money-supplyHoarding of the fixed quantity currency (such as gold coins) limits the trade, as people don’t have the necessary fluidity to conduct it. If the same fixed quantity currency could be infinitely divisible however (that is, one could divide a single gold coin as easily into 1/10 or 1/1000000), would it also be damaging to the economy if some entities decided to accumulate and not spend the currency?
Would there be any aspects of the economy that are affected by hoarding only if the currency is not very divisible?
Certianly any fixed quantity anything could be hoarded. The fact that the coins can be divided will not prevent a few entities from collecting and storing a large percentage of coins. Especially since there is no physical component to the coins. Any hoarding that causes a signifigant increase in the value of the coins presents a risk to the system for pump and dump type scams. This type of volitility causes loss of confidence in the currency and devalues the coins.
Anything that’s not ephemeral can be hoarded. Removing some stock of a valuable thing from circulation will generally increase the value of the remaining circulating stock.
Removing currency from circulation will generally be deflationary: the price of goods, in that currency, will drop (and its exchange rate with other currencies will rise).
If prices drop so far that goods tend to cost more than a single unit of currency, then the currency ceases to be a medium of exchange, and other things will be used as substitute currency; and/or people revert to barter. Obviously, that could not happen with an infinitely divisble currency.
Howver, by the time that deflation has happened so much that the divisibility becomes an issue, then there is a much much larger problem: the hoarders have now become nominally very rich (without having created any real wealth), and have the power to cause enormous disruption to that currency’s economy. If the total amount of currency (or the proportion of currency that is hoarded) is known to only a very few market participants, then the currency is only viable as a store of value, insofar as the hoarders wish it to be: all other currency-users are playing a game with their wealth, blindfold. It’s a financial russian roulette, where the biggest hoarders never have to put the gun to their heads, but all other market participants in that currency do.
Furthermore, the hoarders can exploit the market, by creating false scarcity to drive up the currency’s exchange rate. In the right (wrong?) circumstances, this will create a bubble, that the hoarders can then sell into, removing lots of wealth from the rest of the market, and inflating the currency to near worthlessness - but they have will have very profitably dumped (most of) their hoarded currency before the bubble bursts.
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