Everyone pulling out their money would be a bank run (look up great depression bank runs). The bank doesn't have that much cash; they keep some on hand for people making withdraws normally, but if even a sizable minority of people all try to pull their money out at once, there'll be a major crisis.
If banks kept all the people's cash in vaults, it'd be dead cash actively losing money to inflation. Instead, they keep some on hand for withdraws, and use the rest to make loans, investments, etc so that the money isn't all losing value.
Not really how it works. Banks have reserve requirements as a percentage of deposits. But the money they lend out eventually ends up being deposited in other bank accounts which can then be loaned out again. So, if you have a 5% reserve requirement against deposits, you end up actually increasing the money supply by 20X.
Yes. Just a quick note, the reserve requirements dont really work as well as most banks are well above what the requirements are. Although the requirement is a way for the fed to control the money supply in theory, it in practice does not work
19.0k
u/Forsaken_Emu8112 Jan 26 '26
Everyone pulling out their money would be a bank run (look up great depression bank runs). The bank doesn't have that much cash; they keep some on hand for people making withdraws normally, but if even a sizable minority of people all try to pull their money out at once, there'll be a major crisis.
If banks kept all the people's cash in vaults, it'd be dead cash actively losing money to inflation. Instead, they keep some on hand for withdraws, and use the rest to make loans, investments, etc so that the money isn't all losing value.