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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>I ask because since our money is backed in value (a precious resource like gold and oil
In the U.S., our money is no longer backed by a physical commodity. We left the gold standard in 1971, and did not replace it. We have what is called a fiat currency, which is backed by people’s faith that it will remain valuable.
>ELI5: If people all decide to remove their money from a bank at the same time, does it have a serious economic impact?
Yes. That is what’s called a “bank run”. Basically, the bank tells people “we don’t have enough money on hand at the moment, come back later”. This can lead to a panic, if people don’t trust that the bank will have their money in the future (you don’t know if they’ll get it later, or if they lost it. Banks lend your money out, and only keep a small percentage on hand at any one time)
as people start pulling money out to make sure they’re not the ones left out at the end.
Not only can this happen- it *did* happen, in the 1930’s.
In the U.S., we solved this by requiring banks to have insurance from the F.D.I.C. (Federal Deposit Insurance Corporation), which was established in 1933. The federal government guarantees your funds in a proper bank account (up to a limit. I believe right now that’s about $250,000 per account or so). If a bank can’t cover your withdrawal, the government will.
That guarantee has mostly solved bank runs (with some exceptions. The 2008 recession was significantly worsened by what were essentially bank runs, but investment firms/investment banks didn’t have the same failsafes that commercial banks did)
From the comments:
>But then why can I not buy a lot of gold in a foreign country and then bring it back to the US? (Ie from Asia, etc).
You can. But it’s a huge pain in the ass, and people generally have *a lot* of faith in the stability of the dollar. That faith is why it’s so commonly used in foreign countries.
>Like, you and I can weigh gold and someone on the other side of the world can weigh gold and not need to “exchange currency”. That seems like a benefit.
That requires you to have the gold, store the gold, verify it’s actually real gold, etc. It’s incredibly annoying. You’re also vulnerable to fluctuations in the price of gold.
There’s a reason we switched to currencies. And with modern technology, you don’t even need physical bills anymore- it’s digital.
>Additionally, when people protest, if it’s that impactful, why don’t they just protest by everyone threatening to remove their money from a bank if it would have dramatic economic consequences?
A mix of:
– It’s very hard to organize enough people to do so
– FDIC insurance, as mentioned above
– it would likely backfire, and cause a lot of economic damage to the people protesting. The damage done to the economy is not just to the bank itself- if it spreads, it can hit most of the economy. You’d need to be very desperate to shoot yourself in the foot as a protest tactic. If it was bad enough, you might even start affecting people’s faith in the dollar itself.
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