<p>When you say “to lend out a high percentage of their assets instead of holding cash” it seems as if you mean “to lend out a high percentage of their cash instead of holding cash”, otherwise the question makes no grammatical sense.  Assuming that is the case , then I would say that most households already lend out their cash , by putting it in a bank.  That is overnight lending.  The remainder of their cash, which might be held in bank notes, doesn’t constitute a large percentage of the monetary assets of most households.  So overall I don’t think the question makes much sense.  Please correct me if I’m misinterpreting.</p>

CC BY-SA 4.0
2022-12-09T23:10:55.217Z
When cash is deposited in a bank then that would tend to drive down interest rates , but this is offset by a central bank that absorbs the cash through either a deposit facility or open market operations, to keep the interest rate at target.
dm63
CC BY-SA 4.0
2022-12-01T01:32:57.453Z
2022-12-01T01:32:57.453Z
dm63
<p>If you are talking about cash (when you mean assets), then excess of cash could drive down interest rates, other things being constant. And in your case since it is a law, everyone is interested in giving out their cash on loans, this search for borrowers would be competitive and drive down the interest rate. Again, in an imaginary world, if you do this, it might generate a difference in cash holding patterns in the long run after you introduce the law. How that plays out is hard to say without putting a bit more structure on the model.</p>

CC BY-SA 4.0
2022-12-01T07:02:20.457Z
I would say it almost surely drives up interest rates. Most cash is held at bank accounts at very low interest rates. These deposits build a base for loans (among many other things) that banks can use.
AKdemy
CC BY-SA 4.0
2022-12-01T11:03:40.697Z
Why would more deposits drive up interest rates? It would increase banks base, which in turn would mean that banks lend more. The only way they can lend more is by driving down interest rate on fresh loans.
EndLoop
CC BY-SA 4.0
2022-12-01T11:10:39.977Z
There wouldn't be more deposits. People already have the vast majority of their cash in bank accounts. What would change is that if you are forced to lend it out directly, your money is tied in loans, and you cannot simply stop the loan at any time. Assume you have $1000 and need USD800 to give someone for a loan (say to buy a mobile phone). If it is agreed to buy back the loan over 2 years, you cannot get the money back tomorrow. However, in a bank deposit (ignoring some savings accounts), you have essentially ON as explained by @dm63.
AKdemy
CC BY-SA 4.0
2022-12-01T11:11:13.410Z
Since you need to tie your money (for a lot) longer, you would want a higher interest rate.
AKdemy
CC BY-SA 4.0
2022-12-01T11:20:06.750Z
If what you are saying is true, then I would just put all my money in savings bank account and have 400$ cash with me. Nothing more. But it is interesting to think of situations when you would have to circumvent the banking system.
EndLoop
CC BY-SA 4.0
2022-12-01T15:42:59.440Z
On aggregate - who do you think has vast amount of money in cash? It will be very small, and mostly for shady reasons (drugs, black market activities etc). No one can force this money to be lent out, because the owners are not dentifiable. In the total scope of cash, deposits will be the vast majority. All coin and banknotes per capita are only ~USD4000 in the US [source](https://www.bis.org/cpmi/publ/d171.pdf). The average american citizen has ~90.000 in debt.
AKdemy
CC BY-SA 4.0
2022-12-01T16:28:33.040Z
And what you explain in your last comment is essentially what most (the average person) people do(es).
AKdemy
CC BY-SA 4.0
2022-12-01T00:36:15.767Z
2022-12-01T00:36:15.767Z
EndLoop
<p>Suppose that we have an economy where households mostly hold their liquidity as cash under their mattresses. If they suddenly start lending all of it (to construction projects and the like), no matter the interest rate they get in return, what is the effect on prevailing interest rates?</p>

CC BY-SA 4.0
2022-11-30T16:36:45.450Z
On what interest rates? Also what does it even mean being forced to lend out high percentage of their assets? How do you lend a % of truck or house? Also what specific artificial restrictions? That actually can change the answer since there might be some second order effects
csilvia
CC BY-SA 4.0
2022-11-30T16:39:08.233Z
are you feeling ok today? That is clearly not true.
csilvia
CC BY-SA 4.0
2022-11-30T16:40:20.027Z
lol you literally linked to an answer that says there are multiple interest rates. Ok no point in talking to you.
csilvia
CC BY-SA 4.0
2022-11-30T16:48:58.873Z
I do not even have Stack Overflow account with enough reputation to downvote. Also if quality of your answers on stack overflow is same as quality of answers here you should not get surprised that you get down voted there as well.
csilvia
<macroeconomics><interest-rate>
What is the effect on interest rates if households are forced to lend?
Criticize SE actions means ban
# What is the effect on interest rates if households are forced to lend?

(Asked by: username_0 on 2022-11-30)

Suppose that we have an economy where households mostly hold their liquidity as cash under their mattresses. If they suddenly start lending all of it (to construction projects and the like), no matter the interest rate they get in return, what is the effect on prevailing interest rates?

**Tags:** macroeconomics, interest-rate

> **Comments:**
> **username_1**: On what interest rates? Also what does it even mean being forced to lend out high percentage of their assets? How do you lend a % of truck or house? Also what specific artificial restrictions? That actually can change the answer since there might be some second order effects  
> **username_1**: are you feeling ok today? That is clearly not true.  
> **username_1**: lol you literally linked to an answer that says there are multiple interest rates. Ok no point in talking to you.  
> **username_1**: I do not even have Stack Overflow account with enough reputation to downvote. Also if quality of your answers on stack overflow is same as quality of answers here you should not get surprised that you get down voted there as well.  

---

## 2 answers

### Answer by username_2 on 2022-12-01. Score: 3

When you say “to lend out a high percentage of their assets instead of holding cash” it seems as if you mean “to lend out a high percentage of their cash instead of holding cash”, otherwise the question makes no grammatical sense. Assuming that is the case , then I would say that most households already lend out their cash , by putting it in a bank. That is overnight lending. The remainder of their cash, which might be held in bank notes, doesn’t constitute a large percentage of the monetary assets of most households. So overall I don’t think the question makes much sense. Please correct me if I’m misinterpreting.

> **Comments:**
> **username_2**: When cash is deposited in a bank then that would tend to drive down interest rates , but this is offset by a central bank that absorbs the cash through either a deposit facility or open market operations, to keep the interest rate at target.  

---

### Answer by username_3 on 2022-12-01. Score: 1

If you are talking about cash (when you mean assets), then excess of cash could drive down interest rates, other things being constant. And in your case since it is a law, everyone is interested in giving out their cash on loans, this search for borrowers would be competitive and drive down the interest rate. Again, in an imaginary world, if you do this, it might generate a difference in cash holding patterns in the long run after you introduce the law. How that plays out is hard to say without putting a bit more structure on the model.

> **Comments:**
> **username_4**: I would say it almost surely drives up interest rates. Most cash is held at bank accounts at very low interest rates. These deposits build a base for loans (among many other things) that banks can use.  
> **username_3**: Why would more deposits drive up interest rates? It would increase banks base, which in turn would mean that banks lend more. The only way they can lend more is by driving down interest rate on fresh loans.  
> **username_4**: There wouldn't be more deposits. People already have the vast majority of their cash in bank accounts. What would change is that if you are forced to lend it out directly, your money is tied in loans, and you cannot simply stop the loan at any time. Assume you have $1000 and need USD800 to give someone for a loan (say to buy a mobile phone). If it is agreed to buy back the loan over 2 years, you cannot get the money back tomorrow. However, in a bank deposit (ignoring some savings accounts), you have essentially ON as explained by @username_2.  
> **username_4**: Since you need to tie your money (for a lot) longer, you would want a higher interest rate.  
> **username_3**: If what you are saying is true, then I would just put all my money in savings bank account and have 400$ cash with me. Nothing more. But it is interesting to think of situations when you would have to circumvent the banking system.  
> **username_4**: On aggregate - who do you think has vast amount of money in cash? It will be very small, and mostly for shady reasons (drugs, black market activities etc). No one can force this money to be lent out, because the owners are not dentifiable. In the total scope of cash, deposits will be the vast majority. All coin and banknotes per capita are only ~USD4000 in the US [source](https://www.bis.org/cpmi/publ/d171.pdf). The average american citizen has ~90.000 in debt.  
> **username_4**: And what you explain in your last comment is essentially what most (the average person) people do(es).  

---

