Savings and Economic Security
THE IMPORTANCE OF GOVERNMENT FINANCIAL STABILITY
By HAROLD G. MOULTON, President, The Brookings Institution
Delivered before The American Bankers Association, New York, September 13, 1943
Vital Speeches of the Day, Vol. X, pp. 23-26.
MEMBERS of the Association: My address will have two merits. It won't be overly long and it won't be overly burdened with statistics. I shall, however, endeavor to cover a very wide range of history and economic development, with a view to bringing certain things which I regard of very great importance into a clear perspective. The significance of savings to individuals and to nations is one of the oldest themes in economic literature. From biblical times until very recently the virtues of thrift have been incessantly extolled alike by bankers, economists, and ministers of the Gospel. The simple essence of the philosophy of savings is incorporated in such homilies as "a penny saved is a penny earned," or, in Franklin's language, "a penny saved is two pence clear; a pin a day's a groat a year"; and, also, in "take care of the pennies and the dimes will take care of themselves." By way of contrast, one cites the smile-producing illustration of the thrift-unconsciouscolored lad who wasn't interested in earning a quarter by mowing the lawn because he already had a quarter.
Individual Savings and Social Savings: In the literature of thrift and savings one finds that the emphasis is sometimes placed on the advantages to the individual and again on the advantages to society. The moralists, among whom I include Franklin, stressed chiefly the importance of savings from the individual's standpoint. The thriftless individual sooner or later goes over the hill to the poor house, while the thrifty may hope to live in mansions by the sea; the shiftless are buried in potter's field, the savers in the church yard, with a verse on a tombstone to perpetuate their memory. Those who save their money, especially if they put it in a savings bank, achieve economic independence and with it the self-confidence necessary to the exorcising of that inferiority complex with which most poor humans approach the age of manhood.
Who can say that these are not elementary facts of life? Can we, without the universal practice of thrift, develop that independent, self-reliant, fearless citizenry upon which the success of a democracy depends? Stating the matter the other way round, can perpetual dependence upon papa, or Uncle Sam, for present and future needs, fail to undermine the homely virtues and weaken the moral fiber of the people?
Economists, in writing about thrift, have usually placed somewhat less emphasis upon the value to the individual and much more on the importance to society as a whole. They have pointed out that it is through savings that productive capital is created, and that it is productive capital which makes the world go round. In the words of Adam Smith: "Whatever a person saves from his revenue he adds to his capital, and either employs it himself in maintaining an additional number of productive hands, or enables some other person to do so by lending it to him for an interest, that is, for a share of the profits. As the capital of an individual can be increased only by what he saves from his annual revenue . . . so the capital of a society . . . can be increased only in the same manner."
In fact, savings were regarded, in classical economic literature, as virtually the same thing as capital. That is to say, it was assumed that all money savings are automatically used in the creation of new capital goods, and hence, savings and capital formation are really identical. It followed that the greater the aggregate of individual savings, the greater would be the amount of capital formation. Moreover, since additional capital provided additional employment and increased productive efficiency, it was naturally concluded that the rate of economic progress would depend almost wholly on the rate at which new capital might be created.
It should be noted here, however, that the early writers were not hopeful about rapid capital accumulation. They argued that the great masses of people were lacking in forethought, and in any case had meager margins from which savings might be made. Hence, the annual savings fund of a nation would be small at best. And even if, as a result of increased thriftiness, money savings should increase for a time, the process would soon be automatically checked by falling interest rates. This was because the capital created from savings had to be used in conjunction with natural resources which were operating under conditions of diminishing returns. Hence the productivity of additional units of capital would soon fall; hence the rate of interest the borrower would pay would decline; and hence the incentive to save would be reduced. Consequently, there appeared little hope for progress.
The Keep-Money-in-Circulation Philosophy
The preachments in favor of thrift over the years have been paralleled by "counter educational activities" in favor of spending. Where savings bankers have advertised the importance of thrift accounts, manufacturers and merchants have enticed us to spend by alluring appeals to our consumptive desires; they have even enabled us to buy beyond our immediate capacity through the medium of installment credits and charge accounts.
Too much economizing was regarded by those who have goods to sell as bad tor business, reducing employment and curtailing national income. Keep-money-in-circulation has been quite as perennial a slogan as has "save your money for the rainy day." Over the years each group has believed that its philosophy was in the interest of the national welfare.
To one group it has appeared evident that savings provide the indispensable means for individual and social progress; to the other it is consumptive spending that makes the wheels of industry revolve.
Economists, generally speaking, found no difficulty inreconciling these apparently conflicting points of view. They pointed out that when a man saves, he isn't hoarding money; he doesn't curtail expenditures and withdraw money from circulation. He simply diverts the expenditure from consumer goods to capital goods. Thus the total amount of spending would be unaffected. It remains true, in this view, that ever larger savings are desirable because the new capital not only maintains existing employment, but it expands employment because of its increased productivity.
The Confusions of Recent Years
Since the end of World War I, discussion of the significance of savings has entered upon a new phase. The view is now held by many economists that savings may in fact be overdone. It is emphasized that there must be a proper balance between savings and consumption.
In a series of articles published in 1918, in the Journal of Political Economy, the present writer challenged the validity of the classical assumption that there is a necessary identity between the amount of money savings and the amount of new capital formation. It was shown that throughout the nineteenth century the amount of new capital construction in this country had in fact greatly exceeded the amount of money savings—the necessary funds being obtained chiefly from bank credit expansion.
Until the World War period, the United States may be said to have had a deficiency of money savings. Except in periods of depression, the financial requirements of American enterprise for new capital construction exceeded the savings accumulated in savings banks and other savings channels. Some was borrowed from abroad, but much, as already stated, was obtained from commercial banking sources. Under these circumstances, the prevailing emphasis upon the general economic importance of savings in furnishing an adequate supply of capital founds at reasonable rates of interest was well founded.
But during the World War, and particularly in the period of the twenties, the balance between savings and consumption underwent a profound change in the United States. Studies made by the Brookings Institution in the early thirties show conclusively that in the late twenties the volume of current money savings greatly exceeded the amount of new capital formation, and that over a period of thirty years the situation of the nineteenth century had been reversed. There had been a tendency for savings to increase relatively to consumptive expenditure. Instead of a deficiency of savings as compared with the volume of new flotations for purposes of capital expansion, there was a surplus.
The explanation of this great change was found in the factors which affect the allocation of the national income as between savings and consumptive expenditures. We enunciated two principles: (1) As the proportion of the national income that accrues to the wealthier classes increases, the bigger will tend to be the percentage that is saved—this because the wealthier groups have much larger margins out of which savings may be made and fewer pressing consumptive needs. (2) As the general level of national income rises—irrespective of its distribution—the greater will tend to be the percentage which is saved—this because the margin above subsistence requirements out of which savings are made will be greater. These principles were based squarely on factual analyses with respect to the amount of savings that were made at different levels of income.
It was our conclusion that the great increase in savings relatively to consumption was retarding rather than promoting economic progress. An abundance of funds was available with which to create new plant and equipment, but much of it was not used for that purpose because the market demands for the potential products did not appear to warrant capitalexpansion. What was needed, as we saw it, was an improved balance between money savings and consumptive expenditures. This could be brought about by a broader distribution of currently produced national income. We suggested that the strictest acting and most effective means of developing mass purchasing power was by progressive reductions in commodity prices as increases in productive efficiency made such reductions possible.
We are not interested at this place in discussing the ramifications of this analysis. Our chief purpose is to make it clear that in the decade of the twenties the proportion of the national income set aside for money savings was excessive under the conditions then prevailing. Please note that the argument was not that the volume of savings was too large in absolute terms; it was only too large relatively to consumptive demands, which in the last analysis provide the basis for earning power on new plant and equipment.
The Changed Outlook Today
Twelve years elapsed between 1929 and the coming of the Second World War. During this period changes have occurred in the economic organization of the country which are perhaps even more far-reaching in their implications than those which occurred between the beginning of World War I and the end of the golden twenties. As a result of recent changes, it is no longer true that savings are too large as compared with consumption.
The income distribution and savings pattern of the twenties no longer exists. We have had, in fact, a veritable revolution in the distribution of national income. The lowest income groups, both urban and rural, have been assisted by relief payments of various kinds. Farmers have been subsidized, wage rates have been progressively increased, and a program of social security and old age benefits have been established. At the upper level, profits have declined somewhat, and salary and bonus payments have been appreciably restricted. In consequence of these developments both the aggregate volume of money savings and the percentage of the national income directed to savings channels have been materially reduced. Department of Commerce figures show a decrease in the ratio of private savings to national income from about 12 per cent in 1929 to an average of roughly 7.5 per cent in the four-year period 1936-39.
It is necessary to emphasize this great change, this reversal of trend, because most people have a strong tendency to assume that economic laws or relationships remain more or less permanent. Because of the conditions which prevailed throughout the nineteenth century, it came to be taken for granted that all available money savings would automatically find use in the construction of new plant and equipment; and it was difficult to conceive that the processes of economic evolution had by the 1920's brought about an entirely new situation. Similarly, there is a tendency now to assume that excess savings are a permanent phenomenon and that henceforth and forevermore it will be necessary to reckon with this fact. The truth is that economic tides flow and ebb; and realism requires that we keep our thinking constantly abreast of changing conditions.
It is true that in the late thirties the supply of money savings continued to be in excess of new capital issues. But this was not because savings were continuing on the high level of the twenties, which the facts show was not the case; it was rather because the volume of capital flotations was abnormally low. Because of disordered world conditions and an unhealthy political and economic climate at home, the spirit of enterprise was unprecedentedly low.
A thorough appraisal of American capital requirements over the next generation, if we are to have a continued rise in standard of living, was published by the Brookings Institution in 1940. It was shown that if we are to have a period of reconstruction and expansion sufficient to double the American standard of living in coming decades, the demands upon the financial markets for investment funds would be of a magnitude comparable to those of any period in the past.
The events of the war period do not alter this conclusion. Reconversion and rehabilitation requirements, the expansion of old industries, and the development of new ones will absorb—assuming we can again achieve a stable and healthy economic situation—an enormous volume of investment capital for many years to come.
In this coming period there is little reason for believing that the supply of money savings will exceed the demands. On the contrary, one may doubt whether the supply will be adequate to meet the requirements. The war will of necessity be followed by much higher levels of taxation than have ever been known before, and taxation eats directly into savings funds.
While per capita income may be appreciably higher than before the war, it does not follow that as large a proportion as formerly will be available for savings. There seems little likelihood, indeed, that the available savings of the higher income classes will be remotely comparable to what they have been in former times. As someone has remarked: "The only way a rich man can save anything these days is by dying soon." The salaried classes and the widows and divorcees living on fixed incomes will find their saving power reduced by the combination of higher prices and higher taxes. These groups, which have long contributed an important part of the funds assembled by savings institutions, will save less in the future. The wage earning groups may have higher incomes, but the tax levies may well absorb a substantial part of the gain. In any case their consumptive habits run deep.
The moral of all this is that fears that savings will continue to be excessive may well be forgotten. From the general economic point of view, as well as from the point of view of the individual saver, thrift will be of the greatest importance in the years ahead.
The Need for Financial Stability
The preceding analysis suggests that as we look forward to the post-war world, savings institutions may hope to play, as they have in the past, a role of great importance. They may serve the interests of the individuals whose savings they manage and at the same time further the economic growth of the country.
But over this picture hangs a shadow, the dimensions of which are already of large proportions. I refer to the unsettled fiscal situation and the accompanying threat to financial stability. The rock on which savings and investment rests is financial stability. And stability throughout the economic and financial system depends primarily upon the maintenance, by the federal government, of a sound fiscal and monetary system.
The troubling economic trends and events of the last decade have resulted in financial conceptions which have been exerting a profound influence upon public policy. I refer particularly to the doctrine that the growth of the public debt is of little, if any, moment, and that it is unnecessary for us to be concerned about the unbalanced budget. Those who adhere to this conception have a simple panacea with which to solve the problems of the post war world, namely, to continue public expenditures on whatever plane is necessary to achieve full employment. The war, it is believed, has taught us how to solve our problems. In the words of the 1941 Report of the late National Resources Planning Board: "The decision by the Congress and theExecutive to do the things required in our defense program has set in motion a connected series of forces which will in time go far toward attaining the goal of full employment. Given our resources, equipment, techniques and skills, only that decision-only that courageous implementation of the will-to-do—was required to release the log jam of idle plants and idle men.
". . . It is an instructive commentary on our time that only under the threat of external aggression could we as a people summon the courage to implement this will-to-do."
As I have elsewhere shown (see The New Philosophy of Public Debt) it will be impossible in the long run to prevent progressive price inflation unless we can check the growth of the public debt. That is to say, inflation could not be prevented without a complete regimentation of the national economy.
If savings bankers are to be in a position to advise customers, actual and potential, that savings accounts are one of the best means of achieving economic security, they must of necessity have assurance that this country will again achieve and maintain a high degree of financial and price stability. Unless reasonably assured of such a prospect, neither the savings bankers nor the government in connection with its social security program, have the right to ask people to forego present satisfactions for the sake of an illusory security in the future.
It is therefore incumbent upon savings bankers and all those who are concerned with the problems of savings and investment to bring every possible influence to bear in favor of sound policies in the realm of public finance.
Fortunately I think the situation is not without hope. There is, I think, a growing recognition, both inside and outside the government, of the danger that lies in the continuation of the trends of recent years. Of particular interest was the recent explicit statement of Senator Barkley, on behalf of the Administration, that the government was committed to a policy of reducing the public debt after the war is over.
The task of achieving a balanced budget and providing at least a modest sinking fund for debt retirement will not be easy at best. A clear recognition of the fundamental importance of achieving financial stability is a step in the right direction, for it is certain that unless we are determined to balance the budget we shall never do so. We must never lose sight of the fact that without government financial stability there can be no security for savings.