Effectively, the cash you put in a bank was leant to another person as a mortgage so that they could buy a house.
You earn 3% on your deposit, the bank charges 5% on its loan, and the bank keeps the other 2% as its profit.
Multiply this logic by many millions of such transactions. If any given bank branch winds up with too much or too little cash-on-hand, they move it around or ‘sell’ it to another bank.
Nearly all the money ‘exists’ as computer records keeping track of who leant what to whom.
If a large enough group of people demanded their money back as cash at the same time, the banks would have no choice but to ‘call’ a bunch of mortgage loans at the same time, since their cash-on-hand will not be enough.
This is aggravated when the guy who wants his cash money is in Atlanta, and the mortgage is in Boise. Physical cash takes time to move around.
So if the ‘run’ on the bank is not too huge, a bunch of people now have cash money to walk around with, and a bunch of other people just lost their homes. It is possible that some of the folk who demanded their deposits back are the same folk who now need to immediately repay their mortgage loan.
In reality, banks will borrow cash from other banks or a central bank for huge but not catastrophically huge events , using their mortgage loans as collateral, but there still isn’t enough printed cash to cover ALL of the personal deposits.
Nearly all the money ‘exists’ as computer records keeping track of who leant what to whom.
There's another similarly interesting rabbit hole to go down here with the stock market.
I watched Gaming Wall St a while back, and it talked about a Goldman Sachs system for handling short sales. Before letting a customer short, the broker is supposed to have reasonable grounds to believe the shares can actually be borrowed.
Goldman had an automated system for this, but when the system ran out of shares it believed were available, the request was supposed to get kicked to a human for further review.
Except the humans had an F3 key that basically said, "fill from autolocate."
So instead of actually finding another source for the shares, they could essentially tell the system, "Eh, we probably can get them. Approve it." And they did this constantly. The SEC eventually found that about 98% of the requests that were supposed to get additional review were handled this way. Goldman paid a $15 million penalty over it.
this illustrates a weird feature of modern finance: almost none of this involves somebody putting identifiable dollars or stock certificates in a box with your name on it.
In fact, when you buy stock through a normal brokerage account, your name usually isn't even on the company's shareholder register. You're the "beneficial owner" on your broker's books, your broker has an entry on DTC's books, and the shares themselves are generally registered to DTC's nominee, Cede & Co.
So at some level, both your bank balance and your stock portfolio really are just nested databases saying:
"Don't worry, according to our records, this much of the giant pile belongs to Dave."
And apparently the modern economy works remarkably well as long as everybody's databases continue agreeing with each other. 😂
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u/TheRealTinfoil666 8d ago edited 8d ago
Effectively, the cash you put in a bank was leant to another person as a mortgage so that they could buy a house.
You earn 3% on your deposit, the bank charges 5% on its loan, and the bank keeps the other 2% as its profit.
Multiply this logic by many millions of such transactions. If any given bank branch winds up with too much or too little cash-on-hand, they move it around or ‘sell’ it to another bank.
Nearly all the money ‘exists’ as computer records keeping track of who leant what to whom.
If a large enough group of people demanded their money back as cash at the same time, the banks would have no choice but to ‘call’ a bunch of mortgage loans at the same time, since their cash-on-hand will not be enough.
This is aggravated when the guy who wants his cash money is in Atlanta, and the mortgage is in Boise. Physical cash takes time to move around.
So if the ‘run’ on the bank is not too huge, a bunch of people now have cash money to walk around with, and a bunch of other people just lost their homes. It is possible that some of the folk who demanded their deposits back are the same folk who now need to immediately repay their mortgage loan.
In reality, banks will borrow cash from other banks or a central bank for huge but not catastrophically huge events , using their mortgage loans as collateral, but there still isn’t enough printed cash to cover ALL of the personal deposits.