The Problem of “Hoarding”

The Problem of “Hoarding”
Profile photo of Murray N. Rothbard

money_cash[This article is excerpted from What Has Government Done to Our Money?] Reprinted from

There is the ancient bugbear of “hoarding.” The image is conjured up of the selfish old miser who, perhaps irrationally, perhaps from evil motives, hoards up gold unused in his cellar or treasure trove—thereby stopping the flow of circulation and trade, causing depressions and other problems. Is hoarding really a menace?

In the first place, what has simply happened is an increased demand for money on the part of the miser. As a result, prices of goods fall, and the purchasing power of the gold-ounce rises. There has been no loss to society, which simply carries on with a lower active supply of more “powerful” gold ounces.

Even in the worst possible view of the matter, then, nothing has gone wrong, and monetary freedom creates no difficulties. But there is more to the problem than that. For it is by no means irrational for people to desire more or less money in their cash balances.

Let us, at this point, study cash balances further. Why do people keep any cash balances at all? Suppose that all of us were able to foretell the future with absolute certainty. In that case, no one would have to keep cash balances on hand. Everyone would know exactly how much he will spend, and how much income he will receive, at all future dates. He need not keep any money at hand, but will lend out his gold so as to receive his payments in the needed amounts on the very days he makes his expenditures. But, of course, we necessarily live in a world of uncertainty. People do not precisely know what will happen to them, or what their future incomes or costs will be. The more uncertain and fearful they are, the more cash balances they will want to hold; the more secure, the less cash they will wish to keep on hand. Another reason for keeping cash is also a function of the real world of uncertainty. If people expect the price of money to fall in the near future, they will spend their money now while money is more valuable, thus “dishoarding” and reducing their demand for money. Conversely, if they expect the price of money to rise, they will wait to spend money later when it is more valuable, and their demand for cash will increase. People’s demands for cash balances, then, rise and fall for good and sound reasons.

Economists err if they believe something is wrong when money is not in constant, active “circulation.” Money is only useful for exchange value, true, but it is not only useful at the actual moment of exchange. This truth has been often overlooked. Money is just as useful when lying “idle” in somebody’s cash balance, even in a miser’s “hoard.”1 For that money is being held now in wait for possible future exchange—it supplies to its owner, right now, the usefulness of permitting exchanges at any time—present or future—the owner might desire.

It should be remembered that all gold must be owned by someone, and therefore that all gold must be held in people’s cash balances. If there are 3000 tons of gold in the society, all 3000 tons must be owned and held, at any one time, in the cash balances of individual people. The total sum of cash balances is always identical with the total supply of money in the society. Thus, ironically, if it were not for the uncertainty of the real world, there could be no monetary system at all! In a certain world, no one would be willing to hold cash, so the demand for money in society would fall infinitely, prices would skyrocket without end, and any monetary system would break down. Instead of the existence of cash balances being an annoying and troublesome factor, interfering with monetary exchange, it is absolutely necessary to any monetary economy

It is misleading, furthermore, to say that money “circulates.” Like all metaphors taken from the physical sciences, it connotes some sort of mechanical process, independent of human will, which moves at a certain speed of flow, or “velocity.” Actually, money does not “circulate”; it is, from time, to time, transferred from one person’s cash balance to another’s. The existence of money, one again, depends upon people’s willingness to hold cash balances.

At the beginning of this section, we saw that “hoarding” never brings any loss to society. Now, we will see that movement in the price of money caused by changes in the demand for money yields a positive social benefit–as positive as any conferred by increased supplies of goods and services. We have seen that the total sum of cash balances in society is equal and identical with the total supply of money. Let us assume the supply remains constant, say at 3,000 tons. Now, suppose, for whatever reason—perhaps growing apprehension—people’s demand for cash balances increases. Surely, it is a positive social benefit to satisfy this demand. But how can it be satisfied when the total sum of cash must remain the same? Simply as follows: with people valuing cash balances more highly, the demand for money increases, and prices fall. As a result, the same total sum of cash balances now confers a higher “real” balance, i.e., it is higher in proportion to the prices of goods—to the work that money has to perform. In short, the effective cash balances of the public have increased. Conversely, a fall in the demand for cash will cause increased spending and higher prices. The public’s desire for lower effective cash balances will be satisfied by the necessity for given total cash to perform more work.

Therefore, while a change in the price of money stemming from changes in supply merely alters the effectiveness of the money-unit and confers no social benefit, a fall or rise caused by a change in the demand for cash balances does yield a social benefit—for it satisfies a public desire for either a higher or lower proportion of cash balances to the work done by cash. On the other hand, an increased supply of money will frustrate public demand for a more effective sum total of cash (more effective in terms of purchasing power).

People will almost always say, if asked, that they want as much money as they can get! But what they really want is not more units of money–more gold ounces or “dollars”—but more effective units, i.e., greater command of goods and services bought by money. We have seen that society cannot satisfy its demand for more money by increasing its supply—for an increased supply will simply dilute the effectiveness of each ounce, and the money will be no more really plentiful than before. People’s standard of living (except in the non-monetary uses of gold) cannot increase by mining more gold. If people want more effective gold ounces in their cash balances, they can get them only through a fall in prices and a rise in the effectiveness of each ounce.

Profile photo of Murray N. Rothbard

Murray N. Rothbard (1926–1995) was dean of the Austrian School. He was an economist, economic historian, and libertarian political philosopher.

More in Articles


Mankiw vs. Rothbard on Tax Reform

Robert P. MurphyJuly 27, 2017

Property Rights and “Human Rights”

Murray N. RothbardJuly 26, 2017

Health Costs Are Rising Because of Price Controls

Daniel J. MitchellJuly 25, 2017

The West Is a Portable Idea, Not Blood and Soil

Jeffrey TuckerJuly 24, 2017

Reflections on the Misesian Legacy in Economics

Israel KirznerJuly 21, 2017

Mises’s Vision of the Free Society

Thomas E. Woods Jr.July 20, 2017

Thomas Piketty on Inequality and Capital

Peter KleinJuly 19, 2017

My Awesome and Cheap Medical Experience…in Lebanon

Bill FrezzaJuly 18, 2017

General Augusto Pinochet Is Dead

George ReismanJuly 17, 2017