Bank run

A bank does not keep all its customers’ cash on the premises. It keeps a fraction; the rest is lent out and working elsewhere. That is not fraud — it is how the system is designed — but it has one consequence: if every customer arrives on the same morning, the ledger is perfectly accurate and the cash still is not there.

New York, October 1907: a rumour spread that the Knickerbocker Trust was in trouble. Depositors queued, the bank paid out around eight million dollars in about three hours, and closed at noon. England, 2007: queues formed outside Northern Rock in the first British bank run in roughly 150 years.

After more than four thousand American banks collapsed in the early 1930s, the United States introduced deposit insurance, guaranteeing deposits up to a limit. Most countries now have an equivalent. It works largely by removing the reason to panic: if nobody needs to run, nobody does.