Wooden Nickels Float

Federal Reserve Chairman Alan Greenspan didn't think there was need to worry about bank safety during the Y2K event. Although the Fed is planned to accumulate a nestegg of 200 billion extra in the form of its scrip, withdrawing cash from the bank wasn't necessary, Mr. Greenspan insisted. "The most sensible thing is to leave it where it is, " he told a Senate Banking Committee recently. He said that our money would be safe in the banks.

Well, Mr. Greenspan, as it turned out, you were correct, but that begs the point, which is: how could you possibly withdraw the money anyway?

Does that sound like a stupid question? So, I guess, is the question, "What is a dollar?" although I've never had it answered by those who insist that "everybody knows what a dollar is." Sometimes a stupid question is simply one which we've never encountered before, or for which we have no answer---or don't want to give it.

So how do we take money from the bank? Let's consider, for a moment, the float. The term is used to designate the same funds in two accounts simultaneously. That happens readily, in this way: You write a check payable to a company thousands of miles away. Although you deduct the amount from your checkbook balance, your bank knows nothing about it; and the amount, let's say 100, is still in your account at the bank. When the check arrives at its destination, it is quickly deposited, and 100 is added to the account of the recipient. Now it's in both your accounts simultaneously---a float. It will remain in both until the check is returned to your bank and cleared, at which time it will be subtracted from your balance: end of float.

So what? Your modest check is only one of millions written every day. The float amounts to an awfully large number, which constitutes bank reserves which may justify additional lending. When some of those millions disappear with the clearance of checks, there may be an imbalance between bank deposits--loaned funds--and the reserves needed to maintain them.

When you attempt to withdraw money from the bank, what do you do? You may get cash, but you pay for it with a check. The bank won't consider giving you a fistful of bills just for the asking, no matter how large your account. If you write out a check to "cash," the bank will deposit it in its own account, which contains numbers not considered part of the money supply. The amount of "money" in the bank, however, has not changed. The cash is a "float," cash in your pocket, and the check which bought it in the bank's account, which will go out of existence when the cash is eventually deposited and put in the vault, where it ceases to be part of the money supply, which is cash or checkbook money in the hands of the non-bank public.

Money, in other words, is created in banks, and can never be removed from them. Even if you sought to withdraw your funds from the bank by requesting a cashier's check, the bank would require that you "pay" for it with your own check for a corresponding amount. Money in the bank's account, though not part of the money supply, can still be used by the bank to buy assets, or as the reserves needed for additional lending.

Mr. Greenspan warned against withdrawing cash from the bank, therefore, not because the banks would lose money in the process (impossible!), and not even because, as he told Congress, "Walking around with a lot of $100 bills is not the safest thing," but because cash is "high powered" money. Deposit that 100 bill in the bank, and if the reserve requirement is ten percent, the bank can instantly lend one thousand. Deposit a check for 100, however, and the bank can only lend 90, keeping ten in reserve. Of course, it can then lend 81, keeping nine in reserve, and so on, until it has lent 1000, but it is a slower process.

Additionally, using cash for transactions makes those transactions private, and privacy is against public policy in the United States. The information needed to regulate the economy is not as readily provided by cash transactions as by the use of checks or credit cards, and to be discouraged.

So was there any reason to take cash from the bank as 2000 approached? Sure. Nobody (as yet) refuses cash, but checks might have been suspect when the computer links needed to verify their "goodness" were jammed or inoperative. Should a store be willing to accept checks, it might change its mind when it finds that depositing or cashing those checks is hampered by computer snafus.

The encouraging thing, I suppose, is that when times get tough, people instinctively prefer to have money they can get their hands on, like cash. The discouraging thing is that they fail to realize that numbers engraved on bank "notes" are no more valid or significant than those handwritten or typed on checks. They represent nothing, and entitle their holders to nothing from the source which issued them. There is, sadly, no actual money, and the numbers which represent imaginary money are in banks, were created in banks, and can never leave the banking system.

If all depositors demanded cash, the banks would soon find their supply exhausted. Of course, the Bureau of Engraving and Printing could dust off those old 10,000 denomination plates, and start churning out some really large bills. It would be simpler, however, for the banks to simply issue cashier's checks in lieu of cash. If customers were reluctant to take them, they could be declared a "legal tender" by Congress, for the duration of the emergency, just like withholding taxes were instituted during the 2nd World War as an emergency measure (which, we hope, will come to an end in our lifetime!). In whatever form, however, the "money" apparently leaving the bank does not, and cannot leave. It's only a float that's out there bobbing around.