On Dec. 20, 1946, “It’s a Wonderful Life” premiered in New York.
A bank’s function is to take in savings from customers, and loan it out to individuals and businesses for a higher rate of interest than it pays to its savers. The difference pays its cost, and if the bank is prudent with its loans and rate setting, it delivers a profit to shareholders.
As a result, when you put money “into” a bank, it doesn’t go to the vault just to sit there. Instead, a little is kept for cash transactions, but most of it is loaned out again, usually into illiquid investments like mortgages or business loans. If all the customers of a bank ask for their savings at the same time, no bank has enough cash in reserve to pay it all out.
In normal times, this works fine, as the various deposits, payments and withdrawals balance themselves out. And when they don’t, banks can rely upon other banks to deal with short-term problems.
But when all the banks are under stress, things can get a bit crazy. Until the Depression, your money was only as safe as the “soundness” of the bank it was in. Watch this scene from “It’s a Wonderful Life” to see the emotions at play in a “run” on a bank:
Since 1933, small depositors (those with less than $250,000 in savings in banks and in savings and loan associations) are insured by the Federal Deposit Insurance Corporation. Credit unions are insured by the National Credit Union Insurance Fund. This seems to have ended the era of bank panics, but as we saw in the financial crisis of 2008, it didn’t end other kinds of financial panics.
- What is a run on a bank? When do bank runs occur? What are the negative impacts of a run on the banks?
- If banks were required simply to keep your money in the vault, instead of reinvesting it, what do you think would be some of the consequences?
Capra, F. (Director). (1946). It’s a Wonderful Life [Theatrical Poster]. Retrieved from https://www.imdb.com/title/tt00038650/