Upon reading http://mises.org/Community/forums/t/6827.aspx, the main thread about fractional reserve banking and inflation, I stumbled upon a question relating to 100 reserves and saving, or saving in general. Saving is described as being the same thing as investment since you are freeing up resources to give to someone else in the economy. Increases in cash balances are different because you are holding the money in anticipation or something, waiting to get enough money to invest, and/or are just uncertain like all human beings.(I am right on saving and cash balances being two different things, and "saving", in the Austrian sense exactly or "equaling" investment right?Meaning in 100% reserves, loan banking is "saving", while deposit banking "increases in cash balances?") -see below.
In 100% banking, can "hoarding" and/or "Increases/decreases in cash balances" manifest itself in deposit banking? They seem to be three terms that mean the same thing. Me keeping a big bag of gold under my bed is the same thing as me putting it in a deposit warehouse correct? I guess another way to say it is deposit banking is "hoarding" or "increases cash balances?" But that doesn't equal "saving/investing" right, because I am not freeing up resources correct?
Thank you to anyone who clearly explains this to me as I am confused and see many people saying different things.
Lets say a man earns 2000£ a month.
he purchase 1000£ a month on goods and servies, in that month. he gives and receives no gifts, he earns no other incomes.
this pattern goes on for a year.
at the end of the year, are we best to say that he has spent 12000£ and has a hoard of 12000£, or that he has savings of 12000£, or are we saying something else about how the year worked out for him?
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I still don't know what to exactly say as to whether saving is "deposit banking/loan banking" or "loan banking".
Perhaps an easier way to go about this would be to post some quotes.
Here is a quote from Murray Rothbard's America's Great Depression (starting on page 38)
Savings and investment are indissolubly linked. It is impossible to encourage one and discourage the other. Aside from bank credit, investments can come from no other source than savings (and we have seen what happens when investments are financed by bank credit). Not only consumers save directly, but also consumers in their capacity as independent businessmen or as owners of corporations. But can’t savings be “hoarded”? This, however, is an artificial and misleading way of putting the matter. Consider a man’s possible allocation of his monetary assets: He can (1) spend money on consumption; (2) spend on investment; (3) add to cash balance or subtract from previous cash balance. This is the sum of his alternatives. The Keynesians assume, most contrivedly, that he first decides how much to consume or not, calling this “not-consumption” saving, and then decides how much to invest and how much to “leak” into hoards. (This, of course, is neo-Keynesianism rather than pure Keynesian orthodoxy, which banishes hoarding from the living room, while readmitting it by the back door.) This is a highly artificial approach and confirms Sir Dennis Robertson’s charge that the Keynesians are incapable of “visualizing more than two margins at once.”2 Clearly, our individual decides at one and the same stroke about allocating his income in the three different channels. Furthermore, he allocates between the various categories on the basis of two embracing utilities: his time preferences decide his allocation between consumption and investment (between spending on present vs. future consumption); his utility of money decides how much he will keep in his cash balance. In order to invest resources in the future, he must restrict his consumption and save funds. This restricting is his savings, and so saving and investment are always equivalent. The two terms may be used almost interchangeably.
And here are two quotes from Murray Rothbard's What Has Government Done to Our Money? and The Case for a 100 Percent Gold Dollar (Starting on Page 134-135 and then 162)
In one sense, 100 percent banking is now easier to establish than it was in 1962. In my original essay, I called upon the banks to start issuing debentures of varying maturities, which could be purchased by the public and serve as productive channels for genuine savings which would neither be fraudulent nor inflationary. Instead of depositors each believing that they have a total, say, of $1 billion of deposits, while they are all laying claim to only $100 million of reserves, money would be saved and loaned to a bank for a definite term, the bank then relending these savings at an interest differential, and repaying the loan when it becomes due.
(Page 162)
Another argument holds that the fact that notes and deposits are redeemable on demand is only a kind of accident; that these are merely credit transactions. The depositors or noteholders are simply lending money to the banks, which in turn act as their agents to channel the money to business firms. And why repress productive credit? Mises has shown, however, the crucial difference between a credit transaction and a claim transaction; credit always involves the purchase of a future good by the creditor in exchange for a present good (money). The creditor gives up a present good in exchange for an IOU for a good coming to him in the future. But a claim—and bank notes or deposits are claims to money—does not involve the creditor’s relinquishing any of the present good. On the contrary the noteholder or deposit-holder still retains his money (the present good) because he has a claim to it, a warehouse receipt, which he can redeem at any time he desires.[25] This is the nub of the problem, and this is why fractional-reserve banking creates new money while other credit agencies do not—for warehouse receipts or claims to money function on the market as equivalent to standard money itself.
To those who persist in believing that the bulk of bank deposits are really saved funds voluntarily left with the banks to invest for savers, and are not just kept as monetary cash balances, I would like to lay down this challenge: If what you say is true, why not agree to alter the banking structure to change these deposits to debentures of varying maturities? A shift from uncovered deposits to debentures will of course mean an enormous drop in the supply of money; but if these deposits are simply another form of credit, then the depositors should not object and we 100-percent theorists will be satisfied. The purchase of a debenture will, furthermore, be a genuine saving and investment of existing money, rather than an unsound increase in the money supply.
Now these seem to agree with Giles' view on saving
Of course perplexingly enough when you look in the Index of the book you find that the word Savings is listed on Page 43. There is no word "savings" on page 43, but instead his talk about Hoarding. Cruel trick or typo? I don't know.
But then....
In Henry Hazlitt's Economics in One Lesson (Page 167) he says
The enemies of saving are not through. They begin by drawing a distinction, which is proper enough, between “savings” and “investment.” But then they start to talk as if the two were independent variables and as if it were merely an accident that they should ever equal each other. These writers paint a portentous picture. On the one side are savers automatically, pointlessly, stupidly continuing to save; on the other side are limited “investment opportunities” that cannot absorb this saving. The result, alas, is stagnation. The only solution, they declare, is for the government to expropriate these stupid and harmful savings and to invent its own projects, even if these are only useless ditches or pyramids, to use up the money and provide employment.
There is so much that is false in this picture and “solution” that we can here point only to some of the main fallacies. Savings can exceed investment only by the amounts that are actually hoarded in cash.’ Few people nowadays, in a modern industrial community, hoard coins and bills in stockings or under mattresses. To the small extent that this may occur, it has already been reflected in the production plans of business and in the price level. It is not ordinarily even cumulative: dishoarding, as eccentric recluses die and their hoards are discovered and dissipated, probably offsets new hoarding. In fact, the whole amount involved is probably insignificant in its effect on business activity.
* Many of the differences between economists in the diverse views now expressed on this subject are merely the result of differences in definition. Savings and investment may be so defined as to be identical, and therefore necessarily equal. Here I am choosing to define savings in terms of money and investment in terms of goods. This corresponds roughly with the common use of the words, which is, however, not consistent.
Of course the confusion continues.... In Robert Murphy's Human Action Study Guide (page 178) he says
Before lengthening the period of production, a person must first engage in saving, i.e; consuming less than what is possible. An obvious example is the stockpiling of consumer goods for the workers who will be devoted to a project (such as construction of a bridge) that will not yield direct benefits for several years
Now I’M REALLY confused lol.
Perhaps a Mises staff or Austrian Professor could sort this out.
(Sorry for the length)
If you stick a bag of gold under your bed you are decreasing the amount of gold in circulation. That increases the buying power of the gold still in circulation. So yes, you are saving. And yes, you are redirecting resources to meet the wants of others - because others can now buy more with the gold they spend. The savings is not being invested in a targeted manner but it is being invested nonetheless.
Adding or removing money from circulation does not increase or decrease wealth so the wealth you had a claim to has to go somewhere.
nirgrahamUK:at the end of the year, are we best to say that he has spent 12000£ and has a hoard of 12000£, or that he has savings of 12000£, or are we saying something else about how the year worked out for him?
He has increased his cash balance by the amount, what's so difficult about that notion?
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yes, and what is the reason that his larger balance of money (cash if you will) is not categorizable as savings?, what does it lack that 'savings' does not lack?
it is consumables gone for some time unconsumed, the very definition of savings.
you are saying that 'my life savings', are not my life savings if they are in the form of cash.
nirgrahamUK:yes, and what is the reason that his larger balance of money (cash if you will) is not categorizable as savings?, what does it lack that 'savings' does not lack?
He doesn't subjectively see it as purposeful action directed at increasing his future consumption, that is the definition of saving.
nirgrahamUK:you are saying that 'my life savings', are not my life savings if they are in the form of cash.
No, that is not what I said.
JohnBrown:Before lengthening the period of production, a person must first engage in saving, i.e; consuming less than what is possible. An obvious example is the stockpiling of consumer goods for the workers who will be devoted to a project (such as construction of a bridge) that will not yield direct benefits for several years
This seems to be in accordance with the views of Rothbard, as are mine.
As for the Hazlitt quotation, what is confusing? He is wrong.
Wait, so how is stockpiling consumer goods for several years different than "hoarding" cash?
So Hazlitt is just wrong? And they keep reprinting the book with no note or anything? Seems hard to believe.
JohnBrown: Wait, so how is stockpiling consumer goods for several years different than "hoarding" cash? So Hazlitt is just wrong? And they keep reprinting the book with no note or anything? Seems hard to believe.
Hazlitt was not an economist, I'm not saying that he has nothing worthwhile saying, just that it seems difficult to believe that he was infallible. It wouldn't make sense to attach a note to the book of every author who made a mistake.
So how is stockipiling consumer goods for several years different than "hoarding" cash? :)
DBratton:And yes, you are redirecting resources to meet the wants of others - because others can now buy more with the gold they spend. The savings is not being invested in a targeted manner but it is being invested nonetheless.
It only decreases demand for consumer goods thereby cutting their prices. That does not make capital goods cheaper so does not mean investment in them. If it does increase investment at all it is infinety inferior to loaning to enterpreneurs through the banking system.
scineram: DBratton:And yes, you are redirecting resources to meet the wants of others - because others can now buy more with the gold they spend. The savings is not being invested in a targeted manner but it is being invested nonetheless. It only decreases demand for consumer goods thereby cutting their prices. That does not make capital goods cheaper so does not mean investment in them. If it does increase investment at all it is infinety inferior to loaning to enterpreneurs through the banking system.
OK one of us is confused. Decreased demand for particular consumer goods causes the price of those consumer goods to fall, which in turn reduces the demand for the capital goods and natural resources required to make those consumer goods, which causes them to be transferred to other lines of production. It does tend to make the capital goods cheaper, but no that doesn't cause an increase in investment in them, at least not for that particular use.
Here is the question I was trying to answer:
JohnBrown:n 100% banking, can "hoarding" and/or "Increases/decreases in cash balances" manifest itself in deposit banking? They seem to be three terms that mean the same thing. Me keeping a big bag of gold under my bed is the same thing as me putting it in a deposit warehouse correct? I guess another way to say it is deposit banking is "hoarding" or "increases cash balances?" But that doesn't equal "saving/investing" right, because I am not freeing up resources correct?
Hoarding gold is saving and does free up resources. Sure it's by a small amount but that wasn't the question. And yes it's arguably inefficient compared to having a loan officer at a bank carefully weigh who the money should go to (depending on your definition of efficient), but that wasn't the question either.
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Okay, thanks for all of the replies guys. To ease my own confusion (lol), IN SUMMATION: the Austrian view of saving is deferred consumption right?
So, (going back to the original question), if John works at McDonalds and earns 50 dollars, and spends 40 dollars on food, but then refrains from using the 10 dollars and puts 5 in a McDonalds stock and 5 in his deposit warehouse/hoard/cash balance (he is not planning on buying anything now but just putting it there for the occasion he can buy something he likes), both of those are saving correct? Going off of this, does that mean that all of the goods that I have in my house (such as food, change, medicine, etc) that I bought but are not using right now means I am saving those items right?
I understand how the 5 dollars of McDonald’s stock helps the economy. It gives them money and resources to invest and grow their company, and represents actual savings because it is relinquished. I am confused as to how the 5 dollars I put in my deposit warehouse/hoard/cash balance helps the economy in the same way as the 5 dollars put into McDonald’s stock helps it. I have “saved”, but in essence I have not relinquished any resources. The 5 dollars is still there waiting for me. This is why I’m confused between the Rothbard quotes and such where he says money put in a deposit bank really isn’t “savings” (see quotes above, it would help me greatly if someone could explain this).
And if putting the 5 dollars in my deposit warehouse/cash balance/hoard equates to saving, then why does Rothbard and others always say saving and investment are equal? (“This is restricting his savings, so saving and investment are always equivalent”). Going off B) and C) being saving, this statement is impossible. Everyone will always have cash balances, so they will never be equal. Ever.
Am I missing something? I would be extremely gratefully to someone who can answer my questions.
Thanks as usual.
JohnBrown: So how is stockipiling consumer goods for several years different than "hoarding" cash? :)
Well, that depends on the person in question and their subjective assesment.