1. The individual saver is enabled to improve the agents that he uses. The simplest case is presented when means of enjoyment are improved and made more durable. If Crusoe on his island spends less time and fewer resources on gratifying his immediate wants, he may improve the quality of his clothing and the convenience of his house and furniture. By thus putting his consumption goods into durable instead of temporary forms, he will increase eventually the sum of utilities enjoyed. Again, abstinence permits the tools of the laborer to be made more convenient. If the farmer spends less time in the garden and he and his family live on plainer food, while he makes a plow, mends a rake, and builds a shed, he will be enabled thereafter to gather a greater crop with less effort.

Saving of consumption goods for exchange.

2. Consumption goods, when saved, may be exchanged for services, and these may be used to create durable agents. Various ways are open to one wishing to increase his stock of durable agents. He may forego seeking immediate enjoyments while he makes durable agents himself. Or he may make and save a stock of consumption goods, a surplus supply for the future, and exchange it for durable agents.

Finally, one who has accumulated consumption goods can always exchange them for the services of those seeking subsistence and enjoyment; and thus in control of a labor force, he can direct it toward the production of new forms of productive agents.

3. In modern industry, saving frequently takes the form of money, which is then loaned to productive borrowers. This is the typical form of saving in modern industry. As it is more and more the case that income takes first the form of money, saving most conveniently takes the money form. The clerk on a salary of $60 a month spends $50 and saves $10 which he lends to a neighbor or deposits in a savings-bank. The borrower is thus empowered to increase his stock of productive agents in the measure that the lender has limited his consumption. The complexity of the process by which money saving becomes embodied through a money loan in new productive agents should not blind to its real nature. The money is saved as a means to the exchange of present goods for future income. Money even in our day is occasionally stored away for future use under hearthstones or in old stockings and hollow trees, but this is a primitive and wasteful method, involving the loss of all the additional rents that its exchange and investment would yield.

If the money saved by the thrifty saver is loaned to a thriftless borrower, wealth is not increased, but merely changes hands. The prodigal mortgaging his wealth, spending the money, and living beyond his income, absorbs the savings of the other. One saves and adds to wealth, the other consumes it. There is no net increase of goods, but two individuals have shifted positions; each has gotten his reward of growing affluence or penury.

The "normal" end, however, of savings and loans is productive. The borrower, in getting control of purchasing power, aims to put a new machine where it will be useful, to remove obstacles, and to make economic agents more effective. Along the border-land of industry the active and alert borrower seeks out opportunities to make new agents earn a rental, and having found the opening, turns to the money market for the means to profit by it.

Money savings are converted into other wealth.

Lower interest means higher capitalization.

4. A fall in the rate of interest normally accompanies an increase in the mass, efficiency, and valuation of durable economic agents. A lower rate of interest means a higher capitalization of all incomes. It is not that either can be called the cause of the other; rather both are aspects of the same thing, the interest rate merely registering the change in capitalization. If the rate of interest has been five per cent., an income of $100 has been capitalized at $2000. When the rate falls to four per cent, the income is recapitalized at $2500. All along the line of investment there is an increase in the value of the durable economic agents.

And more complex industrial processes.

It encourages the increase of fixed charges to reduce cost of operation.

Another phase of the change is the greater complexity of the processes of industry. Production becomes technically more complex when interest falls. Rental, product, and present goods, bear a smaller ratio to the value of capital, and therefore it becomes advantageous to apply newly formed capital to uses which before did not justify the investment. Where formerly the utility of a second tool did not justify its making, now it can be made to earn the smaller rental needed to balance its capital value. One form, therefore, which the change takes, is a multiplication of the tools already used. Things are placed wherever most convenient. Another form this change takes is the putting of new links into the chain of technical production. Cost of operation constantly is compared with fixed charges, the interest with the capital investment. Expensive improvements on railroads, the straightening of curves, the tunneling of mountains, the reducing of grades, the replacement of lighter by heavier rails, have been made possible by a fall in the rate of interest. A fall in the rate of interest disturbs the equilibrium that has been arrived at, between the cost of operation, the amount paid for wages, coal, etc., and the income on permanent investment. If the rate of interest has been five per cent, and falls to four per cent, many permanent improvements before unwise become economical. One thousand dollars paid annually in wages then balanced an interest charge on a capital investment of $20,000; now it balances the interest charge on $25,000. It becomes a paying thing for the railroad to abandon or throw aside an enormous capital represented by the old, less perfect roadbed, and build a new one alongside of it. The changes of this kind one sees in traveling on the great and progressive railroads, reflect in part the growth of traffic, but in part also a change of the interest rate, making it a net saving to increase the capital investment in order to reduce the cost of operation per unit of traffic.

The benefits of saving viewed broadly are not confined to the owner of the wealth saved, but are diffused throughout society, in the degree that they increase and improve the industrial environment, and thus raise the efficiency of production. Such a change works the same results as would a magical increase in the fertility of the soil, an improvement in the richness and accessibility of natural mineral stores, or in the quantity and quality of artificial appliances.

Diffused benefits of saving.

Questions On Chapter 19. Saving And Production As Affected By The Rate Of Interest

1. The savings of the people of the United States are nearly a billion dollars a year. What and where are they?

2. What are the main social conditions necessary to saving?

3. What influence has commercial morality on saving?

4. Do savings-banks and insurance companies stimulate saving, or do they exist because of a disposition to save?

5. What influence has the formation of joint-stock companies on saving?

6. Will you save more or less if the rate of interest falls?

7. Distinguish between hoarding and saving.

8. A woman cut the wool from a sheep's back, spun and wove it by old hand-methods, and within twenty-four hours wore the dress made of it. Is more or less time needed in production with the best machinery and processes?

9. Ricardo said that on account of the cheapness of food in America there was less temptation to employ machines than in England, where food was high. What is the fact about this temptation in America?

Note

The older abstinence theory of interest is given by F. A. Walker, Political Economy, Sees. 87-93. A noteworthy advance was the able article, by T. N. Carver, in Quarterly Journal of Economics, Vol. VIII, p. 40 (1893), "The Place of Abstinence in the Theory of Interest." A number of writers have written (fallaciously, in our judgment) on the "fallacy of saving," arguing that the capital-market easily becomes glutted; the contrary view is well presented by Cassel, The Nature and Necessity of Interest (1903), pp. 96-157, in chapters on what he calls "The Demand for Waiting," and "The Supply of Waiting."