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A Note on the Development of the Doctrine of "Forced Saving" Author(s): F. A. von Hayek Source: The Quarterly Journal of Economics, Vol. 47, No. 1 (Nov., 1932), pp. 123-133 Published by: Oxford University Press Stable URL: https://www.jstor.org/stable/1885188 Accessed: 07-03-2019 19:26 UTC

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A NOTE ON THE DEVELOPMENT OF THE DOCTRINE OF "FORCED SAVING"

The enhanced interest in the problem of "Forced Saving," due to recent developments in the theory of industrial fluc- tuations, has led to the discovery of so many more or less dis- tinct allusions to that subject in the works of earlier writers

that the sketch of the development of that doctrine, which I attempted in the first chapter of my Prices and Production,' has rapidly become out-of-date. Since, in addition to the several early references to this problem which have recently

been noticed by other writers, I have now discovered what is, perhaps, their common source, it may be worthwhile to redraw my previous sketch of the development of this doc- trine.

Altho it is impossible at the present time to show conclu- sively whether, or in what way Jeremy Bentham's teaching on this point was disseminated at the time when he formu- lated his opinions, it now appears to me to be practically cer- tain that the earliest - and also the clearest and most elaborate statement of this theory is to be found in the writings of that author. In a passage which received its final

form in 1804 -tho it was probably sketched much earlier, and not published until 1843 in his Manual of Political Economy2- he deals in some detail with the phenomenon

1. Prices and Production, London, 1931, pp. 17-19. Part of the material used in the following note has already been mentioned in the German edition of the same work, published shortly after the English edition under the title of Preise und Produktion, Vienna, 1931, pp. 18-20.

2. The Works of Jeremy Bentham, published under the superin- tendence of his executor, John Bowring, vol. iii, Edinburgh, 1843, pp. 31-84. The Manual, as there reprinted, tho the only edition which is reasonably complete, obviously does not represent a complete manu- script which Bentham intended to be published in that form, but rather a compilation by the editor from different manuscripts and some frag- ments published by Dumont. Nor is it true, as is frequently asserted, that all parts of the Manual, as printed there, date back to 1793. A cursory inspection of the Bentham manuscripts in University College, London, shows that the material in the published Manual belongs to quite different periods and that there is, in addition to it, a good deal of

123

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124 QUARTERLY JOURNAL OF ECONOMICS

which he calls "Forced Frugality." He seems to have hit upon this idea in exactly the connection in which one would expect it to occur first; and his influence on almost all econ-

omists of the early nineteenth century probably accounts for the fact that the idea is mentioned again and again in this period in very similar terms, even tho his own statement did not appear in print until a much later date.

It might be expected that the author of the Defence of

Usury, who was an acute observer of the effects of the Fixa- tion of Prices3 and who had adopted as his leitmotiv for the study of the art of Political Economy the statement that "industry is limited by capital," would turn his attention to the problem of whether government measures might not lead to an increase of that capital. Indeed, the first example of the "broad measures" of governments (i.e., such measures as "have for their object the augmentation of wealth in all its shapes without distinction") which Bentham discusses among what he calls Non-agenda of the state, is headed "Forced frugality."4 "By raising money," he writes, "as other money is raised, by taxes (the amount of which is taken by indi-

viduals out of their expenditure on the score of maintenance), government has it in its power to accelerate, to an unexampled degree, the augmentation of the mass of real wealth. By a proportionable sacrifice of present comfort, it may make any

addition that it pleases to the mass of future wealth; that is, to the increase of comfort and security. But tho it has it in its power to do this, it follows not that it ought to exercise this power to compel the community to make this sacrifice." And after a lengthy discussion of this form of Forced Frugal- ity, which does not concern us here, Bentham continues:

"The effect of forced frugality is also produced by the creating of paper money by government, or the suffering of the creation of paper money by individuals. In this case, the effect is produced by a species of indirect taxation, which has hitherto passed almost unnoticed."

apparently very interesting unpublished material. A critical edition of all the economic writings of Bentham is urgently needed.

3. Cf. Manual, chap. iii, secn. 22. Works, ed. Bowring, iii, 66. 4. Ibid., p. 44, chap. iii, seen. 4.

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" FORCED SA VING " 125

Bentham then proceeds to study, as example 2 of his

"broad measures " among the non-agenda, the effects of

increasing money in some detail. "Labor," he begins, "and

not money, is the real source of wealth.

All hands being employed, and employed in the most advantageous

manner, wealth - real wealth - could admit of no further increase; but

money would be increasable ad infinitum. The effect of every increase

of money (understand, of the ratio of the quantity of money employed

in the purchase of things vendible, to the quantity of things vendible

for money) is to impose an unprofitable income tax on the incomes of all fixed incomists."5

"If, on the introduction of the additional money into circulation, it pass in the first instance into hands which employ it in the way of unpro-

ductive expenditure, the suffering from this tax remains altogether uncompensated; if before it come into any hands of that description, it have come into hands by which it has been employed in the shape of

capital, the suffering by the income tax is partly reduced and partly

compensated. It is reduced by the mass of things vendible produced by means of it: a mass by the amount of which, were it not for the cor-

responding increase in the mass of money, the value of the mass of

money would pro tanto have been increased, and the prices of things

vendible decreased. It is in a certain degree, tho in a very inade-

quate degree, compensated for by the same means; viz. by the amount of the addition made to the quantity of sensible wealth - of wealth possess- ing a value in the way of use. Here, as in the above case of forced frugal- ity, national wealth is increased at the expense of national comfort and national justice."

5. Here Bentham appends the following very interesting footnote, which is curious as an early attempt to estimate the quantitative importance of this phenomenon: "The following is an indication of the indirect income tax resulting from the increase of money: In Britain (anno 1801) money is about ?72,000,000; income about ?216,000,000 (72 :216: :1:3). Each million added to money adds therefore three millions for ever to pecuniary income; and this (setting aside the 15 per cent for ever - ?150,000 - for profit on the million if employed in the shape of capital) without addition to real income. If, in every year, ?2,000,000 be added to money (plus ?300,000 for an equivalent to the addition made as above to real wealth) then in 36 years (anno 1837) the nominal or pecuniary amount of a mass of real income equal to the amount of 1801, will be doubled, i.e., become ?432,000,000; to which will be added ?10,800,000 for an equivalent to the intermediate addition to real wealth (?300,000 X36). But the ?432,000,000 of 1837, being worth not more than the ?216,000,000 of 1801, each ?100 of the ?432,000,000 will be worth but ?50 of the ?216,000,000; that is, the income of each fixed incomist will, by that time, have been subjected to an indirect income tax of ?50 per cent. He whose pecuniary income of 1837 is double what

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126 QUARTERLY JOURNAL OF ECONOMICS

After some further remarks on the same subject, which

there is no need to quote here, Bentham continues: "No sooner, however, does such additional sum of money pass on from the hands by which it is employed in the shape of capital, into those hands by which it is employed in adding to unproductive expenditure,

than its operation in the way of making an addition to real wealth is at an end. No sooner does it go in addition to money employed in the pur-

chase of articles for consumption, than its power of producing an addi- tion to the mass of the matter of real wealth is at an end: thenceforward

and for ever it keeps on contributing by its whole amount to the increase in prices, in the same manner as if from the mines it had come in the first instance into an unproductive hand, without passing through any pro-

ductive one."

As an historical fact, however, Bentham thinks that

"It is a matter of uncertainty what part, and even whether any part (of

the increase of wealth) has been produced by the addition to money, since without any such addition it might have been produced as well as by it."

Shortly after Bentham had given definite shape to his thoughts in 1804 (from his manuscripts it seems clear that he

had been working on them at least as early as 1801 - perhaps

much earlier) he noticed that he had already been anticipated. On March 22, 1804, he wrote to his French editor, Dumont:

"I had been working at, and thought to have finished a concise view of the influence of money in the increase of wealth as a specimen of the 'Pracognita,' preparatory to the practical part - the Agenda and

Non-agenda. But, just now, I got returned from Trail my Thornton and your Wheatley; and I see few ideas in my papers that are not to be found somewhere or other in their books. What I could hope to do would be little more than substituting method to chaos, and keeping clear of con- tradictions, which are to be found in both, but more particularly in Wheatley. The moral is that I should go quietly back to Evidence . . ."6

it is in 1801, will in point of wealth be neither a gainer nor a loser by the change. Not so in point of comfort. For by so much as he is a gainer in wealth the one way, by so much is he the loser in the other; and by the nature and constitution of the human frame, sum for sum, enjoyment from gain is never equal to the suffering from loss."

6. See Works, ed. Bowring, vol. x, p. 413. Bentham had already read Thornton two years before and had praised him highly in a letter to Dumont dated June 28, 1802. He wrote, 'This is a book of real merit- a controversy with him would be really instructive. I have tumbled it over but very imperfectly, that not being the order of the day, and for fear of calling off my attention, and absorbing my capacity of exertion.

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" FORCED SA VING " 127

While Wheatley's Remarks7 seem, however, to contain nothing upon the problem which interests us here, Thornton had indeed expressed similar thoughts in the following para- graph of his Paper Credit:8

"It must also be admitted that, provided we assume an excessive issue of paper to lift up, as it may for a time, the costs of goods tho not the price of labor, some augmentation of stock will be the consequence; for the labourer according to this supposition, may be forced by his necessity to consume fewer articles, tho he may exercise the same industry. But this saving, as well as any additional one which may arise from a similar defalcation of the revenue of the unproductive members of the society will be attended with a proportional injustice and hard- ship."

The next and much more detailed exposition of this phe- nomenon which I have noticed- that of Malthus in his review of Ricardo's High Price of Bullion9- I have already

But, one of these days, I may not improbably grapple with him. Admit- ting all his facts with thanks - agreeing with him in almost all his con- clusions - but disputing with him what seems (as far as I have yet seen) to be his most material conclusion, viz., that paper money does more good than harm. Here is a book of real instruction, if the French are wise enough to translate it; the style clear, plain, without ornament or pretension; the reasoning close." (Ibid., p. 389.) Dumont seems to have taken the hint. At least, the Bibliotheque Britannique of Geneva, where, in earlier years, Dumont had published part of the Manual and other manuscripts of Bentham, published in its volumes XXI-XXIII (1802 et seq.) six long extracts from Thornton's book, announcing at the same time a forthcoming French translation.

7. John Wheatley Remarks on Currency and Commerce, London, 1803.

8. Henry Thornton, An Enquiry into the Nature and Effects of the Paper Credit of Great Britain, London, 1802, p. 263. Attention has already been drawn to this remark of Thornton by Prof. C. Bresciani- Turroni, Le Vicende del Marco Tedesco, Milano, 1931, p. 240.

9 Edinburgh Review, vol. xvii, No. XXXIV, February 1811, p. 363 et seq. Cf. also Ricardo's reply in the appendix to the fourth edition of his pamphlet on The High Price of Bullion. "If such a distribution of the circulating medium were to take place, as to throw the command of the produce of the country chiefly into the hands of the productive classes - that is, if considerable portions of the currency were taken from the idle and those who live upon fixed incomes, and transferred to farmers, manufacturers and merchants, the proportion between capital and revenue would be greatly altered to the advantage of capital; and, in a short time, the produce of the country would be greatly augmented."

" Whenever, in the actual state of things, a fresh issue of notes comes into the hands of those who mean to employ it in the prosecution and

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128 QUARTERLY JOURNAL OF ECONOMICS

quoted at some length in Prices and Production. Here I only want to draw the attention of the reader to the striking similarity between the phrasing of Malthus and that of

Bentham. Since my mention of Malthus in this connection, my attention has been drawn to an almost simultaneous dis- cussion of the same problem by Dugald Stewart which, how- ever -- like Bentham's contribution - did not appear in print until many years afterwards.' In a series of memoranda, which he wrote in 1811 for Lord Lauderdale, on the Bullion Report and which were reprinted as an appendix to his lec- tures on Political Economy, he objects to the over-simplified formulation of the quantity theory, employed in the reason- ing of the Bullion Report, and stresses the more "indirect

connection between the high prices and an increased circulat- ing medium." He quotes first a statement from a letter by Lord Lauderdale that

" By the same act with which a bank increases the circulating medium of a country, it issues into the community a mass of fictitious capital, which serves not only as circulating medium but creates an additional quantity of capital to be employed in every mode in which capital can be employed," and then adds: "The explanation you have given of the process by which this affects the price of commodities, coincides so exactly with my own ideas that it would be quite superfluous for me to follow out the speculation any farther. The radical evil, in short, seems to be, not the mere over-issue of notes, considered as an addition to our currency, but the anomalous and unchecked extension of credit and its inevitable effect in producing a sudden augmentation of prices by a sudden augmentation of demand. The enlarged issue deserves attention, chiefly as affording a scale for measuring how far this extension has been carried. The same degree of credit, if it could have been given without the intervention of paper currency, would have operated in exactly the same way upon prices, and upon everything else." (p. 440.)2

extension of profitable business, a difference in the distribution of the circulating medium takes place, similar in kind to that which has been last supposed; and produces similar, tho of course comparatively inconsiderable effects, in altering the proportion between capital and revenue in favor of the former." The continuation of the passage is quoted in Prices and Production, p. 18.

1. Cf. The Collected Works of Dugald Stewart, ed. by Sir William Hamilton, London, 1855, viii, 440-449. The reference to Dugald Stewart in this connection I owe to Prof. Jacob Viner.

2. Cf. J. M. Keynes, A Tract on Monetary Reform, London, 1923, p. 184, and Prof. Edwin Cannan's article Limitation of Currency or

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"FORCED SAVING" 129

Stewart then discusses some different opinions stated by

Thornton in the Bullion Report and by Huskisson, and pro-

ceeds to draw a conclusion which, in a curious way, antici-

pates the subject, and even the formulation, of a well-known recent controversy:

"I have dwelt the longer on this particular view of the subject, con-

sidered in contrast with that adopted by Mr. Thornton (and apparently sanctioned in the last passage quoted from the Bullion Report) because

the two opinions lead obviously to two very different conclusions con-

cerning the nature of the remedy suited to the disorder. The one opinion suggests the propriety of limiting credit through the medium of a restricted currency; the other of limiting the currency through the medium of a well regulated and discriminating credit. If the radical evil

were merely an excess of the circulating medium, operating as such

without the combination of any other cause, it would follow that a reduc- tion of this quantity, by whatsoever means it were to be brought about, and however violent the effects which it might threaten, would be the only measure competent to the attainment of the end. But if, on the other hand, this excess be only symptomatic of another malady, with which, from particular circumstances, it happens to be co-existent (of an extension of credit, to wit, calculated to derange the pre-existing rela- tions of demand and supply) then in that case the restriction and regula- tion of this credit, ought to be regarded as the primary object, and the

reduction of our circulating medium attended to solely as an indication

that the cure is progressives" (p. 443).

Stewart adds that, in his opinion, a repeal or relaxation of the anti-usurious laws "would go to the root of the mischief

by a process more effectual, and at the same time more gentle and manageable in its operation, than any other that I can imagine," and quotes in corroboration of that view, the pas-

sage from Thornton in which this author anticipated Wicksell's theory as to the effect of a money rate of interest which is below the " natural " rate. A little later, Stewart comes back to this point, insisting that "the primary cause of the depre-

ciation is the artificial cheapness in the rate at which, in con- sequence of the laws against usury, the use of money may be obtained " (p. 447). And before he concludes this letter

Limitation of Credit, Economic Journal, vol. 34, 1924, reprinted in the author's An Economist's Protest, London, 1927.

3. Henry Thornton, l.c. p. 287. The passage is quoted and discussed in my Prices and Production, pp. 12, 13.

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130 QUARTERLY JOURNAL OF ECONOMICS

(which was written in March 1811) he mentions that he has just seen the article (by Malthus) in the Edinburgh Review of February and that he was agreeably surprised to find the

passage to which I have already alluded, which he quotes in full (pp. 448-449).

After all this, there can be little doubt that the theory of

"forced saving" was fairly widely known among monetary writers in the early nineteenth century; and I should not be surprised if a closer study of the literature of the time revealed

still more discussions of the problem. Indeed, Prof. A. M.

Marget has noted a rather general allusion to it in R. Torrens' Essay on the Production of Wealth.4 But it would be sur-

prising if an idea, which was discussed as widely as this one

was, should in the course of time be entirely forgotten; and this was by no means the case here. John Stuart Mill in the

fourth of his Essays on Some Unsettled Questions of Political Economy -" On Profits and Interest "- written in 1829 or

1830, goes at least so far as to mention that, as a result of the

activity of bankers, " revenue " may be " converted into

capital; and thus, strange as it may appear, the depreciation

of the currency, when effected in this way, operates to a cer- tain extent as a forced accumulation."5 But he believed then that this phenomenon belonged to the "further anomalies of the rate of interest which have not, so far as we are aware,

been hitherto brought within the pale of exact science."6 The first editions of his Principles seem to contain nothing on this

point. But in 1865, in the sixth edition, he added to his chap-

ter on "Credit as a Substitute for Money" a footnote which so closely resembles the statement by Malthus that it seems very probable that something - perhaps the publication of D. Stewart's Collected Works, in 1855, containing the dis-

4. Robert Torrens, An Essay on the Production of Wealth, London, 1821, p. 326 et seq. The reference is given by Prof. A. W. Marget in his excellent article on Leon Walras and the "Cash Balance Approach" to the Problem of the Value of Money, Journal of Political Economy, vol. 39, No. 5 (October, 1931), p. 598.

5. John Stuart Mill, Essays on Some Unsettled Questions of Political Economy, Second Edition, London, 1874, p. 118. I owe this reference to Mr. Victor Edelberg.

6. Ibid., p. 114.

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" FORCED SA VING " 131

cussion to which we have already referred (including the quo- tation from Malthus) - had directed his attention to the earlier discussion of the point.

The footnote, which qualifies a statement made in the text that credit serves only to transfer capital from one person to another, is as follows:

"To make the proposition in the text strictly true, a corrective - tho a very slight one - requires to be made. The circulating me- dium existing in a country at a given time is partly employed in pur- chases for productive, partly for unproductive, consumption. Accord- ing as a larger proportion of it is employed in the one way or in the other, the real capital of the country is greater or less. If, then, an addition were made to the circulating medium in the hands of unproductive con- sumers exclusively, a larger portion of the existing stock of commodities would be bought for unproductive consumption, and a smaller for a pro- ductive, which state of things, while it lasted, would be equivalent to a diminution of capital; and, on the contrary, if the addition made be to the portion of the circulating medium which is in the hands of producers, and destined for their business, a greater portion of the commodities of the country will be, for the present, employed as capital, and a less portion unproductively. Now an effect of this latter character naturally attends some extensions of credit, especially when taking place in the form of bank notes or other instruments of exchange. The additional bank notes are, in ordinary course, first issued to producers or dealers, to be employed as capital; and tho the stock of commodities in the country is no greater than before, yet as a greater share of that stock now comes by purchase into the hands of producers and dealers, to that extent what would have been unproductively consumed is applied to production, and there is a real increase of capital. The effect ceases, and a counter-process takes place, when the additional credit is stopped, and the notes called in."7

Only fourteen years after this remarkably clear statement by John Stuart Mill, we find that exposition of the theory of "forced saving" to which the modern developments can be pretty definitely traced. Whether Leon Walras, who in 1879 devoted a long section of his Th6orie Math~matique du Billet de Banque to a discussion of it, had been directly influenced by

7. J. S. Mill, Principles of Political Economy, Ed. Ashley, p. 512. This passage in the Principles has been pointed out by Prof. Marco Fanno in his article "Cicli di produzione, cicli di credito e fluttuazioni industriali" Giornali degli Economisti, Mai, 1931, p. 31 of the reprint.

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132 QUARTERLY JOURNAL OF ECONOMICS

Mill is not known; but it seems quite probable. That Walras inspired K. Wicksell and, through Wicksell, all the later Ger- man authors who dealt with the problem, there can be little doubt. But Walras' very interesting discussion had been practically forgotten, and attention has only recently been drawn to it by Professor Marget in the article quoted above. Indeed, Walras there gives more than his disciple Wicksell- or any other author up to quite recent times. In a section headed "Accroissement du Capital par remission des Billets de Banque," he analyses, in great detail, what he calls the undeniable fact that "L'ernmission des billets de banque pour une certaine somme permet une augmentation datns la quantity du capital pour une somme egale."8 He sees clearly that the expan- sion of bank credit "cree non pas un capital nouveau, mais une demande nouvelle de capital, et le capital lui-meme reste a creer"; in consequence, "la proportion de la production des revenues consommables et des capitaux neufs est change, il y a diminution dans la quantity des uns et augmentation dans la quantity des autres. " The situation is not quite the same as in the case of a sudden and considerable increase in saving, because

"dans le cas de l'6mission des billets de banque, comme cela aurait aussi lieu dans le cas de la decouverte de monnaie metallique, il y a augmentation de demande d'un c6t6 sans diminution de demande de l'autre, et, par suite, augmentation dans la valeur totale de la produc- tion. Ainsi: L'emission de billets de banque pour une certain somme am re, pendant toute la periode d'emission, une hausse du prix des produits consistent en revenues consommables et capitaux neufs qui se mesure approxi- mativement par le rapport du montant de l'emission au montant du revenu social anterieur. Ce phenomene est transitoire une fois remission ter- mince, la hausse en question disparait, et il ne subsiste plus que celle provenant de la depreciation du me tal precieux."

Finally, Walras elaborates this theory in algebraic form and gives an arithmetical example in order to show what the practical importance of the phenomenon may be.

In Wicksell's exposition,9 this idea, altho only briefly men- tioned, becomes an integral part of his theory as to the effect

8. Cf. Leon Walras, Etudes d'Economie Politique Appliquee, Lausanne and Paris, 1898, pp. 348-356.

9. Knut Wicksell, Geldzins und Giterpreise, Jena, 1898, pp. 103, 142.

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" FORCED SAVING)" 133

of a money rate of interest which is different from the equi- librium rate. From Wicksell, the idea was taken over by

Mises,1 who elaborated it still further, and from Mises by Schumpeter.2 Through their influence, it has recently become

quite a familiar feature of German writings on the subject,3 even before the interest in these problems was further stimu- lated by the new, and apparently independent, development

of similar ideas among the Cambridge School of Economists. Mr. D. H. Robertson's "Imposed Lacking" and Professor

Pigou's "Forced Levies" are, of course, just the same thing as Bentham's "Forced Frugality," J. S. Mill's "Forced Accumulation " and the " Erzwungene Sparen " or " Zwangs- sparen" of Wicksell and the German authors. Mr. J. M. Keynes, however, who discusses the same problem in his Treatise on Money,4 rejects this terminology and prefers to speak simply of investment being in excess of saving; and there is much to be said in favor of this. Unfortunately, how- ever, Mr. Keynes uses the terms " saving " and " investing " in a sense quite different from the usual one, so that, for some time, the danger of confusion may make difficult the acceptance of what is perhaps the better terminology.

F. A VON HAYEK. LONDON SCHOOL OF ECONOMICS

1. L. v. Mises, Theorie des Geldes und der Umlaufsmittel, MUnchen 1912.

2. Josef Schumpeter, Theorie der wirtschaftlichen Entwicklung, Leipzig, 1912.

3. These more recent German developments have been discussed, in some detail, in an article by Dr. Erich Egner, Zur Lehre vom Zwangs- sparen, Zeitschrift fur die gesamte Staatswissenschaft, 1928.

4. i, 171.

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