Economics of Cash Shoage - _5_ to meet government expenditure needs: i.e., if there is an "excess supply" of deposits. This unwillingness to hold deposits is not due to custom or history, but to the unattractiveness of holding an excess share of wealth in the form of deposits.

In Figure 4 these two forms of cash shortage are represented by different (though overlapping) regions in (i,ir) space. The first form, cash shortages of the households, is represented by values of i and r to the left of the HH curve. The second forn, cash shortages experienced by the banking system, is represented by values of i and _r_ to the right of the DD curve. Point A represents a situation of cash shortage for both households and the banking system: excess demand for currency by households, a demand for deposits by households that does not meet the govermnent's currency requirements, and an implied ambiguous position in the foreign exchange market. Point B represents the household's excess demands for both currency and deposits: the banking system would not suffer a shortage of currency in this instance.<sup>6</sup> If financial disintermediation is defined as the inability of the banking system to satisfy the demands to convert deposits into currency, then the area to the right of the DD curve is characterized by financial disintermediation. This will coincide with the second form of cash shortage: the shortage to the banking system.

The first proposition of this paper is that cash shortages are manifestations of financial - disintermediation. The preceding argument has demonstrated this in a trivial way a 'proof by definition". The crucial feature of this argument has been that the cash shortage to the banking system has not been assumed, or attributed to history or custom: it is the outcome of household decisions given existing interest and inflation rates.

The historical record in the former Soviet Union as provided in Conway (1994) and summarized in Table I illustrates that the cash shortages observed there were initially those of the banking systemn: wage and pension arrears existed prior to shortages of cash observed in household transactions. However, in many of the countries the two coincided: the banking system's cash shortage coincided with a cash shortage of the households (as at point A in Figure 4). Was this a likely outcome?

Although the currency and deposit markets are closely regulated in these countries, the informal foreign exchange market has been quite liberal; the exchange rate has responded to eliminate excess supplies and demands in the market. Incorporating the assumption that there is market balance in foreign exchange leads to removal of equation (5) and a restriction on the observed equilibria in Figure 4_ **'** They will lie on the curve denoted FXE and illustrated in Figure 5, with the 6 The implied excess supply of foreign exchange implies an appreciation of the currency relative to foreign exchange in this instance.

7 There is not a restriction upon the (i,r) pair, but upon each pair's relationship to the HH and DD curves. For example, when there is excess demand for foreign exchange the exchange rate will depreciate. This will raise real wealth in aggregate and cause a shift in both deposit and currency demands. The resulting configuration will be as described in Figure 5 for any (i,r) pair - both HH and DD curves will either lie above, or both below, the pair (unless the economy is in notional equilibrium at the intersection of the two). The appendix provides a mthenatical analysis of excess