Thursday, September 4, 2014

Why You Will Never Be Able to Get Cash Out of a Your Bank During a Major Bank Run

By Robert Wenzel

This is what I wrote two years ago here at EPJ:
Why are home safes important?

Many years ago, there was a bank that failed in NYC's Chinatown. The next morning, the papers showed lines of people, some with lounge chairs waiting in line to pull out their money. (Something similar occurred more recently during the housing bubble)

One thing I couldn't understand at the time of the Chinese bank failure was why the lines took so long to move. If people are bringing lounge chairs, it's a long wait. So when the Chinese bank failed, I contacted the manager to find out why. She was a talkative one and explained to me that the FDIC came in and said there wasn't enough physical cash on hand and that more needed to be shipped to the bank, so the bank needed to slowdown withdrawals .

She then said that the FDIC instructed her and her employees to go very slow when working with customers. That they should follow every regulation included in depositor documents and make sure all the documents required to withdraw money were filled out and filled out completely and correctly, before paying any money out. Thus, the lines.

I have no idea if there actually was a shortage of cash, or what the real reason was behind the FDIC instructing bank employees to go slowly, however, if the FDIC is going to pull this off with a small bank in Chinatown, can you imagine the nightmares trying to pull your money out if there ever is a more serious run?

Remember, I wrote that two years ago, and wrote an earlier version six years ago.

The nephew of  Marriner S. Eccles just spilled the beans on what causes the lines. It's what I suspected all along.

Eccles  was appointed by President Roosevelt as the Chairman of the Federal Reserve and was reappointed chair in 1936, 1940, and 1944 and served until 1948. In 1948, President Harry Truman did not reappoint Eccles to the position of chairman of the Fed, however, he remained on the board until 1951.

WSJ reports that Eccles’s nephew, Spencer Eccles, "shared some little-known stories and family lore of his uncle" over lunch this week at the Center for Financial Stability, a New York-based think tank.

His nephew said that when the Great Depression struck, Eccles employed "a novel strategy" to prevent bank runs, according to family lore:
1. Have the tellers review people’s signatures extremely slowly, before paying out deposits.

2. Pay out deposits extremely slowly, and with very small bills, to slow the process of cash leaving the bank.

3. Bring cash in through the lobby of the bank in flashy carts, rather than through the back, so the bank would appear flush.

The strategy worked in stopping runs, apparently.
Read again what Eccles's nephew said and read again what I reported on years ago, Clearly, bank regulators continue to employ the same tactics that were first introduced by the overbearing, obnoxious Eccles. Even Keynes hated the man (SEE: What Keynes Really Thought About Fed Chairman Marriner Eccles).

If there ever is a major bank panic, this is the standard bank operating procedure that regulators will employ.

Indeed, in recent minor bank runs, this appears to be exactly the procedure that was used by regulators. Here are pics of the lines that occurred in California at IndyMac bank during the housing crisis peak in 2008.

Do yourself a favor, get yourself a quality safe and keep some of your money outside the banking system.


  1. "Quality Safe" is the operative word. Most people don't understand what that is, nor are they willing to spend the money on a TL rated safe, let alone have it bolted to the cement foundation.

    1. Bolted to the foundation? Try IN the foundation. It takes some time, sweat and a jackhammer, but an in ground safe is worth it.

  2. In Milton Friedman's Free To Choose there's a "George Eccles" explaining about how he managed a bank run.

    @ 8:30