Hoarding Cash

[BearBones]

I am going to put my tinfoil hat on and say that if you are truly worried about the demise of paper cash, holding paper cash makes no sense.

I, for one, am not really as concerned about the demise of cash. More wondering what happens if their is a shortage of it when/if lots of people come to convert their digital money into paper because it is more likely to retain value. This would occur in a deflationary environment. Demise of cash (currency) altogether would seem to be more probable in a hyper inflationary environment.

[WildAboutHarry]

[quote=BearBones]I, for one, am not really as concerned about the demise of cash. More wondering what happens if their is a shortage of it when/if lots of people come to convert their digital money into paper because it is more likely to retain value. This would occur in a deflationary environment. Demise of cash (currency) altogether would seem to be more probable in a hyper inflationary environment.[/quote]

During the Great Depression scrip was issued by a variety of entities to substitute for cash shortages (bank holiday, general lack of cash, hoarding of cash, etc.).  Atticus Finch was paid with hickory nuts in To Kill A Mockingbird.

I think the "modern" response to a shortage of cash will be EBT-style cards as a cash replacement.  The technology and infrastructure are already in place (hand reaching for my tinfoil hat).

And aren't we almost already there?  What fraction of transactions actually occur in physical cash?  I usually carry around a couple hundred dollars and try to pay cash for most small purchases.  I cannot remember the last time someone in line ahead of me actually paid in cash.  And someone writing a check has become so noteworthy that I do remember the last time (yesterday, in fact).  I groan each time the transaction is rung up and a check book is then dragged out and the check writing begins.

[dualstow]

I usually carry around a couple hundred dollars and try to pay cash for most small purchases.  I cannot remember the last time someone in line ahead of me actually paid in cash.  And someone writing a check has become so noteworthy that I do remember the last time (yesterday, in fact).  I groan each time the transaction is rung up and a check book is then dragged out and the check writing begins.

It's amazing how you can buy a $2 coffee with a credit card these days without making the clerks groan. Some places still have a $10 minimum for cards, but many don't.

[BearBones]

I think the "modern" response to a shortage of cash will be EBT-style cards as a cash replacement.  The technology and infrastructure are already in place (hand reaching for my tinfoil hat).

And aren't we almost already there?  What fraction of transactions actually occur in physical cash?  I usually carry around a couple hundred dollars and try to pay cash for most small purchases.  I cannot remember the last time someone in line ahead of me actually paid in cash.  And someone writing a check has become so noteworthy that I do remember the last time (yesterday, in fact).  I groan each time the transaction is rung up and a check book is then dragged out and the check writing begins.

Not talking about cash going away. Just that stored in deposit accounts. Most people in this world have much of their liquid assets in deposit accounts, and the banks and economy rely on this money multiplying effect. So, if interest on deposits goes negative, smart people will pull their money out of deposit accounts and store it instead. So what does that do to the larger money supply and economy?

[MediumTex]

I'm ready for negative loan rates.

Buy a car for $20k.  60 months at -1%, and your total payments come out to around $19,000.

[WildAboutHarry]

[quote='BearBones']Not talking about cash going away. Just that stored in deposit accounts. [/quote]

Ok, I see the distinction.  In a negative-interest-rate world, leaving "cash" in deposit accounts paying negative interest makes no sense, and could result in a run on such deposit accounts, and a shortage of physical cash (notes and coins).

Even in that scenario I could see currency controls in the form of electronic payment systems.  Again, most of this is already in place.  All that is required is some control (like the bank holiday of old, only permanent) on cash withdrawals from deposit accounts.

Although, in the case of a physical cash shortage, wouldn't notes and coins then command a premium?

[barrett]

Not talking about cash going away. Just that stored in deposit accounts. Most people in this world have much of their liquid assets in deposit accounts, and the banks and economy rely on this money multiplying effect. So, if interest on deposits goes negative, smart people will pull their money out of deposit accounts and store it instead. So what does that do to the larger money supply and economy?

I'd be curious even with the fractional system in place, how much banks actually lend out when economic activity is still kinda slow as it is now. But my guess is that large-scale cash hoarding (as in greenbacks under the mattress) would be deflationary because it would tend to slow down economic activity. Looks like there are roughly 1.2 trillion actual dollars in circulation which translates into each American holding maybe $4,000 in deposits (pulled these figures from the Internet so trust them at will). So my guess is that hoarding would be deflationary.

Although, in the case of a physical cash shortage, wouldn't notes and coins then command a premium?

Could be, but this complicates my simple analysis! Although each dollar being worth more is deflationary.

Someone please slow me down!

[barrett]

Tenn,

At a certain point though, hoarding of actual cash would have an economic impact, right? I think Bear Bones is just trying to explore what that might be. Por ejemplo, if everyone in the US had $2,000 in cash under a mattress, what would the effect be? I know we are talking about an extremely unlikely scenario but the question is interesting at least in a theoretical sense.

[jafs]

My understanding is that your money in bank accounts isn't just sitting there, waiting for you to collect it whenever you like.  It's being used, and moved around in the system to generate income for the banks.

If that's true, and money held in deposit accounts gets low, then the banks wouldn't have that source of income, so it would definitely affect them, right?

[barrett]

My understanding is that your money in bank accounts isn't just sitting there, waiting for you to collect it whenever you like.  It's being used, and moved around in the system to generate income for the banks.

If that's true, and money held in deposit accounts gets low, then the banks wouldn't have that source of income, so it would definitely affect them, right?

My understanding is that currently they are only required to keep about 3% of your money on hand. The rest can be lent out. If you deposit $100, the bank has to keep $3 on hand and can lend out $97. If that $97 then gets redeposited with them, they've now made a loan of $97, only have to keep $5.91 on hand, and can lend out another $91.09, etc.

There's really quite little cash in the banking system which is why you see, for example, Greeks limited to withdrawals of 50 Euros a day when people fear their money is not there. They fear it's not there because, well, it isn't.

But Tenn or someone else will shoot this full of holes in the next hour or so.

[jafs]

I'm almost certain that banks don't just let the deposits sit there - they do all sorts of inter-bank short term loans, etc. with it.

A quick google search suggests that barrett is correct, reserve requirements are low, and banks don't lend reserves.  So, they're probably lending deposits.

I looked at pragcap, but didn't see anything easily there.  If/when I have time, I may call our bank and ask them what they do with the money - that should be fun 

[Pointedstick]

Banks don't lend reserves or deposits. They just lend. They lend out of thin air. Poof! Deposits become their reserves, but the quantity of reserves on hand is in no way connected to their lending activity. They'll lend if they're cash rich or cash poor, depending on their management's goals and the legal requirements they are subject to. And if they're feeling too cash rich, they'll get rid of their cash by parking it at the Fed! They actually get paid interest on that money these days.

[jafs]

That's hard to believe - they can't create/print money, can they?

Let's use a simple example, because those are easiest for me - you go to a bank and get a mortgage.  That means the bank gives the sellers a check for their house, and then you owe the bank that money plus interest.  When the sellers go to their bank, they can cash that check if they want, so it's real money.

That money has to come from somewhere, I would think.

It goes from your bank to their bank, and then to them, doesn't it?

I know this new electronic era makes things less concrete, but the digital deposits can be withdrawn as actual cash, unless I'm missing something.

[jafs]

That says that they don't "necessarily" have to use deposits to make loans, but that they generally do.

And, that they need funding sources to run their business.  Also, that if they need, they can borrow money from other banks or the Fed to cover things.

I didn't see anything about creating money from thin air.

[barrett]

All very interesting but I'd like to at least temporarily re-rail the thread back to Bear Bones' original question (at least as I understand it). What is the effect on the economy if US savers decide as a group that they want to hoard greenbacks at home? Let's say every American takes $1000 cash out of the bank and sticks it under their mattress. That's about 320 billion dollars. Does that do nothing? And, if that is the case, what happens if they decide they don't want to hoard it anymore?... that all is well with the economy and they start spending down their cash. Still nothing?

[l82start]

deposits, reserves and cash on hand are three different things that fluctuate together, aren't they? deposits become mostly electronic (cash on hand goes up then gets reduced if it exceeds the banks needs)
reserves are a number in a computer that includes cash on hand but is not entirely made up of it (i think)
cash on hand is exactly what it sounds like the amount of cash dollar bills rolls of quarters etc that the bank needs for a days business, if they have to much they send it off.. to little they order more.(send digital money in exchange for paper and vs versa).

?? so if everybody horded cash, the cash on hand might get tight with little or no effect on reserves  until the gov changed the ratio of printed money to digital money ??

i am not sure of any of this...

[jafs]

That's not very clear somehow.

I get that they don't lend reserves, and I've said that before.  And, I get that when they make a loan, they create that amount of deposits in the borrower's account - that's what a loan is - a bunch of money in a bank account that you can use.

But, I thought we were talking about money that we deposit into our accounts, from paychecks or other sources of income, and what would happen if people started taking that money out of bank accounts.  My understanding is that those deposits aren't just sitting there waiting for us to take them out - they're being used.  And, if we all took our money out of the accounts, the banks would lose something useful.

That doesn't mean that they couldn't find other ways to do things, of course.  But it's useful for them to have money we put into accounts, particularly when they don't have to pay us interest to use the money.  That's essentially what the pragcap link said, that they look for the cheapest ways to operate, and so they use our deposits, rather than borrowing the money, which all makes sense to me.