It all depends on how it works, of course. If people start withdrawing at a more or less steady pace, the Fed can print to meet demand. I don't know what the upper boundary on its printing speeds are.
In ordinary times banks that face a decline in deposits can sell assets (loans) to other banks in order to get cash. In the event of a "run," the pace of withdrawal for the system as a whole outpaces the ability to mark loans to market or the cash there to buy them--a classic gold standrad deflation bust scenario. The only difference is that here we are talking about whether there is adequate paper to meet the demand.
The fed could issue a special thousand or ten thousand dollar note that would be issued to panicked people desirous of hoarding at home. These notes could be printed a thousand times more efficiently than one dollar bills, for example. So the printing problem may be minimal.
In addition, the physical problems of withdrawing money at the last minute will deter many people. ATM machines would run dry and there would be lines at the banks. As an administrative matter you probably couldn't cash out that amount of deposit money in a hurry and if you did it slowly there would be no problem because there would be plenty of time to print more.
The more serious issue is that as customers withdraw cash the banks will get out of whack with required reserves relative to their total assets (the loans they have made). There is a very simple solution: the Fed can loan at the discount window in unlimited amounts to meet the temporary crisis. At a 5% rate the monthly cost of these loans to the borrowing institutions for $386 billion (the number I think that was raised) would be something like $1.6 billion.
In other words, the Fed has the ability to manage the crisis by extending loans and being generous either with the interest rate and the payback time or both.
In addition, the Fed can purchase up to $5 trillion dollars in U.S. govt debt in order to add more liquidity to the banking system. Even if people are withdrawing like crazy massive open market purchases will force others to deposit like crazy. Some people will get the idea that having large cash amounts at home probably isn't that good of an idea, anyhow.
So I don't expect to see the anticipated millenial banking meltdown. Probably a more viable strategy than taking out cash is to diversify your credit cards. If computer confirmation problems occur, I suspect that most major companies will accumulate charge slips and put them through whenver the problems are solved.
-- Gregory P. Nowell Associate Professor Department of Political Science, Milne 100 State University of New York 135 Western Ave. Albany, New York 12222
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