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What does it mean to "make a run on the dollar?"?
I'm reading a book where some corporate heavy-weight types are trying to take over the remnants of a shattered America, and in it, one of the old-guard government cabinet secretaries accuses the corp of "making a run on the dollar," and it's said in a way that made me think this was supposed to be a huge deal, but I didn't really understand the econ jargon.
Then I also read recently in the news that some people fear "a run on Greek banks," due to their economic crisis.
Can someone explain to me what it means to "make a run" on currency or banks? And please explain it as you would to a high school freshman who has never taken an economics class. I understand math and politics, but somehow I made it through college and high school without ever taking an economics course. I understand the BASIC concept of supply and demand, but that's about it.
And thanks in advance!
I heard this in a movie, and it sounds like what Bored Gremlin just described:
Posit: People think a bank might be financially shaky
Reaction: People begin to withdraw their money
Result: Pretty soon it IS financially shaky
Conclusion: You can make banks fail
Bored Gremlin: But if a consortium of corporations were going to make a run on the dollar, does that mean they are SELLING all the U.S. dollars they have and are BUYING foreign currency? Or the other way around?
1 Answer
- Anonymous9 years agoFavorite Answer
run on the dollar means exchanging large amounts of dollars for other currencies. The supply of dollars on foreign exchange market exceeds demand, which causes the value of the dollar to decrease. Low value of dollar makes imports (such as oil) more expensive to US buyers.
On the other side, it makes US-made goods cheaper in comparison, which helps domestic producers. But this "import substitution" effect takes months if not years, while expensive oil hits the economy within days.
Bank run means many depositors taking their money out of the bank. It can cause the bank to run out of money, i.e. become bankrupt. Of course, depositors start taking money out when they believe the bank might become bankrupt, so it is a bit of a self-fulfilling prophecy.
When you take money to the bank, they do not keep it there, but loan most of it out to people who need credit. Government requires them to keep cash equal to only 10-20% of deposits. With most loans (credit card, mortgages), bank cannot demand borrower to repay all of it right now. But depositors can demand that bank returns all of their deposit immediately. So everything is fine only as long as most depositors keep their money in the bank.