In 1941, The Federal Reserve Wrote A Letter Explaining Why The Cyprus Bailout Was Such A Terrible Idea

The main reason why people are going crazy this morning over the "Troika's" (EU, IMF, ECB) bailout of Cyprus is the one-off 9.9 percent tax all Cypriots with over 100,000 euros will be charged, and 6.5 percent if you have less.

It seems shocking, but the concept isn't that novel.

As Sky News' economics editor Ed Conway points out this morning, in 1941, the Federal Reserve responded to an inquiry on why American deposits weren't taxed, since it would be so easy to administer and would produce so much revenue.

Perhaps, the Fed said, it could be done.

But such a tax would also violate "one of the fundamental principles of taxation in a democracy."

That is, some rich guy may actually have a relatively small amount in his deposit account that consists only of his salary and dividends, while a local businessman may have his entire payroll locked up in his branch's vault.

That kind of indiscriminate punishment is exactly what the Troika has executed today, Conway writes:

...one’s sympathy has to be with the country’s savers. Consider it: overnight a widow’s life savings, carefully saved up over decades, have been gouged, simply because EU bureaucrats decided to protect hedge funds and the German surplus, and to teach Russians a lesson.

Here's the full reproduction of the Fed's 1941 response. Big thanks to Ed Conway for passing it along.