I ask because since our money is backed in value (a precious resource like gold and oil) and doesn’t leave the country, doesn’t it also mean that our wealth remains intact as a nation regardless of whether or not the bank has it? (Ie, us citizens have it, so it doesn’t matter if it’s in a bank or not- the wealth is held by a U.S. citizen).
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First, your money is not backed by anything other than the confidence that you and everyone else can use that money to purchase goods and services or to make investments. There’s literally nothing else backing that money. You can’t trade it in for a set amount of gold or oil. Except if you want to buy gold or oil, and even then the price of gold and oil fluctuates based upon whether people want to buy gold or oil. So the more people who want to buy gold or oil, the more money you’re going to have to spend to get the same amount of gold and oil you could have gotten before demand went up.
Second, if everyone sought to withdraw their money from banks at the same time, there would be disastrous economic consequences. Simply put, the banks do not have all the money on deposit available to disperse. They have some smaller amount, called a reserve, on hand to distribute. What you describe is a run on a bank (where many depositors seek to withdraw all their money at once), and a run on a bank is disastrous for that bank. It will almost certainly cause the bank to fail. If that happened simultaneously at many banks or all the banks, economies would collapse since people would both not have all their money, and not have any confidence in the money they do have.
Not at all my field, but the way you posted makes me want to point out one thing: a bank works by people depositing their money there (for convenience, safekeeping and low interest), then the bank lends that money to other people who pay the bank a larger interest
So the bank cant just give all people their money back, which seems mostly like a precondition to your question
It does, because banks run fractional reserves. They don’t actually have everyone’s money. So if this happened, the bank would fail. The good news is, your deposits are insured by the government (in some countries), so you’d be reimbursed. The bad news is that’s potentially a huge amount of money the government has to pay out, and where is that money going to come from? Taxation, borrowing, cuts to public spending, or money printing. They’re all bad options, and all have a negative economic impact.
The problem with everyone taking all their money out of the bank at the same times is mostly that bank no longer has everyone’s money.
They lend it out to other people and did other things with it.
If the bank lends you money to buy a house, they lend you the money that someone else put into the bank.
They expect that only a small number of people will want to take their money out of the banks at the same time so they only keep a fraction of the money that people deposited around in a form that they can hand out.
This is called fractional reserve banking.
If enough people try to get their money out of the bank at the same time the bank will run out of their reserve money very quickly.
The worst part about it is that people will see when the bank is coming close to running out because others took their money out. Nobody wants to be the guy who couldn’t get the money out so once the danger of the money running out becomes apparent everyone will want to be at the top of the queue.
People fearing that the bank will run out is what guarantees that the bank will run out of money.
Watch *It’s a Wonderful Life* with Jimmy Stewart for a fictional example of how this would go down.
In practice banks are big and the accounts of individuals tend to be insured via the government so that even if the bank goes bankrupt, the people will still get their money back from the government up to a certain limit.
Bank runs were common during the 1930s when banks were smaller and had fewer funds on hand. Their directors used depositor funds on high-risk ventures such as the stock market. When the market crashed in 1929, there wasn’t enough left to cover deposits.
Today, your corner bank is almost always part of a mega bank with billions in assets. There are many more regulations on how funds can be used. Runs are rare and deposits are guaranteed by the feds.
US currency is not backed by gold or any other precious resource. It’s based on trust in the issuing agent (the US government) and widespread acceptance for payment of goods and services.
When you deposit money into a bank they do not store the bills you give them somewhere. Instead they mark on a ledger (electronic and backed up in many places these days) how much you put in. When you withdraw money they give you currency equal to that amount.
Of the $150 trillion in US wealth, only around $2 trillion is represented by paper currency.
To your question, if a large number of people all try to withdraw money from a bank at the same time this is called a run on the bank. If the bank does not have enough currency on hand to pay everyone well, some people are screwed and those people are going to get angry. This happened during the Great Depression for example. Of course back then you didn’t have electronic payments and national banks with tons of branches and the like. Unless your money is all in a small bank with one location you’d probably not be affected if a single branch runs out of money. You can still pay with debit, still pay with credit. Still go to any random ATM, still go to another branch.
But let’s scale things up. Let’s say lots of people all over want to withdraw money from that bank and it does not have the money. Well it needs to get the money somehow or it goes under (more on that in a bit). One way a bank could get more money is to sell some assets. It might have treasury bonds for example it has purchased or stock portfolios. Or it could sell loans it owns to other banks. It gets money in the short term but not as much as it would have gotten long term. Or it gets some kind of loan itself, either from a larger financial institution or the government.
But what if all that fails? Well then the bank goes belly up. The people it owes money to are paid based on various rules and regulations from whatever money and assets it does have or can be sold off. What about your individual account? Well some account types are insured (you may have heard/seen the term FDIC Insured). That means at least some of the money in your account is gaurenteed even if the bank goes under but there’s a limit, last time I checked it was $250,000 per account. But be careful, not all accounts are insured. Stocks, Bonds, Crypto currency, etc are all not insured.
One other thing I almost forgot to mention, a bank may, if it suspects or detects a run, limit the amount of money that can be withdrawn temporarily.
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