Electronic money are very different from paper money!
Today’s monetary system is a fractional banking FIAT money system. FIAT money basically means the money is backed with nothing, but faith in the government and the central bank. Fractional reserve banking basically mean the banking system can increase the initial reserve money supply by about 10 times (well based on the reserve requirements in each country, credit expansion), this is not my fantasy, but is described in several well known books on macro economy. Well that is in theory, the banks have often found ways around this to increase the money supply much more than the restrictions set by the reserve requirements would initially allow. The high-powered fractional banking was one of the main causes of the massive bubble that now is bursting. Supply and demand to set the price of money does not work well in a fractional banking system. But that is another story (with many opinions), now back to electronic money, paper money and bank-runs.
A bank run is when people loose faith in the banking system or in a bank or in series of banks and run to the bank to take out their money. But with more than 90% (such a ratio could change quickly) of all money only consist as numbers in computers there is several types of bank runs:
Bank-run type-1 This is the ‘good old fashion’ bank run where people line up outside the banks to take their money out in cash, that is in paper currency. In a massive bank run people do not trust the banking system and they put their paper-money in their safety deposit box or hide them under the mattress and keep them there until the turbulence is over. There has been some hording of cash in this financial crisis, but I would think minimal compared to the total amount of fractional reserve money.
Bank-run type-2 During also this financial crisis there have been plenty of bank runs where people have lost their trust in a particular bank or financial institution. Almost every bank run in this financial crisis has been electronic bank runs. That is people have simply electronically transferred their money from the financial institution they are loosing faith in and into another institution they assumed where more solid. The fastest way to do an electronic bank run is basically a domestic wire. This only takes hours in many countries. Most people with a computer do not line up in front of the bank they are afraid will fail; they simply wire their money out to another institution. Of course then there are people that do not have computers, or it could be the internet cite of the bank had so high traffic when everyone wants to wire their money out that it simply did not work. These are the people lining up outside the bank. Many of them tell the teller to electronically transfer their money to another bank, many take their money out in paper currency. Next they walk over to another bank and deposit their money. All these goes under what I will call a bank-run type-2, as the money simply goes from one bank to another.
In a high-powered fractional banking system in a bank-run type-1 for every dollar taken out of the bank this drain the reserve dollars by one dollar, dollar by dollar, pound by pound. And remember each reserve dollar support a large number of high-powered dollars (credit, credit bubbles). So if there was a massive bank-run type-1 on almost every bank then the banking system would more or less collapse, well there are ways for the banking system to try keep going. On the other hand a bank-run type-2 (electronic) bank-run do not drain reserve money from the banking system as a whole, yes it can be catastrophic for the financial institution affected as they are loosing deposits supporting the bank balance, but the reserve dollar is just moving from one bank to another.
Did you wonder why the central banks bailed out so many banks and why the FDIC insurance was increased from $100 thousand to $500 thousand. Yes it was to help insure the deposit of your savings, but it was probably just as much as to “eliminate” the possibility of a bank-run type-1 and a total melt down of the financial sector and the world economy. A good old fashion bank run is now quite unlikely. Most people would prefer to have their money in a government insured savings or checking account rather than under their mattress.
But then there is potentially also a bank run type-X building up, do not ask, I will not tell you more, I told you too much already.
