have money). But there are also inherent moral judgments about the way a bank should work that come across as too black-and-white. For example, when Potter asks Bailey, “Are you running a business or a charity?” we know it’s not mutually exclusive like that. After all, a bank ideally would help people reach financial goals while also turning a profit.

White: And the relationship between morality and banking comes up really early, right when we see that the newly wedded Baileys won’t be taking their honeymoon, but will instead be using that money to temporarily bail out the Building and Loan. Here’s some of the speech that George gives that sets him on that course:

If Potter gets hold of this Building and Loan, there’ll never be another decent house built in this town … He wants to keep you living in his slums and paying the kind of rent he decides. Joe, you had one of those Potter houses, didn’t you? Well, have you forgotten? Have you forgotten what he charged you for that broken-down shack? Here, Ed. You know, you remember last year when things weren’t going so well, and you couldn’t make your payments? You didn’t lose your house, did you? Do you think Potter would have let you keep it? Can’t you understand what’s happening here? Don’t you see what’s happening? Potter isn’t selling. Potter’s buying! And why? Because we’re panicking and he’s not. That’s why. He’s picking up some bargains. Now, we can get through this thing all right. We’ve got to stick together, though. We’ve got to have faith in each other.

I found that speech interesting not just because it sets up the rest of the movie and how George views his banking career, but also because it focuses on some issues that our economy is still wrestling with today, notably the power and relative security that society offers to homeowners in contrast to those who are perpetual renters and subject to the whims and graces of landlords. Of course, prices have risen and loan products have gotten infinitely more complex (not to mention regulated), but I thought the conversation about foreclosure and housing security was still relevant to our current economy.

Lam: There clearly wasn’t renter protection in Bedford Falls, and the housing market didn’t have enough competition. It was a Potter monopoly without regulation. But the issue of who should and shouldn’t get credit is still a conversation our society is grappling with, especially in the wake of the 2008 financial crisis.

Potter talks about this early on when he challenges Bailey: Why would you give Ernie Bishop, the taxi driver, a loan? You know he’s going to miss payments and foreclosure might be a possibility. Bailey gets to be the good guy who makes risky loans and forgives people when they miss payments, but he’s also risking his business along with it.

I also couldn’t help but think about payday loans during this movie. Bedford Falls is a middle-class town, but there are working-class people—such as Ernie and Martini—who can barely afford a house. Without George Bailey, the two would wind up living in run-down rental shacks with nothing to show for their blue-collar work. But Potter thinks that the working class should be “thrifty.” He questions why people can’t just be more disciplined and save money, the same way people with means today wonder why anyone would take out something as awful as a payday loan. I think the movie explores a lot of the questions we grapple with when it comes to credit, like who should have it and on what terms.

White: I think part of what makes It’s a Wonderful Life such an appealing movie is that people can easily rally around Bailey as the savior of the community. He’s a hard-working and self-sacrificing businessman, who is helping out his neighbors. In the end, the community saves itself. I think what’s interesting is that in reality, many places probably didn’t have a George Bailey. And certainly now—with bank consolidation—there are fewer and fewer neighborhood financial institutions and certainly fewer individuals who could help bridge those gaps. In those instances, people who are having a hard time would have much less heart-warming options: government services or dangerous, expensive short-term loans, like payday or auto titles.

Lam: A dose of harsh reality in the film is how big of a jerk Potter is. It always made me really angry that he accidentally received that $8,000 that caused the second bank run at Bailey Building and Loan, yet never told anyone he had it, never gave the money back, and never had any intention of doing the right thing. He’s the coldhearted capitalist, and in the mid-1940s, I think the mores surrounding financial gains were really different. This is pre-Wall Street, pre-“greed is good.” Potter argues that Bailey is undercutting him by running an inefficient market and charging below-market prices for housing. It’s so interesting to me that Capra presented charging below-market prices as the decent thing to do.

But the ultimate importance (at least financially) of this film to me is the role of banks in society. This all reminded me of the Abacus case, which involved a bank in New York, in Chinatown, that was lending to members of the community and judging creditworthiness based on a person’s character and their ties to the community. Essentially credit was provided and managed by the community instead of having mortgages that are signed then sold off again and again. Abacus was eventually investigated for mortgage fraud, but found not guilty by a jury. And yet the scolding words of the district attorney who prosecuted them (“Abacus is a bank, not a community-service organization”) really make me think of George Bailey and his predicament in today’s terms.

White: I thought of that too! I think when you watch the movie with a focus on the financial aspects, it’s easy to see plenty of modern-day parallels. And, while the holiday spirit is deeply woven into the narrative, the fact that George Bailey wouldn’t be able to help his neighbors the way he once did—which nowadays might be categorized as mortgage fraud—can feel like a bit of a bummer when you think about how many people could probably use a little financial help. That our banking system is so much more interconnected and, some would say, immensely complex, is a big part of the problem.