@DoctorJones said in -0.5% interest mortgages:
But this leads to other questions. The amount of paper fiat in circulation is dwarfed by the amount of digital fiat. What if everyone wants paper cash – because it’s more valuable – and there’s not enough to go around?
The interesting thing is that this was true even when the physical currency wasn't fiat. Here, I'm talking about the time when the physical currency was either the actual money (gold or silver coins, bricks of salt, cowrie shells, certificates for future tax revenues, etc.) or a paper certificate that stood for a stock of the physical asset stored somewhere.
It's worth noting that second part, about the paper certificate. Let's go back to 17th Century England, where the currency was, like today, the pound Sterling. A pound (of money) was exactly a pound of Sterling (925 fine) silver. In the centre of Oxford, there's a small museum where they have an actual 17th Century pound coin, and it is, indeed, a pound of sliver. That makes a honking big coin, and that bigness is at the heart of why we have banknotes. The notation "I promise to pay the bearer on demand the sum of ..." on every British banknote is a throwback to that time, and the "sum of ..." was a sum of one / five / ten / etc. pounds of actual Sterling silver.
So, let's look at what happens when we first open a bank. The bank is there to serve as a place to store those honking big coins, and in return, it gives us those paper certificates (bank notes). So I deposit my coins and get my banknotes and I use them as currency. While I'm doing that, the bank lends (most, let's say 90%(1), of) that silver to someone else, who deposits it in a bank. Now there is still 100 pounds of silver in the banking system, but 190 pounds of banknotes. This cycle continues until (in the limiting large-economy case), it converges at a multiplier of 1/(10%) = 1/0.1 = 10. That is, for every 100 pounds of physical currency originally deposited, there are banknotes with a face value, in total, of 1000 pounds.(2)
Everyone trusts that if he needs (small amounts of) physical currency, he will be able to get it, and most of the time, nobody bothers with it because the banknotes are so much easier to use than coins that weigh a pound (weight) per pound (money).
Many moons ago, I explained this to the late Mrs Cynic, and she was horrified.
(1) That figure of 90%, or more specifically the 10% left behind, is technically termed the "reserve limit", and it's a critically important part of a banking system. Yes, the central bankers can use it to manipulate the money supply, but in general they don't because the system doesn't react quickly or easily to changes in the reserve limit.
(2) That 10:1 excess is why bank runs are so terrifying. There are banknotes that claim that people can withdraw 1000 pounds of silver, but the banks only hold 100 pounds. What happens when everyone tries to claim "their" silver?
Note that in all the above, the currency is not fiat, but a similar line of reasoning applies to fiat currencies.