Americans Aren’t Taught About Cash Liquidity Anymore

When I was kid growing up in the Midwest, I remember the 4th of July parades that would feature World War II veterans throwing out candy and waiving with banners at the crowd. At some point in the early 2000s, we stopped seeing those floats as the members of the Greatest Generation died off. With every  passing of a generation, we often lose the unique wisdom that only those members possessed.

For those who lived through the Great Depression, the importance of liquidity was self-evident. They saw banks close. If they were adults engaging in financial transactions before 1933, they actually witnessed their life savings disappear when banks became insolvent. A man like J.P. Morgan was able to rise in stature because he said, “You can trust me, I personally own much of AT&T, Western Union, U.S. Steel, International Harvester, General Electric, and every railroad so if you bank with me I have America, Inc. as a stop-gap available to protect your savings.”

With President Roosevelt regularly ordering bank closures, and financial institutions being pillars of the community one day and sold for pennies on the dollar in a federal bankruptcy court the next, no safety was taken for granted. These individuals knew that there is no substitute for having cold, hard cash. They internalized Warren Buffett’s famous quote comparing cash to oxygen—when it’s around, you hardly think about it, but when it is absent for a few moments, it is all you think about.

As anyone who handled the estate of a Depression-era American or had members of their family from that generation die, it would be common to go through the old closets, old suits, old shoes, and crevices of the house and find “a few hundred dollars here, a few thousand dollars there.” These are the same people who would only have banking or checking accounts within the FDIC limits, and if they were wealthy enough to have more than that, they would open up a second or third bank account to avail themselves of FIDC protection rather than seek out higher interest in money market funds or other financial instruments that are not backed by guarantee.

Sure, over time, as the memory of the Great Depression faded from view, their kids and grandkids would lightly chide them about their ultra-conservative ways, perhaps even judging them for being out-of-step with the times for having “alarmist” views about bank closures and seemingly safe stores of cash values disappearing overnight. Often, they would nod their head and acknowledge the chiding, but they would not amend their ways because it is hard to convince someone that something can’t happen in the future when it in fact happened in their past.  

Nowadays, as is customarily the case, the hard-won lessons of prior generations are forgotten with the passage of time. It is clear that the lessons of the Great-Depression generation have been all but forgotten.  

Many of you are familiar with the widely known data point that “Four in ten Americans are not equipped to handle an unexpected $400 expense.” That comes from this 2018 Federal Reserve Report on American Household Liquidity. It is also stated that the median American with household annual income between $50,000 and $150,000 only has 1.8% in total liquid cash reserves, which means they only have $900 to $2,700 on hand and in the bank at a given moment in time. Instead, it shows that these Americans plan to tap their home equity for a line of credit upon encountering an unexpected expense. While it is better to have an advance contractual credit arrangement than applying in real time, it still carries the counter-party risk and the naïve assumption that “the kindness of strangers” as Warren Buffett puts it will be there for you when you need it rather than dealing with hardships of its own or frankly not determining that you are a suitable credit risk.

Part of the problem is that no one is taught about the importance of cash reserves on hand anymore. Even today, politicians and financial pundits are telling Americans to quickly spend their $1,200 checks that they may receive as a part of the stimulus package to keep the economy going. That is a view that puts second-quarter GDP in 2020 above your household’s safety and security. If you are in a position where the receipt of $1,200 is a meaningful, life-altering event, then you need to be holding onto as much of that cash as possible. But that type of wisdom is no longer culturally transmitted as “common sense.”

I think there is a naivete reliance on the government and lenders to always solve personal problems. From a personal responsibility point of view, your first job is to survive, and your second job is to prosper. But managing the first task is a condition precedent for the latter. It is unacceptable that Americans only have in total cash liquidity what amounts to 1.8% of their annual income for certain median ranges. It should probably be 10-25%, and unfortunately, the lower one keeps their liquidity, the more likely they are to have the experience of understanding why it is so important. Maintaining adequate savings is the most essential of basic financial household management and yet it is often most neglected.

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