Bank Runs During Inflation

"How come the bad guys always have the good cars?"
--Ray Hughes (Running Scared)

Bank runs are often associated with deflation. Using the Depressionary Bailey Building & Loan vision, people rush to withdraw bank deposits when confidence is lost in bank solvency. Solvency is typically questioned when it is suspected that bank investments and loans have gone bad (read: decline in price), thereby limiting the ability to make depositors whole. The greater the price decline, the smaller the price decline necessary to wipe out bank equity.

However, banks runs can also occur during inflationary periods. Here, the primary concern is not bank solvency. Rather, depositors are worried about the value of their cash on deposit. If prices rise steeply, people will begin to withdraw their deposits and convert their paper currency into tangible goods and hard assets.

Initially I was thinking that people withdrawing cash in size from banks during inflation would reinforce a vicious inflation cycle. But would it? As folks withdraw cash, banks would seemingly have to sell assets to maintain their reserve ratios. This would put downward pressure on prices--at least the price of financial assets.

The issue seems to be the fractional reserve characteristic of modern financial systems. Its design is inflationary. Depositors pulling money from banks, whether it be for inflationary or deflationary concerns, ultimately seems deflationary.