One of the grand problems in economics -- heck, in life -- is in distinguishing between a structural change and a mere cyclical or temporary change. On the life front maybe your wife doesn't like you for a day or two because of something you said -- the paratha wasn't quite right today -- or perhaps there's a more fundamental change going on -- all her cooking is terrible. Or, in economics and more seriously, the amount of cash we all keep in banks and the amount we keep under the mattress?
We are actually seeing a change in how much money we want to keep close to us and not in the hands of the banks. The big question is, well, how much of this is some sensible but temporary change and how much is some underlying structural change going on?
Recent events, for example, will naturally lead to an increase in the demand for cash at home. Leave aside why it all happened, but the banks were closed for some days. The internet was down, electronic payment methods were patchy at best. So, we all want to keep more of that necessary cash for daily life available in our hands. We are indeed seeing this.
Some of the money we keep in banks is just to pay the everyday expenses. So, if we can't use the banks to do that then we'll keep more in physical cash. That's obvious. Sure, we might then think that this was all a one off and that it'll not happen again -- but we'll still keep a little more of our total in that physical cash just in case. Losing the interest on a few hundred, or a couple of thousand (increase the number given your own fiscal position) Taka in order to absolutely know that you can buy bread and rice might well be worth it after all.
If we're all beginning to worry about the security of our money in the banks then that's something we need the regulators to deal with
Now, this is unfortunate. Because one of the things the banking system does is to aggregate -- add up -- all of those few thousand Taka from each of us and that's then lent out to industries and becomes part of the capital that makes the country richer in the future. If we keep more cash then that means there's less of that capital.
This is unfortunate but it's not a disaster by any means. Just one of those things and we'll undoubtedly get over it. Recent problems just mean that we'll all hold a little more of our resources in actual cash under the pillow.
But we've also seen the trend before recent events. More of the cash of the country -- the accumulated wealth of us all -- was being held in cash and less in the banks. And that's more of a problem.
One of the explanations offered, inflation, doesn't really work. We gain no interest on cash but we do get interest on a deposit account. So, the higher the inflation the more we should want to use banks to be able to maintain the value of our savings. Unless and until we all think that everything's about to go wrong -- hyperinflation -- and so we have cash so we can spend it all right now, immediately. Bangladesh is not at that point.
The explanation that does work is that we've lost trust in the banking system. Not all of us and not all trust but some and enough. We aren't quite so sure as we used to be that if we put the money in a bank then we're going to get it back. That's a structural problem and that's a big one.
Partly it's a problem because of that aggregation above -- banks mobilize our savings to be the loans that make the future richer. Less money in banks means a less rich future. But more than that it's a failure of bank regulation.
The whole and entirely idea of “fractional reserve banking” is subject to the possibility that we all lose faith in it. That's when bank runs start. That's also when the economy starts to collapse. Bank regulation is the very thing that is supposed to stop this. So, if we're all beginning to worry about the security of our money in the banks -- in the general sense, not just short term -- then that's something we need the regulators to deal with.
By, say, arresting and jailing those bankers who have been making the system more fragile and thereby restoring confidence in the system. Bring it on. Crime isn't a little bit of playing fast and loose with the money in the bank. The real crime is making the future poorer -- and what's the right sentence for that?
Tim Worstall is a senior fellow at the Adam Smith Institute in London.