It's a Wonderful Life: Question about the Bank Run

Cafe Society
1

I’m watching It’s a Wonderful Life for my yearly viewing and trying to understand what was going on with the bank run.

So George is ready to go on his honeymoon and there is a run on his Building and Loan. Potter calls and says that he took control of the bank by guaranteeing it funds. The bank will close for a week. He tells George to tell the B&L shareholders that he will pay them 50 cents on the dollar per share (and thus taking control of the B&L. George tells him to pound sand. Potter tells him that if he closes his doors before 6pm they will never reopen.

The lobby is full of B&L shareholders demanding money that George doesn’t have. One of his customers tells the rest about Potter’s offer. George pleads with them to not sell out to Potter or else Potter will own everything in town. Then Mary offers the $2,000 they had to go on a honeymoon.

George convinces his customers to just take whatever money they needed to tide them over until the bank reopened (except for the one crotchety old bastard who demanded payment in full). George has two single dollars left and counts down the seconds until 6pm when Uncle Billy dramatically locks the doors and they celebrate because they made it. Questions:

  1. What does the bank have to do with anything? My understanding was that George’s customers had their money in the B&L.

  2. If they were worried that the B&L was going under, which they seemed to be, then why does having a week’s worth of cash ease their minds? For example, the one man said he had $300 in the B&L and accepted $20 to hold him over. Why wouldn’t he go and sell $280 to Potter to get at least some of it back? Doesn’t the reason he stormed the B&L remain even though he got $20? I mean, they know that George is in huge trouble, he is massively under liquidated and only got through the day by spending his honeymoon money. Where will tomorrow’s money come from?

  3. What was the significance of George “closing his doors”? Why wouldn’t the problem resolve itself, either good or bad, whether he stayed open or closed?

  4. And why 6pm? What was magic about 6pm instead of 3pm or 9pm?

  5. Why is the crisis over? Won’t shareholders be back tomorrow, see the doors closed and run to Potter to sell?

2

The crowd in the lobby are depositors. They are “shareholders” in a loose sense - the B&L is a co-op. They didn’t invest in B&L shares on the Bedford Falls stock exchange - they deposited money into savings accounts. Most of that money was then loaned out (“It’s in Bob’s house and Linda’s and Harvey’s house…” or whatever the exact line is.) Under ordinary circumstances, the B&L has enough liquidity to cover routine withdrawals. Like literally any banking institution, though, if there’s a run, and everyone demands their entire deposit back all at once, there’s not enough liquidity to cover it all. But, as long as everyone just sticks to their normal withdrawal patterns, the income coming in from loan payments will cover it.

There’s nothing “magic” about 6 pm other than that’s the B&L’s normal hours of business. At 6 pm, they close their doors, and in the hoary elder days of in person banking, after that no one can withdraw any money. I think the B&L was already scheduled to have a week long banking holiday (when George would be taking his honeymoon), so at that point it’s solvent for another week since there will be no withdrawals. And in a week, they’ll have another week’s worth of loan repayments to cover routine withdrawals.

3

  1. The B&L was owned by the depositors. just as credit unions currently are. Each deposit dollar was a share in the B&L. Potter was offering to buy the shares.

  2. It was a panic. They were calmed down by getting a little cash now and George’s promise of more next week. I’m guessing the B&L had some assets they could liquidate.

  3. The B&L closed for business at 6 p.m. That they could stay open the full day without running out of money showed they had the resources to weather the storm.

  4. Regular business hours.

5a) I believe ithe run was on a Friday, which means the B&L would be closed over the weekend anyway. b) They had some money coming in (people making their mortgage payments, etc. so they’d be able to convert some of it to cash and have enough for regular transactions when the doors reopened.

4

Thank you. I guess I’m just not explaining my question very well. I understand the concept of banking and a run on the bank and on shares in a B&L. Basically, depositors/shareholders become worried that the institution will fail and they all want all of their money right now. But no bank, no matter how successful, has all of that cash on hand because it’s not there…it’s in Bill house, and in Dave’s house, etc. They only have money for routine withdraws far less than their total assets.

But when George is talking about “the bank” he is talking about the bank that Potter just took control of and told him would be closed for a week, and after that fully back to normal because Potter used his own funds to handle the run on it, and was making the same pitch for the B&L. George is telling his customers to please, just take enough to hold you over until “the bank” reopens. But if his customers are doing their “banking” with the B&L, why do they care when/if the bank reopens?

But to Kent_Clark’s #2, I still don’t understand. Let’s update the sums and assume no FDIC as was the case at the time. I am worried that Chase bank is going to fail and I am going to lose $40,000 so me and everyone else in town panics and I demand my $40,000 now for the sole reason that I don’t believe any of that money will be there next week. If the manager of Chase (well, pick any other name and pretend that it is a hometown bank and the guy who owns it is a great guy and I really think he means what he says) offers me $500 to get me through a certain time, I’m still not seeing why I would be satisfied with that. I am worried that despite this honest guy’s best efforts that the bank is failing and I am going to lose my money. Why is getting through next week good enough? I am still going to lose my nest egg. If I was satisfied with his word, I wouldn’t be running on the bank to begin with.

Am I just overanalyzing the feel good story of the movie and how much they trusted George? Or is there a principle of banking that I am missing?

5

As I read the responses again, there is confusion either on my part or the posters who replied. The B&L and “the bank” are two separate entities. Potter had just taken control of “the bank.” It was “the bank” closing down for a week. People needed money until “the bank” reopened.

Potter was sitting on a ton of cash and “the bank” would have failed, but he snatched it up by using his resources to cover the run on “the bank.” He was betting/knew for sure that George did not have those same resources and he could use the same trick by buying out George’s shareholders at 50 cents on the dollar and take control of the B&L as well.

I just don’t understand the interplay between the bank and the B&L.

6

Its a long while since I’ve seen it, but I presume that the Bank and the B+L are the only two financial institutions in town. If you own both, then its all over, Red Rover - you have all the business and personal loans and mortgage and become a monopoly with all the power that goes with it.

7

Sorry - it’s been a while since I’ve seen the movie.

Potter announces an unscheduled bank holiday, closing his Bank for week. All banking in 1929 is done in person, so if the bank is closed, no one can access their money (a check drawn on an account at a closed bank isn’t worth much either - the recipient can’t cash it until the bank re-opens, and they risk the bank never re-opening). This causes a run on the B&L for two reasons.

  1. The implication is that a lot of Bedford Falls residents have accounts at both institutions. If they can’t access funds from their Bank account, they need to get funds from their B&L account. This is compounded, by implication, by the different services the two institutions offer. The Bank (probably) offers savings and checking accounts, and Bedford Falls residents usually use it for everyday cash access. The B&L (probably) specializes in long term savings instruments and mortgages - it just isn’t set up to handle the same kind of liquidity demands.

  2. The Bank closing shakes confidence in the B&L. If the Bank is so insecure it needs to close for a week, the B&L might be, too. If it closes, even for a week, the people of Bedford Falls won’t have any money during that week. Even if they don’t have an account at the Bank, they might want to get out of the B&L now.

George convinces everyone, except the one holdout, that the B&L is financially sound, explains the liquidity situation, and convinces everyone just to withdraw enough to cover their expenses until the Bank re-opens in a week, and they can once again access their accounts there, which, again, by implication, is where they usually go to access money for day to day expenses.

A key point here is the “It’s in Bob’s house and Jane’s house and…” moment. The people of Bedford Falls don’t understand banking. They don’t understand why their money, all of their money, isn’t immediately available for withdrawal. George explains it to them, reassures them that their assets are secure in the B&L, that the B&L is financially sound, as long as they are willing to withdraw only a relatively small amount at a time.

The run on the B&L has two components:

  1. The depositors actually need one week’s worth of ready cash right now because the Bank is closed for a week. The B&L doesn’t normally handle this sort of liquidity demand, everyone needing a week’s worth of cash, on the same day and at the exact same time. This part of the run is entirely reasonable, as George immediately recognizes - they really do need that amount of money, and he’s able to, barely, cover it, so that part’s good.

  2. The depositors are also initially afraid that the B&L is insecure, so they’ll lose everything. This part of the run is irrational panic, and George manages to calm the initial panic by being Jimmy Stewart and offering explanation and reassurance.

8

Remember, runs on a bank were hardly unusual before the FDIC was established. If there was a belief that a bank was failing, people would rush to withdraw their money in sheer panic that wasn’t always logical. George was working to quell the panic so people would calm down.

It was psychological, not financial. Once the run had stopped, people would get over their panic.

Note that Capra used a bank run in the climax of his earlier American Madness. It’s a Wonderful Life is in many ways a remake of that with a supernatural element grafted on.

9

This is the key point. The underlying problem with a bank run is people panicking and behaving irrationally. Potter is able to weather the irrationality by throwing lots of cash at it-- That’s his go-to method for solving any problem, and he probably thinks that it’s the only way to solve any problem. Bailey deals with the problem by going to the source, and stopping the panic itself. And once people aren’t panicking any more, the real problem is much smaller, small enough that it can be addressed with honeymoon money, instead of Potter money.

10

Yeah. If the bank had to close early, all confidence would be lost. Getting some people to go away happy with less than their total accounts helps confidence - it shows that the B&L is operating normally, and gives people time to think about other risks (money in the B&L might be at risk if the B&L goes out of business, but money at home might get stolen or destroyed).

11

To add on, I think the thing about saying they can’t close until six o’clock is just saying that the B&L can’t be seen as closing early, as that would confirm the idea that there was a huge financial problem. It’s not that closing would directly lead to them never opening again, but that people would be shaken enough by the early closure that enough people would then take up Potter’s offer to give them half of their money back in exchange for their shares, and then he’d own the B&L, and it would cease to exist. George would never reopen.

Granted, this might be overstating a bit, as maybe he could have satisfied enough people but ran out of money towards the end, but it was Potter saying it. He was also trying to stoke the panic, specifically to intimidate the George and the B&L into slipping up.

BTW, this is just something that I understood after reading other posts, so I thank the OP for asking and the others for posting. I’ve also always wondered exactly how that whole thing worked.

(And apologies if the same idea as mine occurred to everyone else, and I come off as spelling out the obvious.)

12

I don’t think anyone mentioned this but remember that some of the money deposited at the bank & loan was re-deposited at the bank owned by Potter. (Remember the scene when Uncle Billy lost $9000? That was B&L money he was taking to the bank to deposit there.) So once the bank is open, the B&L can withdraw more money to supply the folks who want to withdraw theirs from the B&L.

13

Also, don’t foget the B&L owns the development and the homes there that have mortgages. The B&L has assets, just not liquidity.

14

As demonstrated by the Simpsons:

15

There is more than one thing going on in that scene. But bank runs were mostly caused by panic as Chronos points out, Also, there is no better way to defer panic than to be in a position to have lots of liquid cash to reassure small investors. (Of course from a banking perspective, having cash sitting around doing no growth is a losing proposition – even earning interest is break even because YOU have to pay interest too [and if inflation is an issue stagnate money is a genuine loss].)

The other important thing is that everyone (or very nearly everyone) who owns shares of the building and loan has a mortgage through the Building and Loan. There may be a few people still saving a down payment but the reason you are involved with the building and loan is to be (or become) a homeowner. Those people wanting all their money and to close their accounts better go home and read their mortgages. There is a very good chance that early payment could be demanded if you close your account or your shares drop below a certain dollar amount. But George Bailey would NEVER do that, that is why Bailey Park is so successful.

The reason people invest in the B&L is stated explicitly in the scene where George’s father dies. The Bailey’s are kind hearted souls who will not foreclose on someone who has just hit a bit of bad luck. The bank would in a minute because they are cold, hard businessmen who do not mind making a fortune at the expense of others. Potter specifically says that Ernie the cab driver and inspiration for future Muppet character (absolutely true!!), had his loan rejected by the bank but the B&L financed his mortgage.

The reason the B&L was in trouble in the first place was because the Bank called all their loans. The B&L was getting by on float and all the money they ever made they reinvested in the community by providing them modern new houses at a fraction of their cost. George’s dad and idiot Uncle Billy provided a tangible benefit to society and George just followed the same business plan as it would never occur to him to not care for others as he cared for his own. When the bank called their loans because THEY had a run, George and Uncle Billy were at the wedding and low level clerk Eustace gave all the cash to the bank and had nothing liquid when those same people showed up at the B&L.

That was the first time George saved the town from Potter, he convinced almost everyone to trust him once again because his family had been caring for them for generations. When he turned down Potter’s job offer (at a sacrifice to himself and his family) to keep Potter from ‘being the only game in town’ because he knows how Potter will rape the towns people for his own gain, he had saved the town again.

Okay, I have run on too long but the point is that with everything else going on, George owned the paper on all those people’s homes. Part of why they cooperated with him is likely due to the very real possibility of being evicted if they screwed him over – and later defaulted at all. (Which George would never do.)

The thing about closing before “close of business” might have been something regulated by Bank Examiners. I do not know that specifically, but because there was no regulation between investment banks and retail banks in those days, there were rules every financial institution had to abide by. I believe closing your doors during regular business hours was a violation but I can’t prove it.

Here is a brief fictional account of how banking has evolved. I believe all of the facts and details are correct but cannot guarantee.

16

Shortly after posting in this thread, I was doing some chores and had the news on in the background. I was listening to Joe Biden give a speech in Georgia in support of the Senatorial candidates. It occurred to me that the reason I really admire Joe Biden is because he is as close to a real life George Bailey as anyone I have ever met or even heard of.

In my book, Joe Biden = George Bailey. From his family oriented approach to life, to his friendly attitude to all from lifelong friends to strangers, to his famous temper and sincere Catholic faith, Joe is the every-man hero this time calls for!

17

The Newsroom is incorrect. A building and loan is not a bank. It is an investment that sells shares and loans money to people to buy houses. George Bailey was not a banker but an investment manager.

18

We really shouldn’t examine this too closely, or else we’ll realize

it wasn’t George who saved the B&L at all.

It was Mary

While George was busy lecturing a mob about economics, Mary took action.

19

[Moderating]

Let’s leave politics, even positive politics, out of this. Especially current politics.

20

We are disagreeing about two different fictional works now, and there is a limit to how involved I want to become in such a discussion, but . . . . .
In the Capra Universe of the movie (and I presume in the real world) the Bailey Building and Loan was subject to a bank examiner who wanted to spend Christmas Eve. with his family in Elmira (?) if we could hurry this along… Being subject to a bank examiner and facing an arrest warrant for mismanaging a financial institution is game, set, and match. It was a bank. Period.

Now what George Bailey was above all else was a General Contractor. When his father asked him to stay on at the Building an Loan He answered that he wanted to go build big wonderful projects – buildings a thousand stories tall (said to Mary on the way home from the dance), bridges and dams – historical structures and saving three cents on a length of pipe would drive him crazy.

But in order to build these homes and give people “their own hearth to work, and live, and die” around required financing so his father established the B&L which is a retail banking institution just as modern Savings and Loans are – and if you don’t believe that I could site Charles Keating (whom I met one time when celebrating my first wedding anniversary at the venue where we were wed [that is a sentence with plenty of “w’s” to type!]). Ask the people who lost everything in the Lincoln Savings & Loan scandal if those institutions are banks?!?

In fact, the Bailey Building & Loan is exactly the opposite of a brokerage house or investment manager. They were primarily concerned with financing home mortgages for one specific builder, period. They were not managing portfolios, they were helping their customers arrange financing in the most affordable (and locally sourced) method imaginable. I am sure they also used government securities similar to a bond ladder that had short term government bonds maturing every month or bi-monthly or quarterly. I do not believe T-Bills or the like were available then, and long term savings bonds were no good to them at all (except during the war when George was not allowed to serve in the military because of his ear and sold war bonds which were long term and had nothing to do with the Building and Loan).

In any case, within the movie, the B&L was a financial institution subject to scrutiny by a bank examiner. If that was the case for all building and loan operations in the pre-war economy I am unaware, is this your field? Do you have some expertise in historical banking, or are you stating an opinion if you don’t mind me asking?

And unless you have some authoritative citation, I am not as likely to dismiss Aaron Sorkin as I am to dismiss your claims as I am familiar with both from previous experience.