Monday, January 16, 2023

In praise of cash reserves...............

      Any sudden event which creates a great demand for actual cash may cause, and will tend to cause, a panic in a country where cash is much economised, and where debts payable on demand are large.  In such a country an immense credit rests on a small cash reserve, and an unexpected and large diminution of that reserve may easily break up and shatter very much, if not the whole, of that credit.  Such accidental events are of the most various nature: a bad harvest, an apprehension of foreign invasion, the sudden failure of a great firm which everybody trusted, and many other similar events, have all caused a sudden demand for cash.  And some writers have endeavoured to classify panics according to the nature of the particular accidents producing them.  But little, however, is, I believe, to be gained by such classifications.  There is little difference in the effect of one accident and another upon our credit system.  We must be prepared for all of them, and we must prepare for all of them in the same way—by keeping a large cash reserve.

-Walter Bagehot, from his 1873 classic, Lombard Street: A Description of the Money Market

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