Crypto Had Its Bank Runs Too

One possibility is that fractional reserve banking is deeply rooted in human nature. People have money, they would like to keep it somewhere safe, they would like it to grow, they would like to be able to get it back at any time. Other people need money, they are willing to pay to borrow it, but they want it for a long time — they want to be able to use it to buy a house or build a business; they don’t want their lender to be able to demand the money back at any time. The savers and the borrowers just want different things. Why anyone want to lock their money up for a long time? Why anyone want to borrow money for an uncertain time?

If you are an enterprising middleman, you can try to convince one side or the other to do something that doesn’t quite match their desires — “invest your money long-term, but if you need it back we can probably find a way to get it to you,” or “borrow short-term, but you can probably keep rolling your debt for a long time” — but it is easier and more appealing to just promise everyone exactly what they want. People who want to park their money give it to you and you promise to give it back whenever they want; people who want to borrow money borrow it from you and you tell them they can keep it for a long time; probably this all works out, but the mismatch is now your problem, not theirs. Of course it is also their problem, since if it doesn’t work out you are probably bankrupt. But you don’t them that it’s their problem. This is better marketing.