Free Market

The Case for Hoarding

The Free Market

The Free Market 27, no. 11 (November 2009)


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. 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.

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. 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.

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 pro-inflation camp 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.

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. 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.”

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.

President Roosevelt took matters even further. On March 12, 1933, he 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.”

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. 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?

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.

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.


Smith, George F. “The Case for Hoarding.” The Free Market 27, no. 11 (November 2009): 1–3.

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