Forced Savings

“Forced savings” refers to the use of money creation and inflation to divert resources into the production and acquisition of capital goods. A government that prints money, as opposed to levying taxes or selling bonds, to pay for the construction of a hydroelectric generation facility is pursuing a policy of forced savings. Less-developed countries, particularly in Latin America, turned to forced savings policies in the post–World War II era as a means of financing economic development. At least some of the inflation in Latin America has its roots in economic development strategies based on forced savings.

The mechanics of forced savings operates through the medium of inflation. The government prints money to purchase capital goods, attracting resources into the production of capital goods at the expense of consumer goods. Consumer goods production falls relative to demand, and consumer goods prices increase, reducing the amount of consumer goods that households can afford. This forced reduction in consumer goods acquisition translates as forced savings. Consumers still spend the same amount of money, it just does not stretch as far as it did before inflation. Thus, the consumers do not come out with any more savings, but society does, because society is extracting resources for the production of capital goods. The forced reduction in consumer goods production is the key to forced savings.

The mechanics of forced savings operates through the medium of inflation. The government prints money to purchase capital goods, attracting resources into the production of capital goods at the expense of consumer goods. Consumer goods production falls relative to demand, and consumer goods prices increase, reducing the amount of consumer goods that households can afford. This forced reduction in consumer goods acquisition translates as forced savings. Consumers still spend the same amount of money, it just does not stretch as far as it did before inflation. Thus, the consumers do not come out with any more savings, but society does, because society is extracting resources for the production of capital goods. The forced reduction in consumer goods production is the key to forced savings.

Savings always involve a reduction in current acquisition of consumer goods. Ordinarily, households elect to divert a share of income away from consumption expenditures, and set that share of income aside as savings. Financial institutions and stock and bond markets channel these savings into businesses that need financing to purchase capital goods. Savings are always at the expense of consumption expenditures, but normally savings are a voluntary choice of households. Societies must save, that is, depress current consumption, to make resources available for the production of capital goods.

Economists and policy makers have advanced several arguments in favor of forced savings as an attractive vehicle for financing economic development. First, vast portions of the populations of less-developed countries live at the margin of subsistence, too poor to voluntarily engage in much saving. Second, many less-developed countries do not have the financial institutions necessary to mobilize the small savings of individual households. Third, wars have shown that governments can print up money to finance major public undertakings without destroying economic systems. The same effort that goes into financing a war can theoretically be tapped to finance industrialization.

Notwithstanding arguments favoring forced savings, the anti-inflation bias in current economic thinking emphasizes the downside of any policy that can only be activated with inflation. There has been no evidence of a correlation between inflation and growth, and many countries, such as the United Kingdom and the United States, experienced rapid economic development in the 19th century without inflation. Also, inflation disrupts society and the burden of inflation is not evenly shared. Unionized workers can often strike and gain wage increases that compensate for inflation, and some businesses may receive government aid that compensates for inflation. Other groups in society, those on fixed incomes or living on past savings, are likely to bear the bulk of the inflation burden. Inflation encourages households to invest voluntary savings in hedges against inflation such as land, buildings, jewelry, gold, silver, or stocks of grocery and household necessities. Investment in hedges against inflation diverts voluntary savings away from the purchase of capital goods such as factories, machinery, and so on. After inflation has become expected, creditors extort high interest rates as inflation protection, further discouraging risk-bearing entrepreneurs from accessing sources of borrowed funds.

In countries that insist on printing money to finance government expenditures, forced-savings strategies may make more sense than the acquisition of military goods, or the construction of lavish government buildings and monuments. Nevertheless, forced savings, because of its inflationary effects, entails major complications for the efficient operation of the economy and seems to hold little charm for contemporary policy makers.