What Is Money? Part 15: Hoarding, Old and New

Recently by Gary North: On Sacrificing for an Idea

He that withholdeth corn, the people shall curse him: but blessing shall be upon the head of him that selleth it (Proverbs 11:26).

Solomon was describing a time of dearth, possibly caused by a famine. Some farmers or middlemen with food reserves refused to sell their food inventories, in expectation of a higher price. They went by the free market principle, “high bid wins.” They bid the highest price — sometimes called “reservation demand” — in the hope of selling at a higher price tomorrow.

Food hoarders have always been hated. People who accept the legal principle of high bid wins reject it as immoral whenever life is at stake.

Yet food hoarding is not without uncertainty. Food hoarders guessed incorrectly in Elisha’s day, when Samaria was under siege. “And there was a great famine in Samaria: and, behold, they besieged it, until an ass’s head was sold for fourscore pieces of silver, and the fourth part of a cab of dove’s dung for five pieces of silver” (2 Kings 6:25). Food was in such short supply that a pair of women agreed to eat their children. They ate the first one. Then the second woman reneged. The first woman brought a lawsuit before the king against the other woman, charging breach of contract (vv. 27—30). (In today’s world, she would hire a lawyer, who would take the case for one-third of the corpse.)

Then Elisha said, Hear ye the word of the LORD; Thus saith the LORD, To morrow about this time shall a measure of fine flour be sold for a shekel, and two measures of barley for a shekel, in the gate of Samaria (2 Kings 7:1).

So it proved to be. The food hoarders took a beating, financially speaking. We are not told what happened to the cannibals.


Food hoarding is no longer a threat. It is therefore not called hoarding, except in wartime, when government price controls and supplying the troops create food shortages. The last major famine in the West was the Irish potato famine of the 1840s. Since then, modern mass production techniques in agriculture have prevented famines in the capitalist West. Agricultural prices have fallen steadily. This is why the small family farm has ceased to exist.

Commercial agriculture has freed up agricultural labor resources, which is another way of saying that family farms could not compete. Urbanization has been the result. Most people prefer it this way, all over the world. Look at your fingernails. You do, too.

In the bad old days, famines drove up the price of food. That meant that food became a larger percentage of the typical family’s budget. When 95% of the population was rural and traded little, a famine meant that food in cities got very expensive. Food in the countryside was eaten rather than traded. Money prices are urban phenomena. So, high food prices are the enemy of urban consumers. Low food prices are the enemy of farmers. As the world has grown more urban, food prices have fallen. Low food prices are why the world has grown more urban. Then urban science and technology reduced food prices. This is a benevolent circle.

The World War I ditty announced the demographic truth. “How ya gonna keep ’em down on the farm, after they’ve seen Paree?” Only with very high food prices. But farm prices fell.

One of the most ludicrous of all the arguments regarding the cause of the Great Depression of the 1930s is this: “Farm prices fell after 1918, thereby bankrupting small farmers. This deflation spread to the rest of the economy.” The historians who have written this have never understood economic cause and effect. The miracle of modern economic growth — growth so enormous that it has allowed people to make a decent living by writing ill-informed history books — was made possible only by the capitalist system, and only around 1800, when permanent compound economic growth first appeared in Great Britain and the United States. This system has answered Christianity’s most famous prayer: “Give us this day our daily bread” (Matthew 6:11).

Yet historians and most economists decry falling prices. They see capitalism’s answer to this famous prayer across the board, in economic sector after economic sector — every sector not run by or heavily regulated by the state — and they are appalled. The government must do something to stop falling prices. Or the quasi-private central bank must do something whenever the government does not own the central bank outright.

Sooner or later, they all blame hoarders — not hoarders of consumer goods, but rather hoarders of money.

The Keynesians, the monetarists, and even the supply-siders have rewritten Solomon’s proverb: “He that withholdeth money, the people shall curse him: but blessing shall be upon the head of the central bank that printeth it.”


Jack Benny made a fortune with his radio persona: the tightest of tightwads. “Your money or your life,” says a robber in Benny’s most famous joke. Silence. “I said, your money or your life!” Benny replied, “I’m thinking. I’m thinking.”

As part of this persona, he was said to have a vault full of money in the basement. No one was allowed to go into it with him. It was his hideaway.

In 1938, the whole country wanted such a hideaway.

Scrooge McDuck also has a basement money vault. But Uncle Scrooge has it right. It is filled with gold coins. (Many of the stories in the 1970s were written by Vic Lockman, a gold standard cartoonist who once wrote a cartoon booklet on the Federal Reserve System, “The Official Counterfeiter.”)

The curious thing was that Benny and Uncle Scrooge were regarded as lovable if eccentric characters. They were not hated by the public. Yet they were clearly money hoarders. The adult listeners and the pre-teen comic book readers would have liked to have a vault filled with money.

Benny and Uncle Scrooge were productive. The public knew this. They were both entrepreneurs. They both knew how to make money. Although they had basements full of money, this did not keep them from making more money. They were not recluses. Uncle Scrooge was always doing deals. He was Donald Trump for pre-teens, but without the weird hair or the wives.

Keynesian economists hate Uncle Scrooge and everything he stands for. He knows how to make lots of money. He stores up gold. He is the essence of the non-consumer. He is an anti-Keynesian — in thought, word, and deed.


The trouble with economic analogies from the natural world, either organic (“money in circulation”) or mechanical (“money mechanism”) is that they convey lots of inaccurate information. The type of information they convey lends itself to the restructuring of economic theory in incorrect conceptual categories. Economics is about human action, not natural science. It is about responsible individual choices, not collective statistical reactions.

When money is in the form of coins or pieces of paper money that are legal IOUs for coins, money does not circulate the way that blood does. It moves from owner to owner. It sits in people’s individual hoards most of the time.

People do not spend most of their time buying. They spend most of their time producing or sleeping in preparation for producing. They consume time in front of TVs. They do not shop till they drop.

Most societies have believed that the essence of a life well spent is spent in production, not consumption. Economic success is leaving more behind than you inherited. It is value-added living. It is not this: “He who dies with the most toys wins.”

Such a life requires capital. Capital requires thrift. Thrift requires reduced consumption. Simple. Unless you’re a Keynesian. Then this is too complex to understand apart from formulas and complex graphs. It is ultimately a mystery based on “animal spirits,” as Keynes put it.

In a community without banking, when a woman goes shopping, she takes a few coins. She may bring most of them back. It depends on how much she spends. When a wife brings back most of her coins along with a pile of stuff, her husband praises her. She has kept money out of circulation. More power to her!

The Keynesian declares, “this economy needs a shot in the arm.” If enough wives do this, Keynesians call on the central bank to do something. It must provide the much-needed shot in the arm.

What is wrong with a wife who does not spend all of the money her husband gives her on payday? Not a thing.

Then what is wrong with Keynesians? Their theory of economics.


In a more developed economy, there is banking. If it is not fractional reserve banking — “somewhere, over the rainbow, way up high” — then the bank serves as a way to put coins to work. The saver brings coins to the bank, and the banker lends them to entrepreneurs (at 7%) or consumers (at 15%). He pays maybe 3% to the saver.

This gets money out of the basement vault. But it still is in someone’s mini-vault. The money is said to circulate. Yes, it does become more widely used. Capital is created through freed-up resources. The division of labor extends. People get more efficient through specialization. Society gets richer. This is because entrepreneurs use freed-up resources — freed up by thrifty non-consumers — to produce future goods and services.

Why does the saver surrender his money to a banker? Because he wants more money.

How does a saver accumulate the money to deposit? By reducing his consumption or increasing his income or both.

Why would someone hoard coins at zero percent per annum? There are six main answers.

1. He expects prices to fall.2. He does not trust the bank.3. He is uncertain about the future.4. He is unwilling to report the income.a. Income taxesb. Alimony5. He is either addicted to an illegal substance or else a supplier.6. He is a miser.

Four of these reasons apply to normal personalities. The fifth is a matter of either substance dependence or criminal psychology. The sixth is so rare as to be the subject of popular books.

Keynesians treat the first four as being a variant of #6. They think that there is something deeply antisocial about all six.

The Keynesian deals with #1 by calling on the government-licensed central bank to increase the money supply. So does the monetarist. So does the supply-sider in a recession.

They deal with #2 by promoting widespread trust in the government-guaranteed Federal Deposit Insurance Corporation.

They deal with #3 by creating government-funded safety nets: the welfare state.

They deal with #4 by (1) increasing government funding of tax collection techniques, and (2) no-fault divorce.

They deal with #5 by passing laws monitoring “excessive” currency withdrawals from banks and by confiscating people’s currency without trial on the basis of suspected drug dealing.

They deal with #6 by using it as an archetype of an entire society that refuses to legislate solutions 1—5.


When you hoard currency, you remove it from the fractional reserve banking system. This contracts the money supply by reversing the expansionary process that resulted from fractional reserves. This is a threat to Keynesian solutions 1—5.

By shrinking the digital money supply, you have done the following.

1. Made life more slightly more difficult for the central bank.

2. Made life more difficult for the FDIC.

3. Increased the uncertainty of the banking system, which may encourage others to hoard currency.

4. Made it tougher to track down tax evaders and alimony evaders: more currency to trace.

5. Made it tougher to track down drug dealers: more currency to trace.

6. Made misers look like early adopters.

Ultimately, the legal authority of the central bank to inflate the money supply by purchasing any asset can offset the decisions of individual currency withdrawers and mattress-stuffers. The currency hoarder who hoards currency to strike a blow against the system is naïve. He does not understand the centrality of central banking and the degree of authority that legalized counterfeiting conveys.

Nevertheless, as the Keynesian would say, “it’s the principle of the thing.” It is the principle of acting contrary to the Keynesians’ assumption that money is outside the logic of economic cause and effect. To believe that the asset-owning individual should decide how much money to spend or save (hoard) is to accept heresy. Heresy is always regarded as ignorant and often regarded as immoral. To act as though the state does not have sovereignty over money is an affront to a Keynesian. Also to the monetarist.

Yet even the Keynesian is trapped by the logic of central banking. It is only paper dollars that announce: THIS NOTE IS LEGAL TENDER FOR ALL DEBTS PUBLIC AND PRIVATE. The person who hoards paper money is announcing that he knows what real money is. So is the immigrant who sends paper dollars back home. So are those back home who never report this income and never deposit the money in a bank.


Individuals do not hoard digits. Digits are money today only because they cannot be hoarded by individuals. To own digits is to surrender currency.

This logic does not apply to commercial banks. It is quite possible to hoard digits if you are in control over a commercial bank. You decide not to invest those digits. Instead, you turn them over to the regional Federal Reserve Bank. You tell the branch to count these digits as excess reserves.

The money is not spent into circulation. What do Keynesian economists call money that is not spent into circulation, but is instead kept out of the market place? Hoarding. What do they call this decision when you get zero percent on your hoarded money? Irrational.

What are American banks being paid today by the Federal Reserve? Between zero and 0.25%. This is the federal funds rate: overnight bank-to-bank money.

The money in excess reserves does not enter the economy. It does not multiply by means of fractional reserves. Every digital dollar in an excess reserves account has a tiny digital sign under it: “The buck stops here.”

This is why the doubling of the monetary base by the Federal Reserve in the second half of 2008 has not doubled prices. The increase in excess reserves has offset the excess expansion of the monetary base. The monetarists used to call the monetary base high-powered money. It is low-powered money these days.

Excess reserves allow the FED to buy Freddie Mac and Fannie Mae debt and not drive up housing prices. Excess reserves allow the FED to buy Treasury debt and not create hyperinflation. Excess reserves are the FED’s friend. And they cost the FED approximately nothing.

Keynesians are not happy about excess reserves, but they are thankful that there is not hyperinflation.

I am, too. I would prefer that individuals held these excess reserves at home.

What we have today is a system of digital mattresses. These days, commercial banks hold a trillion digital dollars in regional Federal Reserve mattresses.

Why? Reason #2. Commercial bankers do not trust the banks. Who can blame them?


There will come a day, I dearly hope, when central banks will tell their respective Treasury Departments, “No more subsidies. We will no longer buy your debt.”

On that grand and glorious day, the Treasury Departments of the world will move rapidly toward bankruptcy, interest rates on government debt will rise, the stock markets and commodity markets will begin to crash, consumer prices will begin to fall, and the mother of all bank runs will begin.

Get there early.

November 18, 2009

Gary North [send him mail] is the author of Mises on Money. Visit http://www.garynorth.com. He is also the author of a free 20-volume series, An Economic Commentary on the Bible.

Copyright © 2009 Gary North

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