So Austrians and others say that “saving”, not consumption helps the economy. In economics for real people, Callahan defines saving “As the decision to guide actions toward satisfactions more distant in time”. So, correct me if I’m wrong, but does that make a)increasing your cash holdings and b) investing in something both “saving” in the economic sense? If not, please explain.
And in a world of 100% reserves (just imagine it), wouldn’t that mean that a large portion (at least 10%) of societie’s “money” is stored away in a vault? Would that have problems in the economy? This is more of a bonus questions, but I’m more concerned about the first, since I see some definitions including both while others say saving=investment and increasing your cash holdings is different but then I see Callahan’s definition and get confused.
I don’t know if Rothbard has a special definition of the term or a discrepancy between savings and investment. I believe to the Austrians they are one in the same. I believe to the Keynesians they mean two different things. I’m not 100% in this.
Think of saving as not consuming, but wealth has been created - which is what you are saving. The commodity or wealth not consumed remains in the economy for someone else to consume. If overall savings go up that means that overall there is more wealth / commodities remaining in the economy that one can use to improve/advance or increase production. If more people save their dollars and put them in the bank then that means overall consumers are reducing their consumption and reducing the number of loans they are borrowing to consume. All the savings deposited in banks are therefore available for companies to borrow and invest in production. The saved commodities / wealth are also simultaneously available in the economy for the businesses to use in production.
When businesses borrow money the money is the receipt/ticket that gives them the right to secure commodities/wealth existing in the economy. Saving by foregoing consumption is what makes that commodity/wealth available in the economy for the business to use. You can’t have both. That’s why printing money to lend to businesses creates higher prices (called inflation by main-stream economists). Printed money gives you a receipt to go into the economy to secure commodities/wealth… but if no-one is saving any wealth then there’s none for the borrower of new printed money to secure. This creates a price war and prices rise. More money chases the same number of goods.
No. Saving is just that, foregoing current spending for future spending. However you can do that and still have the money available on demand. Investing is a conscious decision not just to not spend, but to lend, that is to let someone use your savings to fund some productive activity from which you expect a return.
When speaking of ‘reserves’ you have to realize it covers demand deposits, not time deposits. That is if I put my money in a CD with the understanding that I will not take it out for 2 years, that technically doesn’t have to be held in reserve unless of course the bank allows me to withdraw at will. Otherwise the bank would merely structure their loans to match their time deposits. If however I have a demand note or some other type of claim that has to be satisfied on demand, that does have to be held in reserve. This all assumes of course money receipts/claims are circulating with the real property at the bank. It’s the mixing of the two banking functions, warehousing and lending, that makes things somewhat confusing these days. As a warehouser a bank just holds the money property for you, and can even charge a fee for doing so. As a lender the bank can take your resources and lend them out via prior contractual agreement. These days the functions are mixed for various reasons.
Sorry if I’m just about to restate what you replied to in my first question, but an increase in cash balances would not be considered saving because you still have the money “next” to you (or at your disposal), while saving (investment), you give it up?
For your second reply, thats what I thought would happen under full reserves. But wouldn’t the “warehouse” banking be considered hoarding? So warehouse banking is not considered saving, while loan banking is right?
Savings are Savings… it’s choosing not to consume. It doesn’t matter as long as it’s in the bank and the bank turns around and lends it back out. The difference is that your money in your daily checking account may have less loans made off it than say your savings account.
As for demand -vs- time deposits, it’s money in your checking account -vs- being in your savings account. My savings account only lets me make a certain number of withdraws per month, but I can deposit as much in there as frequently as I like. My checking account on the other hand can have as many withdraws per month as I like. There’s different banking fractional reserve lending requirements set on demand deposits -vs- time deposits. Because time deposits are considered longer term deposits banks feel less risk to create and leverage a bigger loan using your deposit as the base or reserve for the loan. They earn more of the loan and therefore I earn more interest on my savings account -vs- checking account. Then there’s other types of time deposits like locking the money into a CD for say a whole month or whole year. The bank can leverage even bigger loans (a lower fractional reserve requirement) on those longer term deposits.
So, time deposits, to you, may be considered warehousing your money since you’ve decided not to spend any of it for a fixed period of time. As for the bank, your time deposit enables them to create and leverage a bigger loan off your deposit since you won’t be coming in to withdraw it. Therefore, “warehousing” your money won’t result in bank hording. It’s just the opposite.
Although if more money is being held in banks as “Cash reserves” then the inevitable result would be simply that prices would adjust to account for the lower level of money in circulation - so you should not conclude that this would have any impact on production. Typically only a certain portion of delayed consumption would manifest itself in the form of increased cash balanaces - the rest would be reinvested and so would serve to INCREASE production (not decrease it)… although this is not always obvious since the immediate effect of increased savings can lead to reduced investment in consumer goods industries or what Menger called lower order goods. The increased investment is typically in more round about and thus lengthy, interest sensitive, investments much less proximate to the consumer (higher order goods).
Sure warehousing is saving… that’s delayed consumption. All delayed consumption is saving.
People can do one of three things with savings:
Spend them - i.e. consume
Keep them on hand - e.g. in the form of cash… typically cash is kept to ensure against near to mid term uncertainties
Invest them - e.g. by loaning them to others, buying stocks or bonds or starting companies… basically the goal of investment is to increase future production (and thus ultimately consumption).
To the Austrians, the choice to forgoe immediate consumption is saving. It doesn’t matter what is done with the resources resulting from this delayed consumption.