People deposit money and they take money out. That’s the banks sole job. They have to ensure that people have money to do their business.
That might have been the case to the folks on "Little House on the Prairie," but banking is FAR more than this. Banks are also in the business of lending, not just storing money in a vault. Banks would charge a fee instead of paying interest if their sole job was to hold deposits.
But for the sake of this discussion, let's leave aside the lending side of the business.
In order to pay interest to depositors, a bank has to take those deposited funds and do something with them. What exactly is a bank supposed to do with your money in order to pay you a 2% to 5% return on your savings accounts and certificates of deposit? They do two things: (1) they lend money at higher interest rates than they pay you; and (2) they invest in stable, "safe" investment vehicles such as government bonds.
It's no more complicated than that. And keep in mind that your "bank run" involving thousands of people running to the local branch to withdraw their $5,000 cash is not even an issue for the bank. The bigger problem is the corporate customer that keeps an average of $10 million in the bank and needs $500,000 every two weeks to meet its regular payroll. All of the CURRENT problems you are reading about in the banking industry are all tied to the complexities of managing the cash flows of these deposit-withdrawal cycles while generating enough revenue to pay the bank's costs of doing business.
I’m only pointing out that one of the reasons for bank runs is because the banks have chosen to leave less in the vault than what they are able to cover because of a surge of customers wanting their money.
You've just described the basic business model for fractional reserve banking, which has been the standard practice in banking for as long as either of us have been alive.
I’m not claiming to be clever. But that’s the overall picture. Many banks have placed themselves at risk, because they’ve reduced what they hold to well below previous levels that were considered safe.
To survive, they have to have enough on hand to conduct business for people making withdrawals. I’m not denying lending or investing, but people also take money out.
Fractional reserve banking has been a practice, yes. The Rothschilds invented it. You still need a certain amount in the bank to cover withdrawals. It’s still a problem if too many people try to take out their lifesavings, as it’s already been noted.