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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The way the bank generates value for it’s customers is holding deposits in investments. So a bank with 1M in deposits may have 200k cash on hand, 300k in treasury bonds that pay out in under a year, and 500k in longer term investments paying out over 5-10 years.
As people want their value in cash, withdrawals come from that cash pool. If too many people withdraw, they have to start selling investments. Depending on the investment type, doing so may take time or generate losses.
If everyone at a bank withdraws, they will almost certainly not be able to liquidate in time and the costs of liquidation may generate enough losses that they can’t pay everyone back in full. However, programs (insurance) exists so that covered institutions can give confidence they will be able to pay even in that unlikely event..
If everyone at all banks withdrew at once, it would be a massive issue. The insurance schemes would fail, and all the banks liquidating their assets that take 5-10 years to pay out would result in a glut of those assets on the market, meaning they are worth less (if you are selling for immediate cash rather than wait for payout), meaning a whole lot of banks don’t get enough cash to cover deposits
Usually what happens then is a regulator defined freeze, to calm the environment and find a path back to liquidity
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