Australians squirrelled away as much as $4 billion when the Reserve Bank of Australia embarked on an unprecedented increase in note printing during the global financial crisis.
Demand for currency rose abnormally fast in late 2008 after the Lehman collapse and the RBA’s response, resulting in an extra $5 billion of Australian banknotes on issue by the end of that year.
Traditional models of currency demand suggest interest rate reductions and the $21 billion in federal government handouts accounted for about one-fifth of the increase, with the rest being socked away by individuals, funnelled by banks into their ATMS, and purchased by people overseas taking advantage of the low exchange rate at the time.
“The remaining 80 per cent of the rise may be due to an increase in precautionary holdings by people concerned about the liquidity or solvency of financial institutions and by financial institutions as a contingency," an RBA research discussion paper states. “This is consistent with the disproportionate rise in demand for high-denomination banknotes at this time."
People kept saving even though demand for cash withdrawals from banks increased by hundreds of millions of dollars, as Australian banks weathered the financial storm.
“The global financial crisis resulted in the failure or near failure of a number of large financial institutions in many countries, putting financial markets around the world under considerable stress," the paper says.
“Although the solvency of Australian banks was not in jeopardy, there was a substantial policy response in Australia due to the potential economic and financial consequences of the global financial crisis."
The surge in banknotes on issue in late 2008 was most pronounced in $50 and $100 bills.
“$50 and $100 notes are more likely to be held to store value, so their demand is likely to have been more sensitive to concerns about the stability of financial institutions," the paper says, noting that foreign demand for Australian currency from overseas is mostly for the $100 bill as it is the least costly to transport.
Retail cash withdrawals – either over the bank counter, from ATMs or via eftpos – also picked up during the period, being $700 million higher in October 2008 than in previous months. Withdrawals from ATMs spiked at $850 million in December and hit a smaller spike in March 2009, coinciding with government stimulus payments.
“The increase in the value of withdrawals in October was greater than the increase in the number of withdrawals, which is consistent with a smaller number of people making large precautionary withdrawals due to financial uncertainty," the paper states.
The Australian Financial Review