During WWII and after Pearl Harbor, the United States issued the Hawaii overprint notes because they feared the possibility that if the Japanese captured Hawaii they would also control a considerable amount of USD bills [1].

I found this piece of trivia not only interesting but also made me wonder why this could be an issue? Does this mean it is also an issue if say today China starts hoarding stacks of American dollars?

  1. https://en.wikipedia.org/wiki/Hawaii_overprint_note

If the Japanese captured Hawaii and hence also all the dollar bills in Hawaii, then the problem would not be that they "hoarded" these dollars, but that they would have been able to use these dollars (to buy other goods and services).

And so the purpose of the Hawaiian overprint notes was this: they "would be worthless in the hands of the enemy, but could be used as money in Hawaii as long as the U.S. maintained control."

I have noticed that laypersons tend to be unduly worried about the possible effects of "hoarding" (as evidenced for example by the questions on this site about hoarding). There seems to be a myth that hoarding cash can somehow cause damage to other parties. But in fact, under most circumstances, it is those who do the hoarding that suffer, while those who aren't hoarding benefit.*

If China "hoards" US dollars that were acquired through legitimate, peaceful means, then this is no bad thing for the US.

Say China sells T-shirts and other goods to the US in exchange for \$1 trillion in dollar bills. That is, the US receives these goods and simply gives China a bunch of paper money. China then "hoards" these \$1T in paper money. Then this is no bad thing for the US. The US will simply have acquired \$1T worth of T-shirts and other goods, while China will have acquired a lot of paper that is useless so long as it is "hoarded" and unused.

Indeed, the value of this paper will tend to depreciate. In fact, the US can cause the value of this paper to depreciate by simply printing more dollars. And in a state of war, the US could even undertake drastic measures such as declaring those \$1T useless or achieving this effect by requiring all US citizens (and possibly other non-Chinese parties) to exchange their dollar bills for new legal ones.

*One important exception to this is the underground economy. When cash is hoarded, this can negatively affect those in the underground economy who rely heavily on cash to facilitate transactions.

  • $\begingroup$ The answer is very straightforward then. I was especulating that some sort of economic principle would complicate things further. $\endgroup$ Feb 6 '19 at 3:40
  • $\begingroup$ Perfectly good answer as far as Hawaii goes, but I think there is some risk involved in your other example of China holding $1T in cash: if they were to exchange it rapidly for other currencies it could have not great effects for the role of the dollar as global reserve currency. As you say, there are possible ways the US could respond, but most of which would further serve to undermine the dollar as dependable reserve currency. $\endgroup$
    – Dan
    Feb 6 '19 at 9:40

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