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Most people would admit to hoarding money only with a tinge of guilt,
because to be a hoarder carries with it the suggestion of being a miser
— a Scrooge. And yet, every participant in an economy based on indirect
exchange holds some amount of money and can be said to be hoarding it, that is, declining to spend it. Hoarding is a strategy
for achieving personal goals or for dealing with economic uncertainty.
However, some economists argue that hoarding money causes recessions.
In the Keynesian universe,
hoarding is a great evil because it means people are stifling demand for the
economy's products and services.
Unspent dollars means reduced sales, and as sales decline, profits
drop, layoffs increase, and the total social income decreases, making less
money available for consumption. Hoarding induces more hoarding as the
economy sinks into a downward spiral. If not corrected by timely government
policy — deficit spending and inflation — the hoarders could shut
down the economy.
Money, of course, has to be easily inflatable for Keynesians to
execute their policies. And this means that money needs to be severed from
its roots in trade.
As Menger, Mises,
and others have written, a commodity becomes money only gradually, as
increasing numbers of market participants, on their own, decide to use it
rather than other consumer goods. To become a common medium of exchange, a
commodity needs to possess certain objective characteristics, such as being
durable, transportable, recognizable, divisible, fungible, and scarce.
Another needed quality, often overlooked, is a commodity's suitability for
hoarding. As we learn from Mises, money as it arose
on the market served as a transmitter of value through time and space.…
Menger has pointed out that the special suitability
of goods for hoarding, and their consequent widespread employment for this
purpose, has been one of the most important causes of their increased
marketability and therefore of their qualification as media of exchange.[1]
In more formal terms, hoarding refers to an individual's increased
demand to hold cash balances. Holding cash balances is an expression of the
fact that money's value lies in its potential for future exchanges as
well as present ones.
As people increase their demand for cash balances, prices will tend to
fall, and the purchasing power of the money unit will rise. The production
structure of the economy remains intact — hoarding as such does not
wipe out goods on store shelves, or machines in factories. If anything, it
makes them cheaper.
Hoarding and the General Public
In this world of uncertainty, there are strong incentives to hoard,
and given the "solutions" pushed on us for the current crisis,
those incentives could easily explode into full-time obsessions. People don't
know what will happen to them, and the greater their uncertainty and fear,
the greater their demand to hold cash balances to meet the unexpected.
But what happens if people hoard today's cash, the stuff of Fed
"accommodative" policies? To the holder of the cash, it's like
trying to hold air in an inflated balloon. Over time, it will leak out.
But even if Ben Bernanke decides to take an extended vacation, how can
hoarding work for the public at large? Total cash balances
equals the total supply of money. When someone adds to his cash
balance, some other person subtracts from theirs — "What Peter
spends, Paul receives," as Hazlitt expresses it.[2] It would seem, then, that Peter and Paul cannot
both hoard at the same time.
However, let us consider the change in public demand. While the total cash balances cannot
increase without increasing the supply of money, real cash balances can increase if the value
of the dollar increases. As people value cash balances more highly, the
demand for money increases (relative to their demand for other things), and
prices will fall. When people hoard, the same total cash balances will buy
more goods and services.[3]
As Rothbard points out, people always
say they want more money, but what they really want is "greater command
of goods and services bought by money." Inflation frustrates this
desire, hoarding satisfies it.
One of the assumptions of the inflationists
is that consumption is the driving force of prosperity. The more people
spend, the better off we will all be. But if this were true, poverty would
exist only in history books.
Putting money in people's hands and telling them to spend it is not a
problem. Producing the goods to spend it on is. Nevertheless, many people
profess to believe that spending is our salvation. And one way to get people
to spend is to roll the presses and give them more money.
Those "Traitorous" Hoarders
The Great Depression brought hoarding and inflation to center stage.
Before 1933, gold coins and banknotes were accepted media of exchange, with
the banknotes serving as money substitutes of coins. As long as gold was
available to the public, people could protect themselves against bank
failures by hoarding gold coins. But if they deposited their gold in banks,
it was soon on its way out of town.
After 1917, gold could no longer be part of a bank's legal reserves;
it had to be deposited at the Fed. According to Rothbard,
"Gold poured into the Central Bank from the private banks, and, in
exchange, the public got Central Bank notes and the disuse of gold
coins." With gold locked up far away, the public had to trust the
printed receipts of the government instead.[4]
As the Depression got worse and people lost their confidence in the
banks, they decided to take custody of their cash. Seeing people in large
numbers pulling their money out of banks — money the banks had promised
to provide on demand — President Hoover, in 1932, blasted them for
their "traitorous hoarding." On February 3 he organized an antihoarding drive and on March 6 delivered a radio
address in which he pleaded with the public to
stop hoarding (i.e., to stop converting their bank deposits into cash):
The battlefront today is against the hoarding of currency, which began
about 10 months ago, and with its growing intensity became a national danger
during the last 4 months.… I believe that the individual American has
not realized the harm he has done when he hoards even a single dollar away
from circulation. He has not realized that his dollar compels the bank to
withdraw many times that amount of credit from the use of borrowers.
Hoover apparently never considered what happens when a single dollar
is used to create multiple dollars of credit. He never questioned the ethics
behind it or investigated its redistributionist effects — or why a
depository institution would loan dollars in the first place, instead of
charging a fee for keeping them safe. But his listeners didn't seem bothered
by these matters either.
As Rothbard notes, Hoover's campaign against
hoarding seemed to help; hoarding peaked in July, and never rose above that
amount until February, 1933. Consequently, bank liquidation was postponed and
the final crisis intensified. But perhaps worse, Hoover's campaign kept the
public from learning firsthand the truth of fractional-reserve banking.[5]
President Roosevelt took matters even further. As long as dollars had
to be payable in gold coin, the Fed was limited in the amount of money it
could create. If the redemption requirement were lifted, the money supply
could be determined by government-appointed bureaucrats, and government would
no longer be held hostage by the promise of convertibility. Getting the
public to go along with this coup de grace wouldn't be easy, but FDR was up
to the task.
A growing pool of people struggling to feed their families made his
job a little easier. By 1933, unemployment had
risen to 25 percent nationally, but some states averaged over 40 percent, and
a few cities were hit even harder: Cleveland and Toledo averaged 50 and 80
percent, respectively. Distinguished economists promoting the virtue of a
stable price level — or at least one that didn't plunge when they were
heavily invested in the stock market — were ready to join hands with
FDR, too.
If gold were out of the picture, reflating prices would be less of a
problem. And with gold removed, hoarding would be discouraged and more money
in circulation would increase spending. The nightmare of Hoover's
administration would soon be over.
On March 12, 1933 President Roosevelt delivered his first fireside
chat and told the American people that the new dollar, which they
could no longer redeem for gold coin, was money they could trust. "This
currency is not fiat currency," he insisted. "It is issued only on
adequate security — and every good bank has an abundance of such
security."
He told his audience their confidence in the "readjustment of our
financial system" was the most important element in its success —
even, he said, "more important than gold." "Have faith,"
he pleaded. Do "not be stampeded by rumors or guesses."
Roosevelt told his audience their confidence in the "readjustment
of our financial system" was the most important element in its success
— even, he said, "more important than gold."
"Have faith," he pleaded.
Roosevelt never mentioned the Constitution in his talk but rumors
persisted that the creators of the US government wanted only gold and silver coin to
serve as legal tender. Whether he was aware of it or not, he was also
repudiating Jefferson's warning in the
Kentucky Resolutions about placing "confidence in man," and seeking
to unleash all manner of "mischief" by breaking the "chains of
the Constitution."
The public was not interested in historical documents, either, and it
was easy to believe a charismatic leader whose ideas had the blessings of
renowned Ivy Leaguers. Still, if even one of the country's founding documents
had made an eloquent statement about the tie between liberty and sound money,
it might have kept the torch lit for the general public during a government
attack on their gold.
Keynes to the Rescue
Lingering doubts about the soundness of Roosevelt's policies were all
but eliminated three years after he took office, with the publication of John
Maynard Keynes's General
Theory in 1936.
Economists swooned over it. Perhaps typical was the reaction of 1970 Nobel
laureate Professor Paul A. Samuelson of MIT, who described Keynes's work as a
badly written book, poorly organized.… It is arrogant, bad-tempered,
polemical, and … abounds in mares' nests and confusions.… In
short, it is a work of genius.[6]
Keynes already had strong political ties, and with the right promotion
his book could serve as a kind of Scotchgard for
government agendas. If enough elites prostrated themselves in its presence,
who would believe its critics?
"It bears repeating," Samuelson claimed, "that the General Theory is an
obscure book so that would-be anti-Keynesians must assume their position
largely on credit."[7] One would think would-be pro-Keynesians would be
under the same handicap. And I wonder if Samuelson was that generous with
students who turned in "badly written, poorly organized" papers
abounding in "mares' nests and confusions."
Neither Keynes nor Roosevelt ended the Depression, though most
historians were slow in conceding this point. The current mainstream view is
that World War II, with its enormous government outlays for the war effort,
was the incentive needed to administer Keynesianism in doses strong enough to
get everyone working again.
True, the unnecessary war
"solved" the unemployment problem with massive conscription, which,
according to Robert Higgs,
pulled "the equivalent of 22 percent of the prewar labor force into the
armed forces." But prosperity didn't return until government wartime
controls were gone, and government spending and employment had fallen
sharply.
Keynesian economists had predicted that the two-thirds reduction in
spending after the war would bring on another depression. On the contrary,
with government out of the way, the private economy quickly recovered.[8]
Precious Metals
President Nixon completed the process of severing the
dollar's gold roots in 1971. Since then, the accelerated depreciation of the
dollar has relegated monetary hoarding to the days of our grandparents and
earlier — almost.
Even before the Fed, hoarding was not the way to get rich, but because
gold retained its value "through time and space," holding it was a
way of avoiding penury and saving for old age. The present fiat money system
pressures people to drop a portion of their income into the great slot
machine of the investment world, most often by means of financial
intermediaries.
People's portfolios fatten during the boom years, but working below
the radar is the central bank's monetary policy, silently siphoning off the
value of their money while orchestrating a disaster. Whether the boom ends in
depression or a spurt of aggressive inflation, Fed policy will ruin investors
who don't time their bets properly.
One way to hoard money today is in precious metals, particularly gold
and silver. Thanks to Congressman Ron Paul's work, it has been legal for
Americans to own and trade gold coins since January 1, 1975. Buying gold and
silver coins and holding them is not only a way of protecting oneself against
inflation, but it is also, in a sense, a way of boycotting the federal
reserve. That in itself would be reason enough to
own them.
George F. Smith
Read his book : The
Flight of the Barbarous Relic
Visit his website
Read his blog
Also
by George F. Smith
George F. Smith
is the author of The Flight of the Barbarous Relic, a novel about a renegade
Fed chairman and the editor of Barbarous Relic.com.
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