THE SELF-DESTRUCTIVE NATURE OF THE ARTIFICIAL BOOMS CAUSED BY CREDIT EXPANSION: THE THEORY OF “FORCED SAVING”

[Quarta parte do sexto capítulo do livro Money, Bank Credit, and Economic Cycles, de Jesús Huerta de Soto]

In the broad sense of the term, “forced saving” arises whenever there is an increase in the quantity of money in circulation or an expansion of bank credit (unbacked by voluntary saving) which is injected into the economic system at a specific point. If the money or credit were evenly distributed among all economic agents, no “expansionary” effect would appear, except the decrease in the purchasing power of the monetary unit in proportion to the rise in the quantity of money. However if the new money enters the market at certain specific points, as always occurs, then in reality a relatively small number of economic agents initially receive the new loans. Thus these economic agents temporarily enjoy greater purchasing power, given that they possess a larger number of monetary units with which to buy goods and services at market prices that still have not felt the full impact of the inflation and therefore have not yet risen. Hence the process gives rise to a redistribution of income in favor of those who first receive the new injections or doses of monetary units, to the detriment of the rest of society, who find that with the same monetary income, the prices of goods and services begin to go up. “Forced saving” affects this second group of economic agents (the majority), since their monetary income grows at a slower rate than prices, and they are thereforeobliged to reduce their consumption, other things being equal.*

Whether this phenomenon of forced saving, which is provoked by an injection of new money at certain points in the market, leads to a net increase or decrease in society’s overall, voluntary saving will depend on the circumstances specific to each historical case. In fact if those whose income rises (those who first receive the new money created) consume a proportion of it greater than that previously consumed by those whose real income falls, then overall saving will drop. It is also conceivable that those who benefit may have a strong inclination to save, in which case the final amount of saving might be positive. At any rate the inflationary process unleashes other forces which impede saving: inflation falsifies economic calculation by generating fictitious accounting profits
which, to a greater or lesser extent, will be consumed. Therefore it is impossible to theoretically establish in advance whether the injection of new money into circulation at specific points in the economic system will result in a rise or a decline in society’s overall saving.**

In a strict sense, “forced saving” denotes the lengthening (longitudinal) and widening (lateral) of the capital goodsstages in the productive structure, changes which stem from credit expansion the banking system launches without the support of voluntary saving. As we know, this process initially generates an increase in the monetary income of the original means of production, and later, a more-than-proportional rise in the price of consumer goods (or in the gross income of consumer goods industries, if productivity increases). In fact, the circulation credit theory of the business cycle explains the theoretical microeconomic factors which determine that the attempt to force a more capital-intensive productive structure, without the corresponding backing of voluntary saving, is condemned to failure and will invariably reverse, provoking economic crises and recessions. This process is almost certain to entail an eventual redistribution of resources which in some way modifies the overall voluntary saving ratio that existed prior to the beginning of credit expansion. However unless the entire process is accompanied by a simultaneous, independent, and spontaneous increase in voluntary saving of an amount at least equal to the newly-created credit banks extend ex nihilo, it will be impossible to sustain and complete the new, more capital-intensive stages undertaken, and the typical reversion effects we have examined in detail will appear, along with a crisis and economic recession. Moreover the process involves the squandering of numerous capital goods and society’s scarce resources, making society poorer. As a result, by and large, society’s voluntary saving ultimately tends to shrink rather than grow. At any rate, barring dramatic, spontaneous, unforeseen increases in voluntary saving, which for argument’s sake we exclude at this point from the theoretical analysis (which furthermore always involves the assumption that other things remain equal), credit expansion will provoke a self-destructive boom, which sooner or later will revert in the form of an economic crisis and recession. This demonstrates the impossibility of forcing the economic development of society by artificially encouraging investment and initially financing it with credit expansion, if economic agents are unwilling to voluntarily back such a policy by saving more. Therefore society’s investment cannot possibly exceed its voluntary saving for long periods (this would constitute an alternative definition of “forced saving,” one more in line with the Keynesian analysis, as F.A. Hayekcorrectly indicates).*** Instead, regardless of the final amount of saving and investment in society (always identical ex post), all that is achieved by an attempt to force a level of investment which exceeds that of saving is the general malinvestment of the country’s saved resources and an economic crisis always destined to make it poorer.****

*Consequently in its broadest sense, “forced saving” refers to the forced expropriation to which banks and monetary authorities subject most of society, producing a diffuse effect, when they decide to expand
credit and money, diminishing the purchasing power of the monetary units individuals possess, in relation to the value these units would have in the absence of such credit and monetary expansion. The funds derived from this social plunder can either be completely squandered (if their recipients spend them on consumer goods and services or sink them into utterly mistaken investments), or they can become business or other assets, which either directly or indirectly come, de facto, under the control of banks or the state. The first Spaniard to correctly analyze this inflationary process of expropriation was the scholastic Father Juan de Mariana, in his work, De monetae mutatione, published in 1609. In it he
writes:

If the prince is not a lord, but an administrator of the goods of individuals, neither in that capacity nor in any other will he be able to seize a part of their property, as occurs each time the currency is devalued, since they are given less in place of what is worth more; and if the prince cannot impose taxes against the will of his vassals nor create monopolies, he will not be able to do so in this capacity either, because it is all the same, and it is all depriving the people of their goods, no matter how well disguised by giving the coins a legal value greater than their actual worth, which are all deceptive, dazzling fabrications, and all lead to the same outcome. (Juan de Mariana, Tratado y discurso sobre la moneda de vellón que al presente se labra en Castilla y de algunos desórdenes y abusos [Treatise and Discourse on the Copper Currency which is now Minted in Castile and on Several Excesses and Abuses], with a preliminary study by Lucas Beltrán [Madrid: Instituto de Estudios Fiscales, Ministerio de Economía y Hacienda, 1987], p. 40; italics added)

Asomewhat different translation from the original text in Latin has been more recently published in English. Juan de Mariana, S.J., A Treatise on the Alteration of Money, translation by Patrick T. Brannan, S.J. Introduction by Alejandro A. Chafuen, Journal of Markets and Morality 5, no. 2 (Fall, 2002): 523–93. The quotation is on page 544 (12 of the translation).

**Joseph A. Schumpeter attributes the appropriate expression “forced saving” (in German, Erzwungenes Sparen or Zwangssparen) to Ludwig von Mises in his book, The Theory of Economic Development, first published in German in 1911 (The Theory of Economic Development [Cambridge, Mass.: Harvard University Press, 1968], p. 109). Mises acknowledges having described the phenomenon in 1912 in the first German edition of his book, The Theory of Money and Credit, though he indicates he does not believe he used the particular expression Schumpeter attributes to him. In any case Mises carefully analyzed the phenomenon of forced saving and theoretically demonstrated that it is impossible to predetermine whether or not net growth in voluntary saving will follow from an increase in the amount of money in circulation. On this topic see On the Manipulation of Money and Credit, pp. 120, 122 and 126–27. Also Human Action, pp. 148–50. Mises first dealt with the subject in The Theory of Money and Credit, p. 386. Though we will continue to attribute the term “forced saving” to Mises, a very similar expression, “forced frugality,” was used by Jeremy Bentham in 1804 (see Hayek’s article, “A Note on the Development of the Doctrine of ‘Forced Saving,’” published as chapter 7 of Profits, Interest and Investment, pp. 183–97). As Roger Garrison has aptly revealed, a certain disparity exists between Mises’s concept of forced saving (what we refer to as “the broad sense” of the term) and Hayek’s concept of it (which we will call “the strict sense”), and thus “what Mises termed malinvestment is what Hayek called forced savings.” See Garrison, “Austrian Microeconomics: A Diagrammatical Exposition,” p. 196.

***See Hayek, “A Note on the Development of the Doctrine of ‘Forced Saving,’” p. 197. See also the comments on Cantillon and Hume’s contributions in chapter 8, pp. 615–20.

****Fritz Machlup has compiled up to 34 different concepts of “forced saving” in his article, “Forced or Induced Saving: An Exploration into its Synonyms and Homonyms,” The Review of Economics and Statistics 25, no. 1 (February 1943); reprinted in Fritz Machlup, Economic Semantics (London: Transaction Publishers, 1991), pp. 213–40.