If people all decide to remove their money from a bank at the same time, does it have a serious economic impact?


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).

In: 8

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.

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.

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