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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
is the author of The Flight of the Barbarous Relic, a
novel about a renegade Fed chairman. Visit his website.
Visit his blog. Send him mail. See George F. Smith's article archives.
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Notes
[1]
Ludwig von Mises, The Theory of Money and Credit,
Yale University Press, 1953, p. 35.
[2]
Henry Hazlitt, The Inflation Crisis, and How to
Resolve It, The Foundation for Economic Education, 1995, p.
89.
[3]
Hans-Hermann Hoppe, "How is Fiat Money Possible? — or, the Devolution
of Money and Credit," in The Economics and Ethics of
Private Property: Studies in Political Economy and Philosophy,
2nd Edition, Mises Institute, 2006, p. 203.
The demand for
money is the unwillingness to buy or rent nonmoney
goods, and these include consumer goods (present goods) and capital goods (future
goods). Not-spending money is to purchase, neither
consumer goods nor
investment goods.…
Accordingly, if
the demand for money increases while the social stock of money is given, this
additional demand can only be satisfied by bidding down the money prices of nonmoney goods.
[4]
Murray N. Rothbard, What Has Government Done to Our
Money?, Mises Institute, 1990,
p. 73.
[5]
Murray N. Rothbard, America's Great Depression,
5th Edition, Mises Institute, 2000, p. 307.
[6]
Henry Hazlitt, The Failure of the "New
Economics": An Analysis of the Keynesian Fallacies, Mises Institute, 2007, p. 2.
[7]
Ibid., p. 3.
[8]
Thomas J. DiLorenzo, How Capitalism Saved America: The
Untold History of Our Country, from the Pilgrims to the Present,
Crown Forum, 2004, p. 184.
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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