Hoard, Flow, Save, Spend, Hold

Sometimes you wake up in the morning and there it is.

One way the Federal Reserve can fight inflation is to sell some of its assets. If it sells a T-Bill to someone, in exchange the Fed receives money that someone was willing to spend. That money, spending-money, is M1 money. The Fed receives that money and holds it, and it is no longer in circulation. It comes out of M1.

I get it now. A few days ago I wrote You can only either spend or save. I wrote People make their own decisions.

Here's the thing: You can only either spend or save. But while you're deciding between the two, you are holding money.

Here's the picture that was in my head when I woke up this morning:

The heavy line between HOARD and FLOW represents the range of possible attitudes toward holding money. Call it the Hold line. If you don't hold money very long, your spending happens near the FLOW end of the line. If you do hold money a long time, your spending shows up closer to the HOARD end.

The diagram also shows that hoarding is not the same as saving. If you save a dollar, your bank will put it to use, lending out multiple copies of it. But until you put it in the bank, you are holding that dollar. And as long as you hold it, no one is putting it to use. The money you hold may count as being in circulation; but it is not in circulation. Just like at the Fed.

Another H-Word

Many voices

Back when I was teaching myself C language, two of the first words I came upon were declarations and definitions. Well, they were long words and both started with D, and I was just startin' out, and they were two of a kind to me. So I skipped over them and started writing functions.

Things went pretty well for a while. As I learned, my programs got bigger. And then I started getting really strange errors. One time, the source code in the editor changed when I ran the code. Weird errors.

It took me three years to figure it out. In the end I finally understood the difference between definitions and declarations. I started using them both, and the weird errors went away.

I'm not sayin' anyone will have a problem like that with the words holding and hoarding. I just thought it was interesting.

Hoarding is an extreme form of holding money.

...there springs up among them an extravagant love of gain--get another
man's and save your own, is their principle; and they have dark places
in which they hoard their gold and silver, for the use of their women
and others; they take their pleasures by stealth, like boys who are
running away from their father--the law....

-- from: The Republic by Plato (Book VIII)

I first came upon the word "hoarding" in The General Theory some thirty years ago. The economy was different then. Hoarding was not something in the news, not part of the world I understood. I had trouble with the concept. Below are some notes and quotes gathered since that time.

Friedman, Free to Choose, p.74:

"...a run that results in hoarding of cash by the public tends to reduce the total money supply."

Samuelson, Economics (1958 edition) p.269:

"A hoarder who earns no money interest on his mattress cache finds the real value of his wealth increasing every day as prices fall."

Hoarding reduces the amount of circulating money, which causes deflation, which causes the value of the hoard to increase. In other words, there are times when money under the mattress will increase in value, as though it were collecting interest in a bank.

This is a fascinating aspect of a money economy. It means that the system has a self-perpetuating, positive feedback loop that can lead to economic collapse.

That is why it is important to the government to keep people spending.


My old Economics text by Campbell R. McConnell (1975 edition, pp.328-29) includes an excerpt from "Whatever Happened to the Cashless Society," from The Morgan Guaranty Survey:

The convenience of paying by check and the credit card revolution would suggest a declining need for currency. But, curiously, the amount of coins and paper money in circulation has increased significantly.

So current-day observations of increasing demand for M1 money are at least nothing new. The excerpt also offers explanations for the increase, including:

A rising price for silver in the Sixties made the old coins... worth more intrinsically than their face value. Silver coins rapidly disappeared into private hoards...

and this:

Tax evasion is believed to be a significant factor in the demand for currency... [People] receive payment in cash so that there is no record. Much of this money ...winds up... in safe deposit boxes, under the mattress, or in fruit jars buried under the old apple tree.

According to the excerpt, hoarding is one reason for the increase of money in circulation. Money hoarded in fruit jars and under the mattress still counts as being in circulation. That's gotta screw up the economic accounting.


From: Money, Prices, and Civilization in the Mediterranean World
Fifth to Seventeenth Centuries by Carlo M. Cipolla:

"Many good historians have told us of the shortage of coins in Europe
in the Dark Ages. Coins were scarce; and they were scarce partly
because the supply of precious metals was scarce and partly because a
tremendous and widespread propensity to hoard drained relatively large
amounts of the existing metals from the current supply."[p.9]

And a follow-up:

"While the transaction demand for coins was very much depressed [in
the Dark Ages], the demand for coins as assets to be hoarded was
exceedingly high. This sort of demand, though, had rather disruptive
effects on the working of the monetary system; it subtracted
continuously coins from business circulation for unreasonable lengths
of time and tended to shift them into the class of jewelry"[p.11]

So hoarding doesn't only screw up the economic accounting. It also screws up the economy.


From Monetary Theory Before Adam Smith, by Arthur Eli Monroe:

"Antonine of Florence also notes the influence of supply indirectly,
in his remarks that, when gold is hoarded, it becomes scarce, and more
goods will be given for the same money."[Monroe p.26]

(Antonini of Florence was one of the "Scholastics" or Schoolmen; he came "in the
next century" after Thomas Aquinas.)


From Wealth and Poverty by George Gilder, 1981:

"economies ...stall... for much of human history, in a slough of depression caused by insufficient buying power, stagnant savings, and hoarded funds." [p.33]

In The General Theory, Keynes analyzes the "stall" that Gilder observes:

"The destruction of the inducement to invest by an excessive liquidity-preference was the outstanding evil, the prime impediment to the growth of wealth, in the ancient & medieval worlds." [p.351]

Let us do everything we can to prevent that from happening in our time.

Either, Or

There is no other choice

You can spend a dollar, or save it. There is no other choice. Keep a dollar, or let it go. If you keep it, that's saving. If you let it go, that's spending, Save and spend are the only options.

The Little Things

Holding Patterns

How are we gonna solve the big problems if we don't even know the meaning of little words?

Milton Friedman used to write about "the amount of money people want to hold." I never quite understood it. I want to hold lots of money. Who would want to hold less? It never made sense to me.

In Circulation

Hustle'n' Flow

Raging river. Meandering stream. Stagnant pond. The flow of water: sometimes more, sometimes less, sometimes not at all. The same is true of money.