§5. The Essence of Waiting. But it is with positive conclusions that we must here concern ourselves. What is the essence of this waiting, as we have called it? What are its results from the point of view of the community? The individual, who saves and lends, waits in the obvious sense that he postpones consumption. He foregoes his right to purchase now a quantity of consumers' goods in consideration of the prospect of purchasing a larger quantity of such things in the future. From the standpoint of the whole community, there is a similar postponement of consumption, though it need not commence so soon. The store of consumable goods is what it is: the quantity of goods in process of manufacture, which will shortly be coming forward, is also what it is. For some time, therefore, a sudden access of saving cannot affect the quantity of goods available for consumption; and if, in fact, they should be consumed less rapidly, that will represent an unfortunate defect, not an essential condition of a smoothly working system. The necessary consequence comes later. The increased saving will cause labor, materials, land, agents of production generally, to be devoted to distant purposes. Men will be set to work producing durable goods, largely durable instruments of production like ships or railways or factories or plant. If the increased saving is considerable, the labor, materials, etc., required for these purposes will be withdrawn even under our present system, as under a smoothly working system they clearly must be, from the production of other and more immediately consumable things. Hence, some time later, the supplies of consumable things will be diminished, while at a later period still they will be more than correspondingly increased as the result of the assistance of the new durable instruments. That is the essence of saving from the social standpoint. An early future is sacrificed to a more remote future. The aggregate consumable income of the present is unaffected; the aggregate consumable income of the near future is actually diminished; it is not until at least some years later that the aggregate consumable income is increased.
§6. Individual and Social Saving. This conclusion is important: but there is an obvious misinterpretation against which it will be well to guard. It is customary for social moralists to preach thrift and saving as a public duty, and to impart to their appeals a special note of urgency in times like the present, when, as the result of the havoc of the war, destitution is widespread over Europe. Now obviously these advisers do not mean to recommend something which will impoverish the world next year and the year after and the benefit of which will accrue only in a distant future: it is the immediate urgency of the world's needs which is rather the substance of their case. Nor would it be right to conclude that these wise men are the victims of a delusion, and advocate a course, the consequence of which they do not understand. The explanation of the paradox is simple. The more the community as a whole saves now, the less in the near future will be the aggregate consumable income of the whole community: but not of the remainder of the community, exclusive of the savers. It is the saver who must wait, whose consumption must be postponed to perhaps a distant future; but at no time does his saving result in a smaller income of consumable goods for other people. The aggregate consumable income of the near future will be diminished, but it may be better distributed, and it may consist of things of a different kind. For consumers' goods, we must remember, comprise champagne and motor cars as well as food and clothes; and, if a rich man saves, it may be purely articles of luxury, the production of which will shortly be diminished. Moreover, if his saving has the effect of transferring purchasing power to impoverished people, like those in Central Europe, it will not be devoted to a distant future; it will very likely be devoted to quite immediate ends. In other words, it may not result in any "creation of capital"; it may not represent any saving on the part of the community as a whole. A relatively rich man waits, and a relatively poor man anticipates his income to a corresponding extent; and it is precisely this that is so urgently desirable in a time of widespread poverty and chaos.
This is no matter of hair-splitting, and making plain things obscure. While it is always better for the rest of us that an individual, who can afford to save, should save rather than spend (though it might be better for us still if we could have his money to spend ourselves) and while this is the more important the greater is the poverty which generally prevails; yet, as a community we cannot save so much, we ought not to save so much, when we are impoverished as when we are prosperous. It is vital to appreciate this truth, because, as we shall see, by no means all the saving of the world is done by individuals. There are many forms of "collective saving," which take place in actual fact; still more which we are often urged to undertake. And it is of practical importance to realize that the very considerations, which call most urgently for individual thrift, forbid a great indulgence in such projects. A time of national poverty is not a time when it is suitable for the State to embark on large schemes of capital development: we require our resources for more immediate ends. Faced with such problems, our practical sense may no doubt suffice to keep us straight; but it is apt to do so at the expense of a complete inversion of the real issues. If, for instance, we call for Governmental retrenchment on what we deem extravagant policies of housing and education, we usually speak as though they represented the profligacy of a spendthrift as contrasted with the saving that is indispensable. The truth is rather that these policies represent a saving, an investment for future purposes, which may conceivably be greater (this must not be taken as representing my personal opinion) than the community can properly afford. This is another instance of what I mean by looking at the problem of capital the right way up.
§7. The Necessity of Interest. It is only now that we are in a position to appreciate the true functions of a rate of interest, and the nature of its claims to be regarded as a "real cost." Interest, it is sometimes said, is necessary to provide for the future. It is far more certain that interest is necessary to provide for the present. It is a matter of legitimate doubt how far it is necessary to pay interest to secure a supply of capital; there is no doubt at all that it is necessary to charge interest to limit the demand for it. As we saw in Chapter I, a world socialist commonwealth would require to retain a rate of interest, if only as a matter of bookkeeping, in order to choose between the various capital undertakings that were technically possible. And this is the primary function which the fate of interest fulfils in our present-day society. It separates the sheep from the goats. It serves as a screen, by means of which capital projects are sifted, and through which only those are allowed to pass which will benefit the future in a high degree. For this essential purpose it is hard to imagine how a better instrument could be devised.
§8. The Supply of Capital. Let us dwell for a moment on this image of a screen, or sieve. One condition of a good sieve is that its meshes should all be of the same size. This condition the rate of interest almost perfectly fulfils. But it is also important that the meshes should be of the right size. Whether this is true of the actual rate of interest is a far more doubtful matter. It is, indeed, plain that it is not altogether devoid of merit in this respect. In times of general world poverty, like those which follow upon a great war, it is desirable, as has been argued, that more of our productive resources should be devoted to immediately useful purposes, and a smaller portion dedicated to a distant future. This readjustment the rate of interest helps to bring about. For it rises to a higher level, and there is accordingly a strong inducement to all manufacturers and traders to economize their use of capital, and thus to set free productive resources for more urgent needs. But, while the meshes of the sieve, as it were, contract in times when it is desirable that they should contract, we have no reason for supposing that they will contract in just the degree that is desired, neither more nor less; or, indeed, that at any time they approximate to the right size. We in the twentieth century owe much of the material wealth that we enjoy to the fact that over the last century men saved as largely as they did. But our natural gratitude should not restrain us from doubting whether they were really well advised to do so. If we ask the question how they managed to do so, our doubts are deepened. For first place among the explanations must be assigned to the inequality in the then distribution of wealth. It was because many men in England were rich enough to save that our railways were built, and the resources of new Continents were opened up. But England, a century or even half a century ago, was not really a rich community. And if the national income in those days had been distributed more evenly among the people, can we doubt that they would have spent a far larger proportion of it on immediate needs; can we doubt that they would have been right to do so? We may rather doubt, in view of the reactions of poverty on physical and mental efficiency, on social harmony, even possibly on population, whether we to-day would have been really injured as much as might appear. How, then, can we suppose that the sum of the amounts which it suits individuals to save will bear any close relation to the resources which the community can properly devote to future ends? Are we to regard an unjust distribution of wealth as a mysterious dispensation of Providence for securing perfect harmony between the future and the present? The point need not be labored further. There are no grounds for assuming that we save, as a community, even roughly what we ought to save. If we wish to believe we do, we must turn for support from economics to theology.
It is important to be clear upon this issue in order to distinguish it from another, with which it sometimes seems to be confused. This is the question, briefly outlined in Chapter II, of the effect of changes in the rate of interest on the supply of capital. As was there indicated, there are good reasons for supposing that a fall in the rate of interest would induce some people to save more, and conversely. But the balance of probability is in favor of the conclusion that the net effect of changes in the rate of interest, though perhaps slight, is usually of the more ordinary kind. The decisive argument in this connection is the fact, upon which we have just touched, that savings are supplied largely by people who are relatively rich, and who become richer when the rate of interest rises. For at this point it is necessary to be careful. It is easy to slide from the above conclusion into an argument of the following kind. A higher rate of interest leads to more saving; it is thus necessary to evoke more saving; it is thus required as an incentive to induce people to incur the sacrifice of waiting; this sacrifice represents the "real cost" for which interest is paid.
This terminology of incentive, inducement and sacrifice is of very dubious validity. A rich man, who is made richer by a rise in the rate of interest, will probably save more, but it will be rather because he has become richer than because he is tempted by the higher rate: and the less we talk about his sacrifice the better. Nor is it clear that the attraction of a high rate of interest is an operative factor on the mind of a man to whom saving means a real sacrifice of immediate comfort or enjoyment. Certainly it is only one among many factors, and seldom an important one. A really poor man will think not so much of the annual income which will accrue from his savings, as of the capital sum upon which he or his family can fall back if a rainy day should come. And for this purpose he might save as much as he saves now, even if there were no interest to be obtained thereby. He might even be prepared to lend what he had saved, at least to banks (a deposit with a bank is in effect a loan), for the mere advantage of safe custody. The people who save rather for the sake of the capital sum that can be realized than for that of the annual interest are very numerous, and probably include many men in receipt of quite considerable earned incomes. Moreover, those who consider mainly the future annual income which their savings will yield them, are usually more concerned with its absolute amount than with the ratio it bears to the amount they must save in order to acquire it. For this reason, as has been often recognized, they may save less when the rate of interest rises, since a smaller quantity of savings will insure to them the future annual income they desire to obtain. There is no need to be dogmatic upon any of these points. The psychology of saving is both complex and obscure. Our conclusion must be the negative one that we have insufficient evidence to warrant the assertion that the particular rate of interest which happens to prevail is a measure of the sacrifice involved in saving, even in the case of what we might regard as the "marginal saving." And, if we cannot assert this, we must be careful not to assume it as the basis of other arguments, or as part of a general analysis of price or exchange value.
It is of some interest to observe that the difficulties which our world socialist commonwealth would encounter if it attempted to dispense with the rate of interest, would not necessarily include that of obtaining a supply of capital. It might, indeed, not find it easy to determine the proportions in which it should allocate its productive resources between immediate and distant ends. Our present system cannot be said to have evolved satisfactory principles for the solution of this question; and the socialist commonwealth would have to work out its own solution. But when it directed that labor and materials should be devoted to purposes of long-period utility, there would be an automatic collective saving, of which no one would be conscious as an individual sacrifice. Even at the present time, our capital is not supplied entirely by the savings of individuals, but to an extent, which though quite incalculable is yet certainly considerable, by involuntary saving of an essentially similar type to the above.
§9. Involuntary Saving. When a municipality embarks on a municipal tramways scheme or any other industrial enterprise, and pays off by means of a sinking-fund the capital which it borrows in the first instance, the proceeding amounts, as the defenders of municipal trading have rightly claimed, to a compulsory and unconscious saving on the part of the citizens. Their consumption has been postponed willy-nilly as the result of the increased rates or the high charges which they have had to pay; and, when the subscribers to the original loan have been paid off, the capital of the community is enhanced to the extent of that loan. Central governments might similarly increase the supply of capital by devoting annual revenue to capital purposes; though their actual record, as it happens, is mainly of a different kind. But what is chiefly a possibility in the case of Governments has actually been carried out on an enormous scale by other institutions. The development of the joint-stock company system has introduced a new factor into the problem of the supply of capital, which is of immense though but dimly perceived importance. The directors of a company are technically no more than the servants of the shareholders. It is the profit of the shareholders that it is the directors' duty to promote with a single mind, and the whole capital of the concern, including its reserves both open and concealed, is the shareholders' exclusive property. But realities have a way of differing from forms, and just as in political affairs it is common to regard the State as a very different thing to the people who compose it, as a sublime entity with a separate existence of its own, so directors are apt to distinguish between the company and the shareholders. It is the company to which they owe allegiance. To pay away in dividends to shareholders money which they could employ in extending the business or strengthening the position of the company appears to some directors a necessity hardly less unpleasant than an increased wages bill, or an Excess Profits Duty. Concessions must indeed be made to the shareholders' rapacity: but when something has been done in this direction, dust can easily be thrown in their not very observant eyes. Reserves, which within limits are a necessity of sound finance, can be accumulated beyond those limits, and, when the further limits of an extreme but just arguable conservatism have been passed, there remain the innumerable devices, known to every resourceful Board, of hidden reserves, the secret of which is unmenaced by the meager information of a balance-sheet. In all this the shareholder, as the directors occasionally assure themselves, has no real grievance, for he will gain in the long run, from the appreciation in the capital value of his shares, all and perhaps more than all that he foregoes in the meantime in the way of dividends.