Lesson 4: When Disaster Strikes, What Can We Do?

Vocabulary:

• comparative advantage
• incentives
• competition
• Federal Reserve System
• money
• liquidity
• personal exchange
• commercial (impersonal) exchange

Content Standards:

Standard 6: When individuals, regions, and nations specialize in what they can produce at the lowest cost and then trade with others, both production and consumption increase.

Benchmarks: Grade 12

• Individuals and nations have a comparative advantage in the production of goods or services if they can produce a product at a lower opportunity cost than other individuals or nations.

Standard 9: Competition among sellers lowers costs and prices, and encourages producers to produce more of what consumers are willing and able to buy. Competition among buyers increases prices and allocates goods and service to those people who are willing and able to pay the most for them.

Benchmarks: Grade 8

• Competition among buyers of a product results in higher product prices.

Grade 12:

• The pursuit of self-interest in competitive markets generally leads to choices and behavior that also promote the national level of economic well-being.
• The level of competition in an industry is affected by the ease with which new producers can enter the industry and by consumers’ information about the availability, price, and quantity of substitute goods and services.

Standard 10: Institutions evolve in market economies to help individuals and groups accomplish their goals. Banks, labor unions, corporations, legal systems, and not-for-profit organizations are examples of important institutions.

Benchmarks: Grade 8

• Banks and other financial institutions channel funds from savers to borrowers through investors.
• Not-for-profit organizations are established primarily for religious, health, educational, civic, or social purposes.

Standard 20: . . . [T]he Federal Reserve System’s monetary policy influence[s] the overall levels of employment, output, and prices. . . .

Benchmarks: Grade 12

• Monetary policies are decisions by the Federal Reserve System that lead to changes in the supply of money and the availability of credit. Changes in the money supply can influence overall levels of spending, employment, and prices in the economy by inducing changes in interest rates charged for credit and by affecting the levels of personal and business investment spending.

Lesson Overview

Understanding what governments and markets can do well in disasters is useful knowledge for citizens and policymakers, but it does not answer the question of what those same citizens can do as compassionate individuals. Allocating tasks among political and economic institutions appears to leave ordinary people without a role – but this is misleading. Institutions are human creations, the processes and procedures through which we interact with one another. The lesson of institutional analysis of disasters is that people who want to help can be most effective when they work through the institutions that form the framework of society. This lesson looks at the record of non-profit charitable organizations in explaining why they so often succeed in transforming the desire to do good into real world benefits.

Key Points

1. People’s desire to help in times of disaster is most effective when channeled through the community of non-profit, charitable organizations. These organizations have a comparative advantage in providing relief services that untrained, unorganized individuals and groups (and government agencies) do not.

• The decentralized nature of the non-profit community makes it an effective transmitter of signals between interested third parties who want to help and individuals and small groups in need of assistance. (Chamlee-Wright & Rothschild, 5-7)

• The common practice by for-profit companies of channeling their charitable contributions through established relief organizations is evidence that the market recognizes the comparative advantage of non-profits in this arena.

• Private, profit-motivated firms want their donations to be used in the most valuable ways, not just for compassionate reasons, but also because they are attentive to reputation and future profits. The route of corporate donations in recent disasters offers corroborating evidence:

• Over $700 million in private-sector contributions was raised in the United States in 2005 for Indonesian tsunami relief.Large gifts from corporations including ChevronTexaco, General Electric, Levi Strauss & Co., General Mills, Proctor and Gamble, Coca Cola, Pfizer, and Johnson & Johnson were funneled through established relief organizations like the Red Cross and UNICEF (United Nations Children’s Fund). (U.S. Dept. of State, http://usinfo.state.gov/products/pubs/tsunami/private.htm )

• Perhaps reflecting CEO Lee Scott’s belief that Wal-Mart should stick to doing what it does “darn well,” the company ran the cash portion of its $20 million in Katrina relief donations through established charities like the Red Cross and Salvation Army and sent goods like chain saws, boots, sheets and clothes, water and ice, diapers, and toiletries to be distributed by established shelters. (Konig, http://www.heartland.org/Article.cfm?artId=17757)

Case Study: Comparative Advantage Mary Theroux, member of the National Advisory Board of the Salvation Army, addressed the Chief Executive Organization Women’s Seminar in October, 2005, on the lessons to be learned from Katrina. Her description of Salvation Army preparation and training is representative of the characteristics that give non-profits a comparative advantage in emergency response: “. . . [W]ithin a few days following Katrina, the Salvation Army had in place 10 mobile feeding units, including at the evacuation points, as well as 2 large mobile kitchens, with a total capacity of serving 200,000 meals per day. As of Sept. 30, the Salvation Army . . . served over 2 million hot meals plus over 3 million sandwiches, snacks, and drinks from its 150 mobile feeding trucks plus 10 field kitchens deployed throughout the region. It has distributed over 35,000 cleaning kits: brooms, mops, buckets and detergent; and 60,000 food boxes. It has sheltered and provided counseling to approximately half a million people. Its Emergency Radio Network, designed to help people locate family members, has received over 60,000 inquiries and found almost 16,000 survivors. . . . As Hurricane Rita built up, the Salvation Army deployed office workers, including our webmaster, to Houston to be prepared to provide disaster assistance there—everyone else was already deployed following Katrina. In all, almost 7,000 Salvation Army officers, together with almost 7,000 Salvation Army employees, plus thousands of trained volunteers have served in the affected areas, and they will remain as long as relief is needed. They’re still serving in Florida in the aftermath of last year’s hurricanes there, and they remained onsite at Ground Zero for two years following 9/11, with a large tent facility housing rest facilities, food, clean socks, counseling and other needs for the rescue workers there. . . . Based from their operations already well-established in nearly every community, where they work daily in permanent shelters with the homeless and poor and with people trying to put their lives back together after an apartment fire or years of alcohol and drug abuse, they’re well prepared to meet the needs of victims of natural disasters. Its military-style structure is designed for rapid mobilization and puts a premium on training people in advance to deal with disasters. [emphasis added] (Theroux, http://www.independent.org/newsroom/article.asp?id=1589)

2. Charitable organizations operate in a “market-like” atmosphere in which incentives similar to those in markets shape the behavior of both the charities and their donors. When charities do a good job of using donors’ money to assist victims, their budgets get bigger because donations increase. When charities perform poorly – whether because of incompetence, fraud, or mismanagement – they suffer budget cuts in the form of reduced donations.

• Charitable organizations compete for donations. This competition is facilitated by feedback similar to that found in markets.

• “The non-profits who create the most value for those they help garner more donations, while those who squander their resources suffer lower future donations.While this feedback is not as strong as the pure profit and loss mechanism, it remains stronger than for government, which finances its activities through . . .taxation.” (Sobel and Leeson, “Uses of Knowledge,” 18)

• The self-interest of donors directs charitable donations toward their most highly-valued uses through the most effective organizations.

• Donors’ self-interest is to provide meaningful assistance, giving them an incentive to seek effective organizations. Websites like Give.org, run by the Better Business Bureau’s Wise Giving Alliance, and CharityWatch.org, by the American Institute of Philanthropy, post easily accessible breakdowns of charities’ expenditure categories.

• Competition among organizations for donations is heightened by modern communication technology, media attention, and Internet dissemination of information about non-profits’ activities.

• For example, in the aftermath of the 9-11 terrorist attacks, news media reported that the American Red Cross could not ensure that donations designated for 9-11 relief actually went to help victims.Donor outrage led to the sacking of then-president Bernadine Healy and a Senate investigation – both detrimental to the charity’s ability to raise funds – and forced the organization to change personnel and procedures in a fight to remain viable.(CBS Evening News, http://www.cbsnews.com/stories/2002/07/31/eveningnews/main517045.shtml)

3. The comparative advantage of non-profits has been strengthened by centuries of experience. In the United States, for example, disaster assistance has traditionally been provided by voluntary action within communities. Our history of private, community responsibility for aiding disaster victims is a reflection of the concept of limited government upon which the U.S. was established.

• The famous descriptions of Alexis de Tocqueville, written in the early 19^th century, indicate that Americans routinely relied on civic organizations to provide help for others.

“Americans of all ages, all conditions, and all dispositions constantly form associations. They have not only commercial and manufacturing companies . . . but associations of a thousand other kinds, religious, moral, serious, futile, general or restricted, enormous or diminutive. The Americans make associations to give entertainments, to found seminaries, to build inns, to construct churches, to diffuse books, to send missionaries to the antipodes; in this manner, they found hospitals, prisons, and schools . . . .” (de Tocqueville, http://xroads.virginia.edu/~HYPER/DETOC/ch2_05.htm)

• The penchant for forming voluntary aid societies persisted. Large numbers of fraternal societies provided members not only fellowship and community but also assistance in times of unemployment, illness or disaster. Many provided death benefits. University of Alabama historian David Beito estimates that 1/3 of the adult male population of the United States, from all levels of the socio-economic range, belonged to fraternal societies at the turn of the century. (Beito, 2)
• On the rare occasions when government played a role in disaster relief, it was local government. Not until the 20^th century did the federal government step in – and then indirectly.

• In apparent recognition of the comparative advantage of non-profits (and perhaps also because of the shady reputation of the city’s government), when other city councils and wealthy philanthropists offered assistance after the San Francisco earthquake and fire of 1906, President Roosevelt directed that donations be given to the American Red Cross.(Strupp, 22-3)

• The first federal legislation dealing with disaster (as opposed to one-time allocations of aid) was enacted in 1950, and not until 1974 did the federal government institutionalize the function of disaster response with the creation of the Federal Disaster Assistance Administration.

• FEMA, the Federal Emergency Management Administration, was created in 1979. Since that time, both the extent and length of federal involvement in and the size of expenditures for disaster relief have grown dramatically. It is now common that the federal role continues long after the immediate emergency has ended.

4. Given the competitive nature of charitable organizations and their background of experience in disaster relief, the best way for individuals to help disaster victims is by finding a reputable relief organizations and responding to their calls for resources.

• When individuals act spontaneously and on their own, unintended consequences are common. Well-intentioned but unhelpful efforts by individuals are so common that relief organizations have a name for this unintended consequence, calling it the “the second disaster.”

Sample Illustrations: “The Second Disaster” #1 – The Urge to Give . . . Old Clothes ? “After floods ravaged his town . . . [in October, 1998, the chairman of a southwest Texas ministerial alliance] . . . ‘made the mistake of initially requesting clothing before we were warned by Church World Service, FEMA . . . and the Red Cross not to do so.’ ‘Believe it or not, we made the clothing request for only 2 days! By the third day, we started announcing “no more clothes” on the radio, in the newspaper, wherever we could,’ he said. Still, the clothes kept coming. ‘We did a lot of sorting and repacking. We had to find other agencies . . . to take them. And we sent away one whole truckload that was simply unusable.’ . . . [H]is dilemma is far from unique. After almost any disaster . . . disaster response experts have stories of inappropriate donations. Shortly after Hurricane Mitch hit Honduras, 1,200 containers appeared in the Port of Cortez that were labeled simply ‘Humanitarian Relief.’ ‘The boxes apparently contained clothes mixed with food – much of it spoiled,’ said Bev Abma, disaster response administrator for the Christian Reformed World Relief Committee. Fleas, mites or mildew on even a few pieces of clothing can render an entire shipment useless. ‘There were also goods donated for which instructions were written entirely in English, size 13 boots, and Christmas sweatshirts – all culturally inappropriate items,’ she said. ‘One organization wanted to send blankets. Really what we needed were sheets and mosquito nets. . . . After a tornado in Spencer, SD, Gil Furst, director Lutheran Disaster Response, visited a donations distribution center. ‘The whole town had been completely wiped out,’ he said. ‘There, hanging at the back of the room, were . . . a gold prom dress and a fake fur stole. Needless to say, no takers!’” (Kim “Unwanted Donations . . .” http://www.disasternews.net/news/news.php?articleid=10) #2 – You’ll Never Guess What We Really Need “Jane Willoughby got a truckload of fig jam – just when she really needed turkey roasting pans. Willoughby, disaster resource manager for the Humane Society of the United States (HSUS), was swirling in the aftermath of Hurricane Katrina when, in a surreal twist, a truckload of fig jam arrived – all the way from the Middle East. ‘We got this truckload of fig jam from a country that just wanted to do something to help. We kept asking each other: what are we going to do with fig jam?’ At that point – when HSUS emergency teams were trying to rescue thousands of stranded pets – what they really needed was turkey roasting pans, explained Willoughby. ‘We were setting up feeding stations for the pets we weren’t able to rescue. We needed turkey roasting pans because they’re disposable, and we could leave food and water in them for the animals that couldn’t be rescued.’ Inappropriate donations come from well-meaning people, said Willoughby, but they can cause real problems at disaster sites. In the days following Katrina, Willoughby and others at HSUS fielded more than 45,000 phone calls from people who wanted to help.” (Kim “Donating Stuff. . .? ” http://www.disasternews.net/news/news.php?articleid=3154 ) #3 – You Could Be In the Way “Some people show up early at a disaster site with good intentions but little preparation, said Bernard Scrogin, a veteran responder with Lutheran Social Services of Texas and Louisiana. ‘That . . . [causes problems]. . . . Some volunteer groups down there got a call from people who said, “Hey, 200 of us are getting on buses, and we’re coming down tomorrow to do work.” They went down there with no transportation, no equipment – just ill-prepared. Their hearts are in the right place but we’re trying to help people realize they need to think ahead.’ (Kim, “What’s the Best. . . ?” http://www.disasternews.net/news/news.php?articleid=3030)

• Whether people want to donate supplies or their time and efforts, relief organizations agree that affiliating with a responding group is the best way to make a difference.

5. Donating money is the most useful way to express compassion.

• Disaster-relief organizations agree that “cash is best,” even though they know that is a message many people do not want to hear. While they understand that donating money may not feel as good as giving or doing something more tangible, charitable organizations also understand that their compassionate mission is best-served by money.
• Money empowers professionals with knowledge and experience to make the decisions most appropriate to the needs in specific disaster situations.

• When well-intentioned people send items that turn out not to be what is needed, aid organizations have to use some of their precious resources of time, energy, and money to deal with the unwanted goods – resources that could have been used to help disaster victims.

Case Study: The Power of Money Interaction, the American Council for Voluntary International Action, has 160 faith-based and secular member organizations. Their collective call for monetary donations reflects experience in a great range of disasters and locations throughout the world: Five Reasons Why Cash Is Best 1. Needs-Based Procurement: Cash allows disaster relief professionals to procure exactly what is needed in a disaster situation. The donating public usually does not have access to a professional and accurate evaluation of victims’ needs. . . . Cash contributions allow disaster relief professionals and the affected people themselves to purchase exactly what is needed in the right quantities. Cash contributions . . . allow for disaster relief to be demand-driven (based on victims’ needs) rather than supply-driven (based on what goods have been donated). 2. Efficient Delivery: Cash is the most efficient donation because it does not use up scarce resources and because it can be transferred very quickly. Because relief supplies can almost always be purchased at or near the site of a disaster, relief professionals prefer to purchase them locally. This frees up transportation routes, staff time, warehouse space, and other crucial commodities which are in very short supply during a disaster. 3. Lower Costs: Cash donations do not require transportation costs, which can outweigh the value of materials donated. The cost to sort, package, and transport individual, material donations to disaster victims is often greater than the cost of purchasing the items locally. . . . 4. Economic Support: Cash supports the economy of the disaster-stricken region. When relief supplies are purchased locally, cash is pumped quickly back into an economy that desperately needs it. . . . The long-term goal after any disaster is to return people to self-sufficiency. Disaster assistance efforts that support local markets contribute to this goal. While cash donations support a local economy, inappropriate material donations may have the opposite effect. Material donations may compete with local vendors who are selling similar items. Recipient governments often have to pay significant costs to unload, transport, and distribute donated material. If unusable by the local population, the country may also have to pay for destroying the donations. 5. Cultural and Environmental Appropriateness: Cash donations can be used to purchase supplies that are appropriate to the local culture and environment. There are many cultural and environmental factors to consider when providing disaster relief, and the American public may be unfamiliar with the local climate, culture, and tastes. For example . . . . [f]ood must be familiar to the affected people and fit within their overall consumption patterns. . . .” (Interaction, www.interaction.org/disaster/advantages_cash.html

6. Although donating cash may seem less satisfying because it is impersonal, it is important to recognize that the impersonal nature of money is what makes it particularly powerful and effective in disaster situations.

• One of the most important advantages of using money is that it allows us to more easily satisfy our wants and needs by making exchanges with people we do not know.

• Economists recognize that we do not use money as the basis for all exchange. Money is the basis for exchange in impersonal or commercial exchanges, but we do not usually carry out personal, or face-to-face, interactions based on money and prices. For example, we would find it unacceptable for a parent to charge his children for feeding them, and we frequently do things for friends or neighbors without expecting payment.

• Disaster response is beyond the scope of face-to-face relationships, but we often feel personally connected to disaster victims.

• One reason that sending money is seen as less satisfying to those wanting to help after a disaster is that advanced communication systems and the media break down the barriers that separate us from disaster victims.Although they are strangers, our media-enhanced relationship feels more like the face-to-face connections we have with family and friends – where offering money is not appropriate – than like the money-based commercial interactions we have with strangers.

• As the late economist, Paul Heyne, explained, the fact that money feels impersonal does not prevent it from facilitating the personal outcomes we desire.

Impersonal Interactions and Benevolent Outcomes Money is peculiarly impersonal. But that is its chief virtue! Precisely because of its impersonality, we can use money to facilitate mutually advantageous transactions among millions of people who know little or nothing about one another personally. When we want pizza while traveling through a town we have never visited before, we just step into a pizza place, order a medium thin with sausage and green peppers, and in ten minutes we are eating pizza. We do not have to find a pizza purveyor who likes something we are carrying in the trunk of our car, or who would appreciate an hour or so of the labor services in which we happen to have specialized, or who is willing to provide us with a pizza because he shares our religion or admires our politics. We do our thing in return for money; he does his thing in return for money. We can each promote the interests of the other very effectively because we both value money. Adam Smith observed early in The Wealth of Nations that, in a market society, everyone “stands at all times in need of the cooperation and assistance of great multitudes,” and that we cannot expect to obtain cooperation or assistance exclusively from the benevolence of others because life is too short for any of us to gain the friendship of more than a handful of other persons. We obtain the help of others by appealing not to their benevolence but to their self-interest. And we do that by offering them money. The institution of money enormously expands the number of people on whose assistance we can reliably count, by enabling us to gain the cooperation not just of friends but of millions of people we have never even met. In the absence of money, almost all social cooperation would have to be on a personal basis. In a market society, which is necessarily a monetary society, the social cooperation that provides all of us with most of what we need or want is predominantly impersonal. (Heyne, 4-5

• Some disaster-relief organizations are also discovering that passing along cash to disaster victims may be more effective in encouraging recovery than purchasing goods and services for them.

• “Cash for work” programs operated by the All India Disasters Mitigation Institute (AIDMI) after the Asian tsunami paid cash wages to victims to work in recovery activities.

• AIDMI believes that “cash for work” is superior to traditional in-kind disaster relief in terms of hastening community recovery. Advantages include:

• the incentives provided by the recognition of human dignity and ability to make rational economic choices despite being disaster victims, and

• the wage earner is in the best position to know how best to meet his own needs for such diverse things as food, shelter, education, or health care.(AIDMI, 3)

• In the U.S., both the public and the non-profit sector recognize that money will attract the goods and services that disaster victims want. The Red Cross routinely distributes “Client Assistance” debit cards, and FEMA distributes “expedited assistance” through electronic funds transfer and check.

• In 2005, because power outages and flooding disrupted banking operations, FEMA experimented with the distribution of $2,000 debit cards to Texas victims of Hurricane Rita. Difficulty determining and processing eligibility led to rapid abandonment of the experiment – within two days. Unfortunately, media reports of fraud and “luxury” purchases sparked public outrage and diverted attention from the reason for ending the experiment. It was the administration of the debit card distribution that caused problems. Even after abandoning the debit card program, FEMA did not stop distributing money; it just returned to the methods of distribution – electronic transfers and checks – that had been used in the past. The Red Cross, however, experienced no such administrative problems. Because activities like determining eligibility for assistance are business-as-usual for organizations like the Red Cross, they accumulate much useful experience and information that FEMA, with its now-and-then spurts of activity, does not have.

Teacher Note: Please see Appendix 1, “Cash Economies,” following this lesson for an explanation of the important role of banks and central banks (like the U.S. Federal Reserve System) in facilitating the cash economies that emerge in the aftermath of natural disasters.

7. As we did in Lessons 2 and 3 with markets and government institutions, we must ask if there are actions by individuals and non-profits in the wake of disaster for which the benefits do not outweigh the costs.

• The ironic answer to that question is that it is possible to provide too much help.

• Nobel laureate Gary Becker explains that private charity is outreach is not immune to the “Good Samaritan” problem we identified in conjunction with government disaster relief.

“[People’s decisions about whether to return and rebuild] . . . would be optimal if those making these decisions had to bear the full social cost of any damages to their property and person from a disaster. Under these conditions, greater insurance premiums in areas that are prone to hurricanes, earthquakes, tsunamis, and other disasters would reflect the greater risk to life and property in these areas. The expected loss for those not insuring would rise in proportion to the greater risk. People, companies, and governments would then build homes, roads, businesses, and the like in disaster-prone regions only if the benefits exceeded the full risk of damages. However, generous private and public help to victims of terrible disasters, while highly desirable, distorts such rational calculations. . . . [P]ublic and private assistance . . . make it more likely for persons, companies, and public activities to locate in high-risk areas because they will often be spared much of the losses. They also may not take out insurance against risks that would inflict large losses; for example, rather few New Orleans homeowners had flood insurance. . . . So, private and public generosity to victims of disasters helps distort many pre-disaster decisions. . . . The federal government and private philanthropy are in a similar Good Samaritan situation with respect to families, businesses, and local governments that build where there is likely to be flooding, landslides, hurricanes, earthquakes, and other major natural disasters. The federal government and others may wish they did not build so much in these areas, and the government may hope for diversification elsewhere. Yet if the government’s [advice] is ignored and there is terrible suffering from a disaster, all humane and politically sensitive governments and philanthropic organizations would help, even though they wish the victims had made more socially efficient decisions before the disaster struck.” (Becker, http://www.becker-posner-blog.com/archives/2005/09/major_disasters.html)

• In principle, private charities create the same adverse incentive effects that government relief does. However, these effects are mitigated by the different structure of accountability under which charities operate.

• Successful, long-lived private charities have proven to be extremely accountable to their donors. As a result, they tend to be much more careful about how their money is spent, targeting aid to people who are in dire distress through no fault of their own and discontinuing aid as soon as is reasonable once the crisis has passed. Watchdog groups reinforce this tendency to reduce waste by reporting and grading charities on how donations are spent.

• This accountability means that assistance tends to be at moderate levels for relatively shorter periods of time and therefore less likely to crowd out the resumption of productive activities on the part of victims.

• Additionally, it is possible to argue that victims are less likely to develop a sense of entitlement to private charity (as they might to government assistance funded by taxation), which also reduces the strength of potential adverse incentives.

Conclusion

As we have looked at the dynamics of how sympathetic onlookers can best aid victims of disasters, we have also implicitly raised the question of whether charitable giving is preferable to leaving victim assistance in the hands of government. We may not think of charitable organizations as “economic” institutions, but economic analysis reveals the underlying reasons for their effectiveness in natural disasters and provides a compelling rationale for funneling our compassionate impulses through them: First, the decentralized network of organizations competes for our donations – of time, effort, and especially money – and we can hold them accountable by our choices of whether or not to donate. Second, because charities are accountable to their donors, they are careful to target assistance and to weigh the value of continuing assistance in one area against reserving resources for use in another. The limited nature of private assistance significantly reduces the potential for moral hazard. And finally, because of their extensive experience and their ongoing day-to-day operation, non-profit charitable organizations have developed a comparative advantage in getting goods and services from those who can provide them to the individuals and groups in distress.

Appendix 1: Money and Banking in the Wake of Disaster: Cash Economies

Teacher Note: Stories of how the Federal Reserve System can help to ensure the smooth operation of cash economies that inevitably spring up after natural disasters is a good way to illustrate how the Fed contributes to the strength and stability of the market. The Fed’s ability to provide banks with currency, so important in preventing the bank panics that have destroyed even sound financial institutions in the past, is also key to the restoration of civil order and the rebound of commercial interaction in modern crises.

1. Review: Money, or purchasing power, can take a variety of forms.

• In normal times, people choose to hold most of their money in the form of transactions deposits that can be accessed by debit cards or checks. Banking allows them to exchange one form of money for another – checks for cash, for example.

• Banks typically hold very little cash, holding most money in the form of transactions deposits. When banks’ customers want more cash, member banks “purchase” additional currency and coins from the Federal Reserve System.
• In the immediate aftermath of disasters, people switch to holding money in cash form.

• Power outages may shut banks and delay or stop electronic transactions.

• Old business relationships may be broken, and when dealing with new customers, in circumstances where their financial reliability cannot be easily checked, businesses prefer cash.

2. Making a smooth transition to a cash-based economy is important in maintaining civil order and facilitating exchanges between demanders (disaster victims) and suppliers (those with goods and services to meet victims’ needs).

• Banks and the Federal Reserve System play an essential role in this transition.

Case Study: The Fed and Hurricane Katrina Because electric power and telephone service were completely knocked out in the strike area of the Gulf Coast, there was no access to purchasing power (money) that required electricity – ATMs, debit cards, credit cards, etc. The Gulf Coast was immediately transformed into a cash economy. The Credit Union Journal reported that much of the Gulf Coast operated on a cash economy for six weeks after the storm. Many banks reopened quickly, but they were hampered by the destruction of the New Orleans Fed branch. The main Atlanta Fed tried to step in but could make only irregular deliveries of cash. The shortage of cash created additional problems for companies trying to resume operations: “When cash is not available to regional operations, many companies must take extraordinary measures to make deliveries. In the aftermath of Hurricane Wilma, American Management Services LLC/Pinnacle, a real estate management firm responsible for approximately 132,000 apartments, sent two-car convoys into the region to deliver petty cash and other supplies. . . . Most extraordinary was the experience of one company that dispatched four armed executives with $300,000 cash in to suitcases into a disaster zone. The four were retired military officers, and all maintained weapons permits. The company had contacted the state police, told them where and when the executives were flying in and where they were headed.” (Stackhouse, http://www.scmr.com/article/CA6406205.html?rssid=68 ) Banks’ source of cash is the Federal Reserve System. The Gulf Coast is part of the Atlanta Federal Reserve district. The New Orleans branch of the Atlanta Fed is the normal source of cash for member banks in the city and surrounding region. The hurricane shot down the New Orleans Fed branch, causing big problems for area banks faced with customers wanting cash. John Hairston, COO of Hancock Holding Company, explained the problems faced by Hancock Bank: “The most frustrating [problems] lay in restoring telecommunications, acquiring fuel and getting access to cash reserves. . . . [C]ommerce was completely a cash and barter economy. ATM, debit, and credit cards were useless because 100 percent of power and telephone connectivity was lost over the entire market. Everyone needed cash, and they needed it right away. The Federal Reserve in New Orleans was lost, thus our source of cash was gone. Our security folks mustered teams and went out to the flooded ATMs and branches to empty vaults of wet and stinking money. Our gaming customers also wanted to get cash off their sites. We took all this cash, and literally learned how to ‘launder’ money. We bleached and washed it in a washing machine, then we dried it in a drier, ironed it, and moved through the branches. We did this with millions of dollars, money that was essential to keep the local economy moving.”(Hancock Bank, http://www.usfst.com/pastissue/article.asp?art=269903&issue=199 ) One of the functions of the Federal Reserve System is to provide member banks with the currency their customers demand. Knowing the importance of cash in post-disaster economies, the Fed has plans for such contingencies. When the extent of the affected area and population after Katrina overwhelmed the plans, new strategies were devised. “Along the devastated Gulf Coast, conditions for cash delivery could not have been worse. Roads were destroyed, fuel was scarce, and the New Orleans Branch was cut off from the rest of the world. But . . . [the Fed] . . . was armed with a contingency plan for cash services. The Atlanta Fed quickly authorized the release of $60 million in cash from a strategic inventory location in Louisiana. Currency distribution for Mississippi and Louisiana was moved into the bank’s Birmingham facility, and New Orleans staff were in position there to deliver fresh currency and remove from circulation large quantities of contaminated coins and cash. In addition . . . . Fed System ‘buddy banks’ in Jacksonville, Houston, Atlanta, and Memphis . . . [paid] out currency in affected areas. Even with this unprecedented support from other Fed offices, more efforts were needed. . . . [A new plan was ] initiated . . . to hire private armored carriers to make daily runs to deliver cash from the Federal Reserve Bank of Dallas’s Houston Branch to banks in Baton Rouge and Lafayette . . . .” (Federal Reserve Bank of Atlanta LINK)

Sources

AIDMI – the All India Disasters Mitigation Institute. When Cash for Work Works. Issue 10, December 26, 2005 p. 3. southasiadisasters.net

Becker, Gary. “Major Disasters and the Good Samaritan Problem – BECKER.” Becker-Posner Blog, Sept 4, 2005 http://www.becker-posner-blog.com/archives/2005/09/major_disasters.html

Beito, David. From Mutual Aid to the Welfare State. Chapel Hill: U of North Carolina Press, 2000, p. 2.

CBS Evening News. “The Battle Inside the Red Cross.” July 31, 2002 http://www.cbsnews.com/stories/2002/07/31/eveningnews/main517045.shtml

Chamlee-Wright, Emily and Daniel M. Rothschild. “Disastrous Uncertainty: How Government Disaster Policy Undermines Community Rebound.” Mercatus Policy Series, Policy Comment No. 9., January, 2007. Mercatus Center, George Mason University. http://www.mercatus.org/Publications/pubID.3579/pub_detail.asp (3-10-07)

de Tocqueville, Alexis. Democracy in America 1835. web version. http://xroads.virginia.edu/~HYPER/DETOC/ch2_05.htm

Federal Reserve Bank of Atlanta. “Making Cash a Priority.” Ruin, Resilience, and Restoration: 2005 Annual Report. http://www.frbatlanta.org/invoke.cfm?objectid=B3A941C0-5056-9F06-99719A33ED982286&method=display (4-10-07)

FEMA. Joint Information Center. Disaster Field Office, Baton Rouge Louisiana. Fact Sheet – Expedited Assistance Program Questions and Answers. http://emergencymanagement.wi.gov/docview.asp?docid=4239 (10-18-07)

Hancock Bank. “When Disaster Strikes.” Financial Services Technology, Hancock Bank. http://www.usfst.com/pastissue/article.asp?art=269903&issue=199

Heyne, Paul. “The Morality of Markets.” The Senior Economist, April, 1995. Published by EconomicsAmerica, the National Council on Economic Education p. 4-5

Interaction. “Five Reasons Why Cash Is Best.” Disaster Response – Advantages of Cash Donations. www.interaction.org/disaster/advantages_cash.html (4-6-07)

Kim,Susan. “Donating Stuff? Think First.” Disaster News.net, May 11, 2006. http://www.disasternews.net/news/news.php?articleid=3154

_____. “Unwanted Donations Are ‘Second Disaster’.” Disaster News.net, April 5, 1999. http://www.disasternews.net/news/news.php?articleid=10

_____. “What’s the Best Way to Help?” Disaster News.net, January 16, 2006. http://www.disasternews.net/news/news.php?articleid=3030

Konig, Susan. “Private Companies Rush in to Help Hurricane Katrina Victims.” Health Care News, October 1, 2005. The Heartland Institute: http://www.heartland.org/Article.cfm?artId=17757

Stackhouse, Andrew. “Disaster Management: Private Lessons for the Public Sector.” Supply Chain Review, January 1, 2007. http://www.scmr.com/article/CA6406205.html?rssid=68

Sobel, Russell S. and Peter T. Leeson. “The Use of Knowledge in Natural Disaster Relief Management.” Global Prosperity Initiative Working Paper, Mercatus Center, George Mason University, November 15, 2006. http://www.mercatus.org/publications/pubid.3584/pub_detail.asp (3-3-07)

Strupp, Christoph. “Dealing with Disaster: The San Francisco Earthquake of 1906.” Washington, D.C. German Historical Institute. Unpublished paper delivered at the Symposium: “San Francisco Earthquake 1906: Urban Reconstruction, Insurance, and Implications for the Future,” Institute of European Studies, University of California, Berkeley, March 22, 2006. http://repositories.cdlib.org/ies/060322

Theroux, Mary L.G. “Public and Private Responses to Katrina: What Can We Learn?” Oct 20, 2005. Speech presented at the Chief Executive Organization’s Women’s Seminar, Oct 7, 2005. Independent Institute, Oct. 20, 2005. http://www.independent.org/newsroom/article.asp?id=1589 (3-29-07)

U.S.A. Today. “FEMA says it will end debit card plan soon.” September 9, 2005. http://www.usatoday.com/news/nation/2005-09-09-femadebitcards_x.htm (10-18-07)

U.S. Department of State. “U.S. Private-Sector Support for Tsunami Relief.” USINFO.STATE.GOV http://usinfo.state.gov/products/pubs/tsunami/private.htm (3-30-07)