18. The Gold-Guaranteed Loan and Saving

(L’Opinion, June 19, 1952)

The Pinay gold-guaranteed loan has provided occasion for a great many dissertations on the relation between saving and inflation. Saving had already given Lord Keynes and his partisans an opportunity for sophisms devoid of good sense. Notwithstanding the aridity of the subject, I would like to say a few words about it here.

First of all, contrary to what is currently affirmed, increase in savings does not reduce consumption. Let the reader not jump to conclusions. He will agree with me, I think, that in our progressive societies, an increase in savings is made more generally on supplementary revenues. The sum of savings created in a country, at a given moment, (with certain exceptions, all personal) results from increases in revenues, of which part is “set aside” but with no reduction in previous consumption.

It suffices to reflect on the manner in which the prosperous corporations, which are, at the present time, the greatest source of savings in a country, proceed. They begin by deducting from their gross profit, every year, the sums to be set in reserve, and it is the difference between the gross profit and these reserves which they distribute to their stockholders. It is in this manner that all those who benefit, for one reason or another, from an increase in revenue operate: artists, doctors, inventors, etc. In general, they divide this revenue into two portions; they set one part aside for future expenses or investments, and they use the remainder, so that any increase in revenues means simultaneously an increase in consumption, as well as in saving.

In societies which are normally progressive, where production increases regularly, there are constantly and simultaneously two parallel currents issuing from the common source which is the revenue: the current of consumption which offers itself on the market as goods for consumption, and the current of saving which offers itself in the investment market. The second of these currents is not increased by drawing on the first, save in certain cases which, for evolved societies, are exceptional. The idea of privation-saving in the sense of a reduction in previous consumption is contrary to the economic reality. This does not mean, of course, that many persons do not “deprive” themselves, meaning by that that they deny themselves a great number of useful items of consumption which are agreeable or even necessary, for fear of going beyond their income. But the term “to deprive oneself” does not in any sense mean subtracting something from previous consumption.

Let us draw our conclusions from this fact:

1. The claims that borrowing means a reduction of consumption are false. They are false concerning private individuals as well as the community.

Even if there is no increase of income, individuals will withhold the sums put into loans from their normal margin of savings. This means that the subscription to the government loan will be to the detriment of other investments, but not to the detriment of consumption.

It is evident, on the other hand, that the loan being immediately spent by the government which receives it, it is translated into a simple distribution of revenues to those paid by the government. The loan is a simple transfer of revenues. The total amount of the revenue distributed remains the same.

2. The principle of the loan has met with objections. It has been said, for example, that all available moneys having already been placed in Treasury bills, the loan could only be subscribed by asking from the government the repayment of these bills, so that the government would provide on one hand the money which it would receive on the other. This is an old concept which (under the Poincaré Ministry) was that of my old friend, Robert Wolff, who unfortunately died in the course of the last war, and who was opposed, in the name of this theory, not only to the loan, but also to taxation. My answer to him at that time was that in a country such as France, many revenues were conserved under different forms than Treasury bills and that, especially, the reimbursement of Treasury bills was offset constantly and automatically by the very play of monetary circulation.

Another objection that has been made to the loan is that the sums hoarded (in particular under the form of gold) once poured into the loan, would increase the total of monetary means in circulation and would, consequently, make the prices rise. The loan would thus be a form of inflation. Such reasoning does not take into account an essential factor, one on which it is important to insist at this time.

There is a fundamental difference between issuing bank notes guaranteed by gold and notes without such guarantees, in a country where distrust in regard to the money has already attained a certain degree. The increase of prices, in a country where monetary distrust exists, results less from the increase of the instruments of payment than from the increased rapidity of circulation. People buy so as not to conserve money. On the contrary, as soon as money represents gold, about which there is no distrust, the reasons to be rid of money no longer exist, and purchasing slackens. In other words, the rise of prices which might be due to the acceleration of circulation drops, and this suffices to prevent the rise of prices. In other words, the slowing down of the rapidity of circulation largely compensates for the rise in prices which could result from an increase in the means of payment. That is what we have seen take place in 1926 and the following years, when the increase of bank notes covered by gold and currencies did not provoke any rise of prices and when, on the contrary, the drop in the whole world since 1929 took place in France as well as abroad.

We hear it said often today that inflation is produced by excess of purchasing power over the goods offered on the market. This is not untrue, but it is incomplete. Inflation may come from simple distrust in the money, without any increase in quantity. And, in this case, increase in the products offered is quite powerless to prevent a rise in prices. One can say that the Anglo-Saxon countries, which persist in seeing in inflation merely the effect of an increase in purchasing power, close their eyes voluntarily, or involuntarily, so as not to see the essential and fundamental difficulty of the paper money systems, which consists in the distrust toward paper as an instrument of store of value. It is because they refuse, by a strange blindness, to recognize this phenomenon, that the same writers distort all the controversies resulting from the international monetary situation, by obstinately considering only the quantity of money and the quantity of merchandise, instead of considering the psychological attitude of the one who receives money in payment.

With them it is, besides, an old tradition. It goes back to the Napoleonic Wars. Even then Ricardo and his friends made insistently an essential difference between paper money as it functioned on the Continent and the paper of the Bank of England which, they said, had never aroused any doubt about its reimbursement. Which did not prevent old Rothschild, of London, testifying before a parliamentary commission (more realistic than the economists) from declaring that the pound sterling fluctuated according to the opinion of foreign countries.

I should ask my readers to excuse me for having theorized a bit here, if so many abstract reasonings launched daily on the market did not justify a little incursion into a domain generally reserved to the “specialists” of abstraction.