- After Russia invaded Ukraine Thursday, people in both countries started withdrawing cash from banks.
- It’s led to fears of bank runs, which triggered turmoil in the US during the Great Depression.
- Bank runs can lead to bankruptcy, unemployment, lending shortages, and closed businesses.
Many of the Ukrainians who haven’t already fled the country as Russia’s threat turned into invasion stood in long lines outside of banks and ATMs hoping to take out their funds, Reuters reported on Thursday.
Meanwhile in Russia, people are also queuing outside of ATMs trying to get US dollars as its citizens worry their own currency’s value will continue to tank, according to the Wall Street Journal. Banks in the capital city of Moscow are running out of money, according to MSNBC.
All of this has led to fears of bank runs, which is when people withdraw money en masse because they worry banks will cease to function. It has the potential to be a self-fulfilling prophecy, destabilizing banks to the point of bankruptcy. That’s what happened in the United States during the Great
, and it triggered mass unemployment and loan scarcities.
In fact, what took place in the US between 1929 and 1939 serves as a case study of what can happen when banks can’t keep up with withdrawals: for years to come, there could be less money to go around.
“Locations around the country that have more bank failures have larger declines in spending,” David Wheelock, the senior vice president and special policy advisor to the president at the
said during a workshop examining the Depression in 2013. Simply put, he said, “People lose money, they spend less.”Bank of St. Louis,
Ukraine and Russia have taken steps to avoid bank runs
Banks in Ukraine are attempting to quell the possibility of economic havoc by imposing limits on withdrawals.
The Donetsk republic in eastern Ukraine limited withdrawals this week to 10,000 rubles, $129 per day, from ATMs. The National Bank of Ukraine also employed a cash withdrawal limit of 100,000 Ukrainian hryvnia per day on Thursday, or about $3,339, also halting exchanges for Ukranians trying to obtain foreign currencies.
To avoid catastrophe in its own country, Russia’s Central Bank announced an emergency support package on Thursday as its stock markets plunged in response to its government’s military action.
That package includes closing the stock exchange and purchasing millions of rubles to increase the value of the currency. The Central Bank has not yet imposed restrictions on how much cash people can withdraw.
European Commission chief Ursula von der Leyen said that although Russia is currently withstanding the impact of its shrinking currency and impending sanctions, additional interventions could “weaken Russia’s economic base and its capacity to modernize.”
The Great Depression is a cautionary tale
After the stock market crash of October 1929, anxious Americans withdrew massive deposits of cash, which frequently forced banks to permanently close, according to History.
Because banks only physically carry a limited amount of cash at any given time, sudden bank runs like the ones that spiraled throughout the country in the 1930s forced banks to sell their assets to acquire the cash to give people when they requested it — leading to bankruptcy.
The impact of such bankruptcies varied throughout the US, according to the Federal Reserve Bank of St. Louis, but it often had ripple effects on the rest of the economy.
“Hundreds of banks failed. Lending declined. Business faltered and unemployment rose,” the Fed wrote. “The crises also generated deflation because they convinced bankers to accumulate reserves and the public to hoard cash.”
A decline in deposits meant that the banks had less money to lend out, which meant that people had less money to pay for goods and services and that the prices of those goods and services deflated. According to the Fed, that deflation further forced banks, businesses, and debtors into bankruptcy, reduced consumption, and ultimately increased unemployment.
“Think of the financial system that keeps the wheels of the economy spinning — bank failure is like throwing sand into the wheel.” Wheelock said. “Or even chopping off bits of the wheel altogether.”