Forced Saving

Forced Saving

Forced Saving, the enforced reduction in consumption that takes place when a Government creates money to finance its activities. It works as follows: the Government prints new currency which it uses to pay for armaments, development projects, etc. The effect is to draw capital, labour and raw materials away from the production of goods and services for the private sector to produce for the public sector. But demand in the private sector will not have fallen, although the quantity of goods available to satisfy it has been reduced, so prices tend to rise until demand and supply are made equal at a new higher level of prices. Private citizens have thus been forced to reduce their consumption because they can no longer afford the goods and services they formerly bought, and resources have been released to carry out the tasks required by the Government.

This technique for appropriating resources has generally been associated with wars and defence, but in recent times it has been used for development projects in under-developed countries in peacetime. The political and administrative difficulties of raising revenue by taxation in such countries are usually formidable. Forced saving' by inflation is thus an attractive method of avoiding them. But if it generates inflationary pressure it may create more difficulties than it solves: it provokes political stresses because poor people are hurt by the rise in prices and foreign investors may be frightened oil.

In economic theory, the concept of forced saving dates back to at least the early nineteenth century, and during the twentieth century it has played a prominent part in many over-investment theories of the trade cycle. A main feature of these theories is that there is an equilibrium, or natural', rate of interest which equates voluntary savings with investment in capital goods and prevents fluctuations in output and employment, if other things remain the same and the level of savings is increased the equilibrium rate of interest will fall. At the lower rate of interest the level of investment will rise to the new level of savings. The economic resources released by the fall in consumption (the increase in savings) will be re-employed by the increase in investment resulting from the lower rate of interest. In a money-using economy, however, the money (or market) rate of interest can be influenced by changes in the quantity of money. An expansion of bank credit can supplement savings, cause the money rate of interest to fall below the equilibrium rate and increase investment expenditure. There is then no reduction in the demand for consumer goods, and so no release of economic resources for investment. The increase of investment expenditure is a net addition to total monetary outlay, and the economy will thus be subject to expansionary and inflationary pressure whenever the money rate of interest is less than the equilibrium rate, or, alternatively, whenever investment exceeds the level of voluntary savings appropriate to the money rate of interest. To the extent that the excess monetary demand causes prices to rise, real incomes fall, consumption in real terms is reduced and forced saving takes place to release resources for the production of capital goods.

The term forced saving could be applied to the saving of Governments. By securing a budget surplus on current account through taxing more than is required for public expenditure, a central Government can extract funds from the public which can be used to finance investment in roads, equipment for coal mines. railways. It can be said that the community has been made to yield forced saving measured by the amount of the budget surplus.

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