American bank depositors sincerely trust the Federal Deposit Insurance Corporation (FDIC). They are as certain as the sky is blue, that the FDIC will protect the money in their bank accounts. Thus, they do not withdraw dollars from their accounts in a banking crisis.
This confidence has minimized the outbreak of full-blown bank runs at American banks since the FDIC was established in 1934. But that doesn’t mean fractional reserve banking isn’t fundamentally flawed.
When you have an interest-bearing savings account at a bank, you’re the bank’s customer. But you also supply the product.
In fact, the modern banking system is built on the lie that the bank will pay you interest by lending out your deposit, but that you can also get your money back at any time – wink, wink. The FDIC serves to make this lie true.
The most common reason for a bank failure is that the bank has loaned money to purchasers of longer-term assets, such as real estate, which isn’t paid back for years, yet depositors have the right to withdraw money at any time. The banks borrow short and lend long. Continue reading