Learning economics on Christmas vacation: What’s a bank run?

December 25, 2015

In education we miss out on most information technological innovation. Textbooks were notoriously dull when books were the chief medium found in schools. Schools took 60 years to make progress in showing film. Television, which started out commercially as a great education tool — what was arguably the best orchestra in the U.S. used to play every Sunday on NBC way back when. Then video, then computers, then the internet and personal data devices penetrated modern life, but not yet schools.

So I am always pleased to hear after Christmas break the questions high school economics and history students came back to class with, especially after “having to watch” that hoary and venerable old movie, “It’s a Wonderful Life.” Frank Capra’s film cuts through the fog on some important history and economics issues.

Not that you find it used much in U.S. schools. What follows is a blog post I did for my U.S. history blog some years back, to answer some of those student questions.

New York -- a classic

George Bailey (played by actor Jimmy Stewart) works to deal with a run on the Bailey Savings & Loan Association in Bedford Falls, New York — a classic “run on the bank” — in the 1946 movie, “It’s a Wonderful Life,” by Frank Capra. Image from Warner Bros., via Our Values blog.

“What’s a bank run?”

Whenever we get to the Great Depression, somebody asks about bank runs. What is a “run on the bank?” Why would people suddenly rush to get their cash out of the bank? And why can’t the bank just pay it out?

Frank Capra showed and explained it best, probably, in his 1946 film, “It’s a Wonderful Life.” But first, my weak attempt:

Banks don’t keep all the money deposited there in the vault. Banks make money by loaning out to others the money put on deposit. The people who get the loans must pay interest on the loan, and that allows the bank to pay interest on the deposits people put there (precious little today — my first account paid 5.25% on my first $5.00 deposit; today you’re lucky to get 1%, and you have to have a sizable minimum, generally. But I digress . . .).

So, if you and a hundred other people each deposit $100 in the bank, the bank turns around and loans out as much as they can. Of the $10,000 deposited, say, they loan out $9,000 to the guy who lives next door to you, so he can put an addition on his house. He’ll pay it back, with interest.

But, that loan means that there is only $1,000 left in the vault. Generally a 10% “reserve” will cover all the cash transactions a bank makes in a day. That is, if they have 10% of their total assets sitting in the vault, making no new money for them, it is highly unlikely that in a normal day there will be a demand for more than about $1,000 of that $10,000 on deposit. (The actual reserve amounts vary; last time I looked, several months ago, the Federal Reserve Board required member banks to hold about 7% of their total assets in cash on hand.)

You can begin to see why a bank run is a problem. If, in one day, every depositor showed up and demanded their deposit, the bank couldn’t pay them all. This is a death sentence in the banking world, for a bank to be unable to meet obligations, and generally that would mean that the bank would be out of business. But of course, that’s rather unfair to the bank — they have their money (your money, really) loaned out to dozens of other people. When those loans come in, the bank will have the cash to pay.

A run on the bank puts a kink in those careful, conservative calculations of how much cash a bank needs to have on hand to cover all the transactions of a day.

Banks fear a run. That’s what killed banks in 1932 and 1933, in the last year of the Hoover administration. Even a good bank could be doomed by an unjustified run — no bank could repay all of its depositors, in cash, on any one day.

Roosevelt’s bank holiday, just a week after his inauguration, stopped the runs for that week. The Federal Deposit Insurance Corporation (FDIC) insured deposits, so that even were there a run on a bank, a depositor could get his or her money back. Those measures essentially stopped runs on banks for decades.

Frank Capra’s 1946 movie, “It’s a Wonderful Life,” tells the story of a man who manages a small town savings and loan association, which is similar to a bank in that it accepts deposits and loans money, but different from a bank in that it is chartered for the benefit of its depositors, or members, and not for a bank corporation. In fact, the antagonist in the film is the town banker, Potter, who does what he can to bring the savings and loan to ruin.

In one memorable scene, a rumor that the savings and loan is about to fail prompts dozens of the members to make a run — indeed, there is also a run on the bank at the same time. Jimmy Stewart explains to the members why he can’t pay everybody . . . but he also has an infusion of $2,000 cash he plans to cash for his honeymoon. This is what a bank run looks like, with a smart banker (savings and loan manager in this case) who can keep his organization going:

This film clip is undoubtedly copyrighted by the current owners of the film’s intellectual property. I wish they would make it available for classroom use without heavy copyright fees, in the interest of the public.

It’s another case of a fictional film portraying history better than any history book, and economics, too. Licensing the film for classroom use costs more than teachers can pay — plus, in the dog-eat-teachers world of the War on Education, few administrators stand the use of fiction in history and economics classes. That’s before a teacher even gets to the issue of whether there is technical support to show the film.


GOP “no-budget” hoax

January 28, 2013

If you repeat some hoary old falsehood often enough, people will begin to assume it’s got some accuracy to it, right?

Paul Ryan and Eric Cantor are at it again, complaining that the Senate hasn’t passed a budget.

But that’s false.  In fact, no only did the Senate pass a budget, but so did the House — and then (perhaps stupidly), they made it a law instead of the budget resolution the Congressional Budgeting process calls for.

Then-Senate Budget Committee Chairman Kent Conrad, D-North Dakota, explained last April how this worked:

We’ve got a budget, by law — and it’s a disaster.

We don’t need a budget resolution nearly so badly as we need some Congressional leadership who understand supply and demand, and who are committed to good government and not the destruction of America (even if unintentional).

Oliphant cartoon on GOP leading nation over fiscal cliff

Cartoon by Pulitzer Prize winner Pat Oliphant, syndicated by Go Comics

More:

Text of Sen. Conrad’s remarks, below the fold.

Read the rest of this entry »


Donate to save Haitians, VISA, MasterCard and American Express get rich?

January 16, 2010

E-mail from Daniel Mintz at Move-On.org:

As the tragedy in Haiti unfolds, Americans are generously donating millions of dollars to aid organizations.

But when Americans donate to charity with their credit cards, the credit card companies get rich. In some cases they keep 3% of the donation as a “transaction fee,” even though that’s far more than it costs them to process the donation.

It’s outrageous and wrong—and it needs to stop.

Can you sign this petition to the CEOs of the major credit card companies demanding that they waive their processing fees for all charitable donations? Clicking here will add your name:

http://pol.moveon.org/nofees/o.pl?id=18607-5763840-FH68Wgx&t=3

The petition says: “Credit card companies shouldn’t be getting rich off of Americans’ generosity. They should waive all fees on charitable contributions from today on.”

The credit card companies are trying to get ahead of this story, announcing they will temporarily waive the fees they charge on some Haiti-related charitable contributions for the next 6 weeks. But that’s nowhere near enough. Many emergency donations to Haiti will still get hit with hefty bank fees. (To give a sense of how limited the exemption is, Doctors Without Borders isn’t on any of the publicly available lists of charities that won’t be charged fees.)2

All American credit card companies should announce that they will waive ALL fees on charitable contributions, starting today, and going forward for good. This isn’t about helping political organizations like MoveOn, just helping true charitable organizations.

It’s the right thing to do, and honestly, it’s the least they could do after the role they played in crashing the entire global economy last year.
But they won’t do it unless they know how angry Americans are that they’re profiting off of this terrible tragedy. Click here to sign the petition, which we’ll deliver to the heads of the major credit card companies:
Thanks for all you do.

–Daniel, Kat, Peter, Lenore, and the rest of the team

Sources:

1. “As Wallets Open For Haiti, Credit Card Companies Take A Big Cut,” The Huffington Post, January 14, 2010
http://www.moveon.org/r?r=86028&id=18607-5763840-FH68Wgx&t=6

2. “Some Card Fees Waived for Haiti Aid,” The New York Times, January 14, 2010
http://www.moveon.org/r?r=86030&id=18607-5763840-FH68Wgx&t=7

Want to support our work?  We’re entirely funded by our 5 million members—no corporate contributions, no big checks from CEOs. And our tiny staff ensures that small contributions go a long way. Chip in here.


PAID FOR BY MOVEON.ORG POLITICAL ACTION, http://pol.moveon.org/. Not authorized by any candidate or candidate’s committee


Quote of the moment: Mark Twain, on speculating in stocks

October 6, 2008

Mark Twain in 1907 - A.F. Bradley, New York, copyright, Mark Twain, three-quarter length portrait, seated, facing slightly right, with cigar in hand 1907. Prints and Photographs Division, Library of Congress

Mark Twain in 1907 - A.F. Bradley, New York, copyright, Mark Twain, three-quarter length portrait, seated, facing slightly right, with cigar in hand 1907. Prints and Photographs Division, Library of Congress

October.  This is one of the peculiarly dangerous months to speculate in stocks in.  The others are July, January, September, April, November, May, March, June, December, August, and February.


“Isn’t that how the last depression started?”

September 25, 2008

Econ, government teachers:  Are you ready to explain this one?

China banks told to halt lending to U.S. banks

And then this one:

China denies shunning foreign banks

“Fasten your seatbelts; it’s going to be a bumpy ride.”


Dallas Fed sessions for teachers June 30 and July 1

June 11, 2008

Federal Reserve Branch banks take seriously the Fed’s pledge to education Americans, and to support educators in understanding economics and the work of the Federal Reserve Banking System.

The educator support team at the Dallas Fed recently secured approval to provide continuing education credits for a two-day session on globalization planned for San Antonio, on June 30 and July 1. These sessions are easy, generally loaded with details, and tailored for educations. Plus they are usually well catered.

$35.00 gets all materials, two lunches, one continental breakfast, and 12 hours of credit.

All details from the Fed’s press release, below the fold.

Read the rest of this entry »


China hammered by “globalization” – why students should study

May 2, 2008

Economics, history and geography, and “vocational” teachers take note:  David Brooks’ column, “The Cognitive Age,” in the New York Times today should be a warmup in your classes next week.  See why in this excerpt:

The chief force reshaping manufacturing is technological change (hastened by competition with other companies in Canada, Germany or down the street). Thanks to innovation, manufacturing productivity has doubled over two decades. Employers now require fewer but more highly skilled workers. Technological change affects China just as it does the America. William Overholt of the RAND Corporation has noted that between 1994 and 2004 the Chinese shed 25 million manufacturing jobs, 10 times more than the U.S.

The central process driving this is not globalization. It’s the skills revolution. We’re moving into a more demanding cognitive age. In order to thrive, people are compelled to become better at absorbing, processing and combining information. This is happening in localized and globalized sectors, and it would be happening even if you tore up every free trade deal ever inked.

The globalization paradigm emphasizes the fact that information can now travel 15,000 miles in an instant. But the most important part of information’s journey is the last few inches — the space between a person’s eyes or ears and the various regions of the brain. Does the individual have the capacity to understand the information? Does he or she have the training to exploit it? Are there cultural assumptions that distort the way it is perceived?


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