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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Yes, it causes a liquidity crisis. This is called a bank run or run on the bank. Banks only hold on to about 10% of the cash in reserves at all time to count for normal business and withdrawals. Everything else is loaned out or invested in stocks and bonds, or loaned to the fed via reverse repo.
If everyone tries to withdraw, the bank can go insolvent. But what usually happens is that banks just close the doors and say nobody else can withdraw. What tends to happen in our case is, the federal reserve steps in and agrees to buy up the banks assets, in the form of US treasuries, corperate bonds, mortgage backed securities. This gives the bank the cash it needs to pay out the bank depositors.
This is what quantitative easing is. But is used for situations other than bank runs, but I won’t go into that.
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