Uncle Scrooge and Liquidity Preference
In my childhood neighborhood on the Old Rock Island Road in East Wenatchee,
most kids liked comic books. Batman, Spiderman, Flash Gordon, and of course
Superman were always popular. I didn’t care much for the action heroes. I can only
remember two comic book characters I liked. One was a fat little kid named Tubby in the
comic Lu Lu. Tubby, Lu Lu and their friends had a very neat clubhouse. As a chunky
little kid myself, I liked Tubby a lot. I guess I had a preference for housing at an early
age as well. But my all-time favorite comic book character was Donald Duck’s uncle,
Uncle Scrooge McDuck. I never liked Donald himself, a holdover from the cartoons at
the Saturday matinee. I found his voice so irritating. Uncle Scrooge, however, to a
budding six-year-old economist was sublime.
Maybe you remember Uncle Scrooge and his castle with the money bin where he
kept his billions of dollars of cash, mostly coin, that he pushed around with what we
called in those days a bulldozer. I imitated my comic book hero by converting my weekly allowance and cash gifts to coin. I often dumped my total financial wealth onto
my bed, and with cupped dozer-hands pushed it around a la Uncle Scrooge.
Like Scrooge McDuck, I too was a harmless miser, not a malicious one like
Dickens’ Scrooge. From an early age, I didn’t like to spend money. I think it had
something to do with my first purchase. I had saved several months to buy a pair of
underwater goggles. They cost $1.25 at the Southend Variety Store. I can remember
counting out the money on the counter as my mom and dad looked on proudly. The next weekend at Lake Chelan I discovered that they leaked uncontrollably. I’ve been a
reluctant spender ever since. To this day, I live in an American League Household,
where my wife is the Designated Spender. Without her, I’d be living in a one-room hovel
somewhere and have a huge Scrooge-like bank account. It’s a little sick, I know.
It wasn’t long before my miserly ways began to differ from those of my hero
Uncle Scrooge. Scrooge held his wealth in one form only. Financial professionals use a portfolio metaphor to describe someone’s collection of wealth. A portfolio is something you keep your wealth in. Wealth is made up of assets. If you have a diversity of assets, you have a diversified portfolio. How about that! Sometimes finance and economics terms actually have meaning. Scrooge’s portfolio consisted almost entirely of the cash in his money bin. He had few other assets. His portfolio was not very diversified. Yes, he owned some real property, his castle, and some big cars and bulldozers, but mostly he had cash. He had no savings account, stocks, or bonds. Any economist would tell
Scrooge that his portfolio was way too liquid, a term we use to describe assets.
Liquidity is the ease with which an asset can be turned into something we can
spend, money. Scrooge’s wealth was all held in the form of money. He had an extreme
preference for liquidity. This is costly to anyone, but especially to a miser, who doesn’t
spend much anyway.
My first lesson in liquidity preference came from my mom. One day, when I was
playing Uncle Scrooge on my bed, Mom came into the room and said, “You ought to
open a savings account and earn interest.”
“What’s that?” I asked.
“It’s something you do at the bank. You know what a bank is, don’t you?” “Not really,” I said. “I usually stay in the car when you or Dad go inside.”
“A bank is a place you can put your money, and earn more money.”
I was immediately leery of banks. If my money was at the bank, I couldn’t push it
around my bed with dozerhands.
“I kind of like having my money here with me.” I said. “You know, like Uncle
Scrooge.”
“I know you do,” she said, in that sympathetic tone all good moms use when they are
about to try to get you to change your mind. “But let me tell you about the other part,
interest. At a bank you earn money on your money. If you leave a dollar in the bank for
a year, at the end of that year you will have $1.02. In another year you’ll have 1.04.
After a while you even earn interest on your interest.”
Mom paused as she looked at my knitted brow. I was thinking as hard as a six-year-old
could think.
“What do I have to do to get that extra money?” I asked.
“Nothing,” she said, “You just have to wait.”
“Nothing?”
“That’s right,” she said. “Of course you can’t spend any of it for a year.”
“That’s OK,” I said, the young miser.
“Could I keep a little at home?” I asked, “So I can play a little Uncle Scrooge.”
“Actually, that’s a good idea.” She said. “Everyone needs to have some cash around, but not so much that you lose that interest.”
“O.K.” I said. “But now that I’m going to put money in the bank, and earn, int ah int..”
“Interest,” she said. “Yeah, interest. If I’m going to have a bunch of my money at the bank, maybe I could have an increase in my allowance.”
“We’ll see,” she said.