Pranav wrote:Under normal circumstances, the probability of this happening is negligibly small.
Its not negligibly small, its routine. Its the reason all fiat currencies inevitably collapse. The more the leverage grows, the more likely it is to collapse due to a proportionatly small withdrawl which cannot be met.
Leverage is essentially gambling with someone else's savings often times without his permission. That is just wrong.
But just for the sake of argument, if we try to imagine a non-leveraged fiat money system that's half way honest (i.e. mimics gold), this should ideally be the scenario :
What should be happening in a bank run under the fiat system is the bank should increase the dividend paid to savers for NOT participating in the bank run. Not only will that provide strong incentive not to participate in the run, it will also attract other savers willing to take the risk (of losing their capital) for the reward. Instead what happens is savers get ripped off with money being counterfeited at their expense to pay off those making withdrawls.
A bank "deposit" is a misnomer. It should be called a "loan to a bank" because that is what most people are doing when they deposit their money in a bank. A loan implies risk of not getting your money back. This should be CLEARLY spelt out to any person making a deposit. There should be no FDIC which passes on the risks to other people who never signed up for the risk to begin with.
Its really for the free market to work out what terms should exist between lender (saver) and borrower (bank). For example, a bank might state that a minimum 3 months waiting period is required before your withdrawl request is processed. You'd agree to this before you ever made a deposit of course.
The evil of central banking, inflating and intrinsically worthless money is to penalise a person who does not want to participate in the useless middleman industry game of paper shuffling. Inflation destroys the fruits of his labor and tries to force the person to loan money to a fee-collecting bank and assume needless risk where the reward at best is keeping the value of what he has earned. All kinds of bizaare theories are used to explain why destroying a person's savings is good for him.