Bank Run

The current banking systems hold fractional reserves against deposits. They tend to shrink when many depositors withdraw their deposits as currency. A bank run or the sudden withdrawal of deposits as currency may cause the bank to run out of reserves which can ultimately lead to its closure.

Governments eventually learned to use the central banking system or some similar system to prevent bank runs. The notes issued by a central bank together with its deposits are called the monetary base. The central bank can either increase or decrease the monetary base by making loans or by buying and selling government securities.