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is impossible for the undermentioned banks to provide even the recent restricted service in the Republic of Ireland.” “In these circumstances it is with regret,” the notice continued, “that these banks must announce the closure of all their offices in the Republic of Ireland on and from Friday, 1st May, until further notice.”
    It may come as a shock to learn that virtually the entire banking system in an advanced economy could have shut down overnight as recently as in 1970. At the time, however, this development was widely expected—not least because it had happened once before, in 1966. The matter of dispute between the banks and their employees was a familiar one in the Europe of the late 1960s: the extent to which pay was keeping up with prices. High inflation throughout 1969—by the autumn, the cost of living had risen by more than 10 per cent over the previous fifteen months—had prompted a demand by the employees’ union for a new pay settlement. The banks had refused, and the Irish Bank Officials’ Association had voted to strike.
    From the beginning, it was expected that the banks’ closure would not be short-lived, so preparations were made. The first reaction of businesses was to stockpile notes and coins. The
Irish Independent
reported that:

    (illustration credit 1.3)
    There were massive withdrawals of cash throughout the country as firms built up their reserves in anticipation of a shutdown. Insurance companies, safe dealers, and security firms are expected to do brisk business while banks remain closed. Factories and other concerns with large payrolls have arranged to obtain ready cash from large retailers such as supermarkets and department stores to meet wage bills. 31
    But in the first month of the crisis, it became apparent that things might not turn out quite as badly as feared. The Central Bank of Ireland had deliberately accommodated the additional demand for cash in March and April, so there were about £10 million more notesand coins in circulation in May than usual. There was an inevitable tendency for the stream of payments to give rise to gluts of small change in some places—generally shops and other retail operations—and dearths in others—usually wholesalers and public institutions which had no reason to take in cash in the course of their daily business. The Central Bank even made a vain plea to the state-owned bus company to have it distribute cash to passengers. But these blockages in the circulation of coins and notes proved a relatively minor inconvenience.
    The reason was that the vast majority of payments continued to be made by cheque—in other words, by transfer from one individual’s or business’ current account to another’s—despite the fact that the banks at which these accounts were all held were shut. In its review of the whole affair, the Central Bank of Ireland noted that prior to the closure “some two-thirds of aggregate money holdings are in the form of credit balances on current accounts, the remainder consisting of notes and coin.” 32 The critical question, therefore, was whether this “bank money” would continue to circulate. For individuals in particular, there was really no other option: for any expenses in excess of the cash they had in hand when the banks shut their doors on 1 May, their only hope was to write IOUs in the form of cheques and hope that they would be accepted.
    Remarkably, as the summer wore on, transactions continued to take place and cheques to be exchanged almost exactly as usual. The one difference, of course, was that none of the cheques could be submitted to the banks. Normally, this facility is what relieves sellers of most of the risk of accepting credit payments: cheques can be cashed at the end of every business day. With the banking system shut, however, cheques were for the time being just personal or corporate IOUs. Sellers who accepted them were doing so on the basis of their own assessment of buyers’ credit.