Currency held by the public is the single best measure of people’s level of fear about the stability of the financial system. When people worry their bank might fail they withdraw cash from their bank accounts and keep it at home in coffee cans or under the mattress. About one year ago people freaked out, as you can see in the chart below, which measures the increase in currency holdings over year earlier levels. The most recent figure shows that people have taken a massive $90 billion of currency out of the bank over the past year. To put that number in perspective, a year ago the entire US banking system held only $90 billion in total reserves. Since a dollar of currency withdrawn from the bank reduces bank reserves by exactly one dollar that means people have taken 100% of the country’s reserves out of the banking system over the past year.
A closer look, however, shows that the increase in currency holdings has run its course and that people are beginning to exhale. Withdrawals peaked a few months ago and have fallen sharply since then. The most recent figure actually fell a bit from $850.1 billion to $849.6 billion for the week ending April 27. This shows an increase in confidence–or reduction in fear–that may be a factor in the recent stock price increase. At some point, when people return to normal levels of worry, they will likely re-deposit the entire $90 billion into their bank accounts. When that happens the economy will grow again and stocks will soar.
You can keep track of these numbers at the Federal Reserve Bank of St. Louis website where they are published every Thursday afternoon.