Why People Are Hoarding Cash in the Coronavirus Panic

A funny thing happened on the way to the Fed.  To keep the COVID-19 economy rolling, the Federal Reserve pumped in trillions of dollars — mostly by buying securities to increase the lendable reserves of commercial banks.  The people behind all this didn't ignore us little folks, either: according to the most recent Fed data, they increased the amount of currency in circulation too.  That's money that folds folks — over 65 billion more dollars during the last sixty days alone.  Its way more than we need to bribe a few government officials, but where did the rest of it go?  It's not being spent.

Credit and debit card use at retail stores — mostly grocers these days — is way up.  The popular story being bandied about is that cash carries the virus, so people are avoiding its use.  Okay, let's buy into that line for a minute and assume that folks would rather have rolls of paper named "Charmin" than tidy stacks with pictures of dead presidents and founders.  However, if that's really the case, then why are ATM withdrawals up so much that many banks are having to order extra currency just to keep them stocked?

Perhaps there's another force at play here.  Look, we know the facts.  There's a lot more currency floating around out there than just a few months ago, and most of it isn't being kept in bank vaults.  Those extra greenbacks aren't being spent at Walmart for Pop-Tarts and beer, either.  So that brings us to the reasoned conclusion that people are hoarding cash while using cards and cellphones for their transactions.

Folks, it's history lesson time.

When Queen Elizabeth I ascended to the throne in 1558, the "Banker to the Crown," Thomas Gresham, penned a letter to her outlining his plans to finance past and future war debts — and there were many.  He also outlined a plan to restore the value of England's monetary base that was ruined in the Great Debasement fifteen years earlier by the queen's father, Henry VIII.  Borrowing an observation from Copernicus, simply stated, he said, "Bad money drives good money out" — and Gresham's Law was born.

Some four hundred years later, the United States passed the Coinage Act of 1965 and began minting dimes and quarters from a mixture of copper and nickel rather than using silver as before.  Half-dollars followed in 1971.  Suddenly, the old coins — the silver ones — disappeared from circulation.  People were hoarding them and spending the new coins.  The bad money drove the good money out of use — Gresham's Law.

This little walk down Memory Lane now arrives at the present day.  People are spending "plastic" money — we'll use that term to include credit and debit cards, cellphone apps, and online systems like PayPal and Venmo.  Simultaneously, they are hoarding cash — even increasing their holdings by yanking it out of banks and stuffing it in coffee cans and under mattresses.  Sure, we're told the decline in the use of cash as a medium of exchange is because it's dirty, infected with the virus, but if that's true, then why are folks acquiring more of it and keeping it stacked around their houses?  Bad money drives good money out.

In these times of face masks and quarantines, people see cold, hard cash as the good money and plastic as the bad money.  The daily news reports of coronavirus deaths, business bankruptcies, and increasing unemployment — all of the bad news — has people believing there is more value to a dollar in their hand than a dollar in the bank.  They are spending the dollars in banks and holding tight with the dollars tucked away in mattresses and cookie jars.

In the 1960s, people hoarded silver coins because the new copper-nickel ones had no intrinsic value.  Essentially, the value of a post-1965 quarter is what the government says it is, not what it's worth.  People spent the new coins because their only value came from the government fiat stamped on their face.  The new coins were bad money because people had less faith in the government's word than in silver.  And while Gresham's Law is also ruling today's economy, the choice of what is good money has flipped from when we all drove VW buses with flowers painted on them.

Today, people see the good money as the one that is fiat.  They are hoarding currency that gets its value simply by the government stating what it is worth.  A piece of paper with Andrew Jackson's picture on it is more valuable to the masses than a debit card with twenty bucks behind it in the bank.  It's actually a vote of confidence in the government that people prefer to hoard cash and spend plastic.  The opposite is true in countries like Venezuela, where the national currency, the Bolivar Soberano, blows in the streets like yesterday's fast food wrapper.

The absence of positive news has driven Americans to make a choice: what is the good money?  In choosing dollar bills, the message being sent is really a signal about belief in the government.  Besides, all that negativity blasting at us every day?  One not generally quoted as a sage, former vice president Spiro Agnew, said it best.  "Bad news drives good news out."  It's Gresham's Law there, too.

Kevin Cochrane teaches business and economics at Colorado Mesa University.  He formerly taught at the University of California/Davis Graduate School of Business and is a visiting professor of economics at The University of International Relations in Beijing.

A funny thing happened on the way to the Fed.  To keep the COVID-19 economy rolling, the Federal Reserve pumped in trillions of dollars — mostly by buying securities to increase the lendable reserves of commercial banks.  The people behind all this didn't ignore us little folks, either: according to the most recent Fed data, they increased the amount of currency in circulation too.  That's money that folds folks — over 65 billion more dollars during the last sixty days alone.  Its way more than we need to bribe a few government officials, but where did the rest of it go?  It's not being spent.

Credit and debit card use at retail stores — mostly grocers these days — is way up.  The popular story being bandied about is that cash carries the virus, so people are avoiding its use.  Okay, let's buy into that line for a minute and assume that folks would rather have rolls of paper named "Charmin" than tidy stacks with pictures of dead presidents and founders.  However, if that's really the case, then why are ATM withdrawals up so much that many banks are having to order extra currency just to keep them stocked?

Perhaps there's another force at play here.  Look, we know the facts.  There's a lot more currency floating around out there than just a few months ago, and most of it isn't being kept in bank vaults.  Those extra greenbacks aren't being spent at Walmart for Pop-Tarts and beer, either.  So that brings us to the reasoned conclusion that people are hoarding cash while using cards and cellphones for their transactions.

Folks, it's history lesson time.

When Queen Elizabeth I ascended to the throne in 1558, the "Banker to the Crown," Thomas Gresham, penned a letter to her outlining his plans to finance past and future war debts — and there were many.  He also outlined a plan to restore the value of England's monetary base that was ruined in the Great Debasement fifteen years earlier by the queen's father, Henry VIII.  Borrowing an observation from Copernicus, simply stated, he said, "Bad money drives good money out" — and Gresham's Law was born.

Some four hundred years later, the United States passed the Coinage Act of 1965 and began minting dimes and quarters from a mixture of copper and nickel rather than using silver as before.  Half-dollars followed in 1971.  Suddenly, the old coins — the silver ones — disappeared from circulation.  People were hoarding them and spending the new coins.  The bad money drove the good money out of use — Gresham's Law.

This little walk down Memory Lane now arrives at the present day.  People are spending "plastic" money — we'll use that term to include credit and debit cards, cellphone apps, and online systems like PayPal and Venmo.  Simultaneously, they are hoarding cash — even increasing their holdings by yanking it out of banks and stuffing it in coffee cans and under mattresses.  Sure, we're told the decline in the use of cash as a medium of exchange is because it's dirty, infected with the virus, but if that's true, then why are folks acquiring more of it and keeping it stacked around their houses?  Bad money drives good money out.

In these times of face masks and quarantines, people see cold, hard cash as the good money and plastic as the bad money.  The daily news reports of coronavirus deaths, business bankruptcies, and increasing unemployment — all of the bad news — has people believing there is more value to a dollar in their hand than a dollar in the bank.  They are spending the dollars in banks and holding tight with the dollars tucked away in mattresses and cookie jars.

In the 1960s, people hoarded silver coins because the new copper-nickel ones had no intrinsic value.  Essentially, the value of a post-1965 quarter is what the government says it is, not what it's worth.  People spent the new coins because their only value came from the government fiat stamped on their face.  The new coins were bad money because people had less faith in the government's word than in silver.  And while Gresham's Law is also ruling today's economy, the choice of what is good money has flipped from when we all drove VW buses with flowers painted on them.

Today, people see the good money as the one that is fiat.  They are hoarding currency that gets its value simply by the government stating what it is worth.  A piece of paper with Andrew Jackson's picture on it is more valuable to the masses than a debit card with twenty bucks behind it in the bank.  It's actually a vote of confidence in the government that people prefer to hoard cash and spend plastic.  The opposite is true in countries like Venezuela, where the national currency, the Bolivar Soberano, blows in the streets like yesterday's fast food wrapper.

The absence of positive news has driven Americans to make a choice: what is the good money?  In choosing dollar bills, the message being sent is really a signal about belief in the government.  Besides, all that negativity blasting at us every day?  One not generally quoted as a sage, former vice president Spiro Agnew, said it best.  "Bad news drives good news out."  It's Gresham's Law there, too.

Kevin Cochrane teaches business and economics at Colorado Mesa University.  He formerly taught at the University of California/Davis Graduate School of Business and is a visiting professor of economics at The University of International Relations in Beijing.