South-Western College Publishing - Economics  
Subject Money
Topic Monetary Policy
Key Words Money, Monetary Policy, Inflation
News Story

The fear of Y2K mishaps resulted in billions of dollars being spent on computer programming fixes. Many people had to work on New Year's Eve as a precaution. People stocked up on water, food, gasoline, but apparently not on cash. To preclude any shortages of cash, the government printed $70 billion in bills. The bills were first distributed to the Federal Reserve's 12 district banks and from there to the vaults and cash machines of each bank. To date, banks have not experienced an increased demand for cash.

Many banks planned for increased cash demand. Chase Bank, for example, planned for a 30 percent increase in cash demand for October and November and a 200 percent increase in December. According to a Chase spokesperson, the demand did not materialize. Citigroup, one of the largest financial institutions in the world, has reported no increased cash withdrawals in the 100 countries that it serves.

So far there have been few problems and people appear to have confidence in the ability of the banking system to handle any problem. A Y2K bug did appear in Britain. During the last few days of December, about 20,000 credit card terminals stalled, disrupting holiday shopping. A spokesperson for HSBC Holdings, the British bank in charge of the terminals, said the problem should be resolved by January 1.

As long as the extra cash that was printed is held in reserve, there should be no inflationary effect. For banks, holding extra cash rather than interest- earning assets will mean that their earnings will be reduced slightly. When the Federal Reserve is certain that the crisis has passed, banks will quickly ship the excess cash back to the Federal Reserve. Most of the bills that are returned to the Fed will be stored in Federal Reserve distribution centers. The new bills will replace older bills and the older bills will be shredded.

(Updated February 1, 1999)

1. What are some of the determinants of the demand for money?
2. What determines whether the individual will hold money in the form of cash or in demand deposits?
3. Why does the article claim that printing the additional bills is not inflationary?
Source Timothy L. O'Brien, "Banks Stocked Up on Cash But Hoarders Stayed Away," The New York Times, December 31, 1999.

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