Preparation for payment system fragility

In previous posts, I have suggested ways to deal with rising prices (COLA) and food insecurity (wild play and the park of freedom). Inflation causes many problems, including the risk of payment system failures, such as shutting down banking and credit card networks, and keeping individuals financially strapped. Cyber ​​attacks, power outages, financial crises and other unforeseen shocks can slow down or even disable the payment system.

True, a Actually Or Judgment The suspension will be effective but don’t forget that if you cannot pay, your employer and other lenders (such as Social Security or Retirement or Investment Fund) will not be able to pay you. So, how do you buy gas or groceries?

The most obvious way to hedge against payment system risk is to keep some cash. Many people living in the Great Depression had saved paper money all their lives, just in case their bank went under or Roosevelt’s ghost, the president who confiscated their gold, declared another bank a “holiday”. But there is very little left of these people, and many members of our youngest adult generation go out of their way to avoid carrying cash. Even some old timers like me use paper notes when absolutely necessary.

Moreover, it would be rather disrespectful to hold large amounts of cash when I-Series bonds are yielding at 9 percent. In terms of inflation-adjusted terms it is still a losing proposition but literally better than the meaning of those flimsy pieces of paper. If you think you can just go down to your bank and fill out a withdrawal slip like in 1999, think again. Even though some banks are open, they keep very little cash nowadays. Any functional ATMs will also be snatched quickly.

Given the current rate of inflation, it may be a good idea to stockpile the perishable items you need. Gasoline is smart but of course many foods can be stored for a long time. As long as you eat it before it goes bad, it will actually save you money by buying now after the price increase (again).

What was the last time America’s payment system crashed during the Great Depression? The various local and state systems that began in 1930 repeatedly failed, and in early March 1933, President Roosevelt declared a national “bank holiday.” New Commander-in-Chief closes to stop currency hoarding, gold exports, and bank failures All Banks of the country, including the Federal Reserve Bank, under section 4305 of the “Dealing with the Enemy Act” of 1917.

No one knew when the emergency leave would end. Yet little rioting has taken place. The Americans were calm and “did”, adapting to the situation in a subtle way. Some municipalities, for example, please lock up offenders who fail to pay cash fines, giving them “three hotspots and one bed” for a day. Although unconstitutional, other municipal employees issued tax-expecting scrips, who then paid local taxes with it. Some churches have stopped collecting collection plates, others have adopted handwritten IOUs. More formally, the IRS has accepted checks knowing that it will not be able to submit for collection after the crisis.

Private businesses have also responded accordingly. Railroads, for example, allow passengers to travel home without a ticket. The American Guardian Life Insurance Company, a mutual life insurance company, rightly thought that it would have to pay for all verified death claims immediately, so it always kept more cash than its profitable competitors. During the bank holidays, it would deposit its cash to buy money orders, which would be sent to beneficiaries via American Express. If the money order system also shuts down, it is ready to courier cash to beneficiaries from the Manhattan home office or instruct its local agents to make cash down payments on its behalf. It may also borrow unofficially, from a few companies that consider themselves large and therefore risky, with cash in hand. Short-term interest rates were understandably high. Businesses that do not want to disclose their money at default risk at an indefinite period of time persuade local police stations and private security agencies to protect their cash.

Most wholesale businesses – manufacturers, importers and the like – sell credit to each other and to retailers, so most respond to the crisis by simply extending the line of credit to existing trading partners. Many retailers have done the same. Ordinary credit cards were a post-war phenomenon. In the 1930s, many retailers maintained book accounts, as did colonial retailers, or issued their own charge cards. But not everyone has a credit account wherever they shop, so some big employers pay their employees through IOUs which local retailers are more than happy to accept than the promise of poor job rigor.

The small change was so low supply that some retailers sent shillings to competitors to buy trivial items with a বিল 20 bill. Some business responses say that customers can choose to bid at any price, but no changes will be made. Perhaps most tragically, many piggy banks suffered an untimely death, as evidenced by the seemingly insignificant ones who kept coins in open glass jars. But precisely because the pigs could only be attacked by destroying them, they acted as a promised instrument and therefore contained more coins than jars, all other constants. Some transactions also start before the end of the holiday.

By mid-March, most of the banks that would reopen (about 4,000 were permanently closed) were already in place, and the payment system returned to its normal, fragile nature. The crisis has led to the formation of the Federal Deposit Insurance Corporation, which has proven itself to be the best. This led to a major devaluation of the US dollar and an end to the holding of domestic gold and the convertibility of retail gold. In other words, Americans still suffer the costs imposed by the government’s New Deal solution.

What will Americans get if the payment system is shut down again? It will depend on the exact nature of the crisis, but a central bank digital currency (CBDC) is a good guess. Most retailers today are not ready to extend credit to their customers and there is no way to get credit card impressions. It may be dawn for them to take credit / debit card pictures but many customers may be worried about allowing them to do so. Innovators may come up with other clever solutions but most business regulators will be afraid to do anything without prior approval. Bitcoin can capture market share through blockchain or through the Lightning Network or through fintech platforms like Venmo, but not too much if there are on and offramp blocks. As tensions rise, people will call on the government to “do something”, just as in March 2020. A Rooseveltian is heard muttering to President Biden or Harris, “You have everything to fear except the CBDC.” But at least Twitter users will be able to express their anger in public. It doesn’t matter.

Robert E. Right

Robert E.  Right

Robert E. Wright is a Senior Research Fellow at the American Institute for Economic Research.

He is the author (or co-editor) of more than two dozen major books, book series and edited collections, including AIER. Best of Thomas Payne (2021) and Financial exclusion (2019). He has also written numerous articles for (including) important journals, including American Economic Review, Business history review, Independent review, Journal of Private Enterprise, Money reviewAnd Southern Economic Review.

Since pursuing his PhD, Robert has taught business, economics, and policy courses at Agustana University, the Stern School of Business at NYU, Temple University, the University of Virginia, and elsewhere. History from SUNY Buffalo in 1997.

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