Banks can open and fail, but they can not close.

I had this neat thought today.

Like everything else in the world, banks are expected to live forever. Because really, the earth is going to exist forever, and so are humans in general and if individual people die, well they can hand off their interest in assets and whatnot to the next generation, but the people will always be there.

The sun is never going to burn out, we’ll never overpopulate the planet, all these things will keep going on forever.

But banks are interesting. Banks create money.

I’ve never started a bank or any other business, but I expect it works something like this:

A group of people take out a loan or hit up some venture capitalists for money to open a retail outlet and hire some people and get carpeting, and have some extra cash left over to lend out as starting money.

People off the street open savings accounts where they get 1% on their deposits, and the bank lends out some number times the amount of deposits and charges 5-10% for use of their money.

Except of course they don’t have that money, the created it.

So as long as the bank does okay, and there’s no runs on the bank everything works fine. This has been going on for hundreds of years at thousands of banks.

But what if you wanted to close your bank. You can’t. In order to close your bank, you’d have to collect all the money you loaned out and give back all the money that was deposited.

Unless you have enough profit to cover giving back all the money in the savings accounts, or plan years ahead so that you stop giving out new loans and wait for them all to come due, you can’t close your doors.

You can, however fail. The FDIC makes it easy, just run your business badly, you go into bankruptcy and the FDIC bails out all your depositors and worries (or not) about the outstanding loans due.

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