The Rush to Buy Toilet Paper Has All the Hallmarks of a Bank Run

Ellen Corby and James Stewart in “It’s a Wonderful Life”

For those struggling to unglue themselves from the constant coverage of the novel coronavirus, or for anyone who has visited a grocery store lately, it would be difficult not to notice that a few key staples — including toilet paper — seem to be in short supply.

A recent Bloomberg article by Millie Munshi, Megan Durisin, and Corinne Gretler notes that — while there is plenty of food — the logistics systems used to deliver food throughout the country (and around the world) and the ability to get those products to shelves is strained under a sudden surge of customers stocking up on food and supplies.

It turns out that the problem isn’t supply — there is plenty of toilet paper in the world. The issue is the sudden surge in demand driven by the fear that, with everyone else rushing to buy toilet paper, there won’t be enough for all of us. This, in turn, drives people to buy more than they normally would out of concern for scarcity. In other words, the shortage of available supply isn’t driven by need, it’s driven by fear that others will get to the shelves first — a sort of self-fulfilling fear. President Franklin D. Roosevelt may have summed it up best when, in his first inaugural address, he said the “only thing we have to fear is fear itself.” Getting consumers to believe that there will be sufficient supply — even if we can’t be certain that there will be — should be sufficient to restore calm, which in turn would restore sufficient supply on store shelves.

This same underlying dynamic is what drives bank runs, perhaps visualized best by Frank Capra in “It’s a Wonderful Life.” Under the Fed’s Reserve requirements, banks are required to hold 10% of checking deposits in-branch, informed by probabalistic models that suggest that such cash reserves are sufficient to meet the needs of customers withdrawing funds on any given day. However, if customers become concerned that their neighbors will rush to the bank to withdraw funds, the desire to withdraw one’s own funds becomes more acute. Fear and panic become self-fulfilling.

The FDIC was instituted in the wake of the Great Depression to help address this concern. By backstopping deposits by the full faith and credit of the U.S. Government, depositors no longer needed to worry about whether there would be enough cash in the bank, as even in the unlikely event that a bank were to fail, customers would be fully repaid by the FDIC. The FDIC thus remains a crucial component driving the safety and stability of our banking sector.

There is a notable exception to the protections afforded by the FDIC: it is limited, currently capped at $250,000 per depositor, per account type, per bank charter. This means that if you hold accounts at a bank (checking, savings, CDs) that, in aggregate, exceed $250,000, you may not be fully protected and could suffer loss of principal in the event of bank failure.

There’s an easy way to protect yourself: spread cash across multiple account types (individual, joint) and multiple banks. Services like were designed to help you do just this, automatically monitoring your accounts and helping keep funds below the FDIC limit at each bank. With a market-leading rate of up to 1.71% APY, Max can also help you earn higher yields on your cash, automatically.

When fear grips markets — whether the market is for toilet paper or bank deposits — the perceived risk of scarcity can lead to a vicious cycle that creates the scarcity that is feared. During these challenging times, the better we’re able to promote rationality over fear, the better we’ll all manage through as a society.