Despite the federal government’s bank deposit guarantee, the RBA’s annual report showed that there was a run on the banks last year, requiring it to print more $50 and $100 notes.
Though demand has since eased off, the growth in currency in circulation at the end of the financial year was still about three times what would otherwise have been expected (even the usual annual 5% growth is surprisingly high, given the massive increase in use of electronic transfers).
It’s easy for voters to say in surveys that they don’t trust politicians, but here was a case when they were backing their opinions with real costs and risks to themselves. They would rather sacrifice the interest they might have earned and take the 3% or so risk of being burgled than believe either the banks or Wayne Swan.
Andrew Norton 
The run was before the guarantee was put in place, as deposits where not guaranteed this was a rational action. Keeping the money out of the banks after the guarantee however was not, the value of our currency is only guaranteed by “the government”, that is the way fiat currencies work. In the end a 100 dollar note is just a financial instrument printed on plastic.
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Charles – No, it was after the guarantee. The guarantee started in June, but if you look at the month-by-month current chart in the RBA annual report (p.38 in the pdf) currency growth was only modestly above average until October, when it skyrocketed.
This is consistent with the US government panicking after Lehman Brothers collapsed, and this panic spreading through the world.
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“They would rather sacrifice the interest they might have earned and take the 3% or so risk of being burgled than believe either the banks or Wayne Swan.”
Trusting the government is one thing. But, ‘trusting Wayne Swan …’, well, when you put it like that … 🙂
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This is the press release that mattered, on 13 October.
The last sentence in your response to my comment is a lot more rational than the original post.
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I’m not sure how much the October announcement added to the situation for ordinary punters compared to the June announcement – will have to defer to financial people on that.
But I don’t see how it contradicts my point. October, November and December 2008 all saw massively above trend growth in demand for cash, which supports my thesis whether the guarantee started in June or October.
It’s quite possible to argue that there would have been a bigger run without the guarantee. It’s much harder to argue against the view that some people did not have confidence in either the banks or the government.
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Unless I’m mistaken, the numbers in the annual report aren’t of the amount of currency held by the general public. The amount of currency held by the general public is located in the financial aggregates table.
Here we see that during the December quarter the amount of currency held by the public increased by $4.3 billion, where generally the amount of currency tends to increase by about $0.5 billion. So there is undoubtedly something happening here.
One of the reasons cited by the RBA was that there was an increase in the conversion of foreign of currency to Australian dollars. I’m not across the size of foreign currency holdings in Australia by households, but it seems unusual that the central bank would need to print more money as a result of people converting foreign currency holdings. In particular, given that the conversion would not necessarily result physical currency.
Another reason cited by the RBA was the effect of the government’s stimulus payments (i.e. people were demanding higher cash balances for transaction purposes). I don’t recall the exact timeline of the payments, but from memory much of the $8 billion to households was made in December. Looking at the monthly seasonally adjusted data, the spike in the demand for currency was in October.
So unless you think that a sizeable proportion of people were taking cash advances to pre-empt the December payments, it is unlikely that the increase in currency holdings in October was the result of stimulus payments.
Another reason offered was a change in risk preferences. Admittedly, globally there was a dramatic change in risk preferences during that period of time. But for individuals to start taking their money out of the bank indicates more than just a change in risk preferences.
Also, during that period of time banks didn’t trust other banks. (If you don’t believe me, have a look at some of the interbank spreads during that period). So it seems plausible to me that some individuals didn’t trust the banks and subsequently withdrew their funds.
I’d also imagine that when the government introduced the bank deposit guarantee, it was receiving advice from the RBA and the Treasury. These two agencies would have been monitoring the flow of funds out of banks very closely and the decision to introduce the guarantee would not have been made lightly.
That said, it appears that guarantee did actually help stem the flow of currency to the general public with the seasonally adjusted increase in the month of November being a modest 0.29 per cent, from 5.91 per cent for October.
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Andrew, I’m not a financial expert, but my understanding is that the October statement is what is regarded as the bank guarantee – since it was the Irish government I think that first introduced full guarantees at the beginning of October.
See http://www.treasurer.gov.au/DisplayDocs.aspx?doc=pressreleases/2008/117.htm&pageID=003&min=wms&Year=2008&DocType=0
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