A few weeks ago I considered, What Is Money? Money
isn't wealth. It is at best a sort of claim check we can exchange
for real, usable wealth. If all goes well and someone produces
real wealth we may be able to exchange our money for real
wealth.
Saving money isn't the same thing as saving real wealth.
How can we save real wealth?
Consider someone saving for retirement. He might store
real wealth such as food, clothing, televisions, autos, etc. This
kind of savings is real but it has its drawbacks. The saved
goods may deteriorate or become obsolete. At a minimum the
saver must bear the cost of storage. The one thing certain is that
the saving will reduce the saver's total consumption while
spreading the consumption over time.
To consider another way to save we will look back to a
simpler world. A farmer wants to save. Instead of devoting all
of his efforts to producing crops and animals to consume in the
near future he spends time clearing new land and building a
barn.
Such effort does nothing to increase immediate
consumption. In the future the farmer will be able to produce
and consume more through use of the barn and the cleared land.
The barn and the cleared land are real savings, real wealth.
Thus, we see the only two ways to save. We can
produce and store goods, or we can invest our efforts in
beginning the production of future consumer goods.
Burying tomato cans of paper money in the back yard
isn't real savings. That money will have value in the future only
if someone who then wants the money produces something the
money can buy.
So long as the money remains buried it provides nothing
for the saver. Burying the money will benefit all spenders of
money. By taking the money out of circulation the saver
increases the purchasing power of all money that remains in
circulation. The total money supply still in circulation will buy
as much as the previous larger supply of circulating money.
Each unit of money will buy a little more than before.
The farmer who put his savings into cleared land and a
barn faces a problem if he wants to retire. The land and barn
will produce something only if someone continues to use them.
This isn't an insurmountable problem When he retires, the
farmer might sell the land and barn to someone else who will
continue producing with them. The farmer can use the money
from the sale to buy goods to consume during retirement.
As a practical matter most of us don't want to put our
savings into something we have to use and maintain ourselves
for productive purposes. Besides, the savings of one person
often will not be enough to build a very elaborate productive
facility such as a factory or railroad.
This problem is easily solved too. We can put our
savings into ownership of small interests in productive facilities.
This is what investors do when they buy stock in a business.
Another option is to lend our savings to others for the
building of productive facilities. The loans don't have to be
direct. We can deposit the money in a bank and let it make the
loans.
If the bank lends the money to consumers for purchase of
consumer goods, there is no real savings. The overall effect is
the same as if we spent the money on our own consumption.
Nothing is invested in future production. All we get is the
borrower's promise that he will produce something in the future
and repay the loan. If the borrower fails to produce, the loan
will not be repaid.
The problem we face today is that much of our attempted
savings is being borrowed by government and spent, either
directly or indirectly, on consumption. Such "savings" produce
nothing for future consumption. They are only an illusion of
saving. Thus, government borrowing and spending has the
potential to put us all in the poorhouse for lack of investment in
future production.
* * * * *
* * * *
* * *
* *
*
Copyright 2012
Albert D. McCallum
18440 29-1/2 Mile Road
Springport, Michigan 49284
Column for May 21, 2012
isn't wealth. It is at best a sort of claim check we can exchange
for real, usable wealth. If all goes well and someone produces
real wealth we may be able to exchange our money for real
wealth.
Saving money isn't the same thing as saving real wealth.
How can we save real wealth?
Consider someone saving for retirement. He might store
real wealth such as food, clothing, televisions, autos, etc. This
kind of savings is real but it has its drawbacks. The saved
goods may deteriorate or become obsolete. At a minimum the
saver must bear the cost of storage. The one thing certain is that
the saving will reduce the saver's total consumption while
spreading the consumption over time.
To consider another way to save we will look back to a
simpler world. A farmer wants to save. Instead of devoting all
of his efforts to producing crops and animals to consume in the
near future he spends time clearing new land and building a
barn.
Such effort does nothing to increase immediate
consumption. In the future the farmer will be able to produce
and consume more through use of the barn and the cleared land.
The barn and the cleared land are real savings, real wealth.
Thus, we see the only two ways to save. We can
produce and store goods, or we can invest our efforts in
beginning the production of future consumer goods.
Burying tomato cans of paper money in the back yard
isn't real savings. That money will have value in the future only
if someone who then wants the money produces something the
money can buy.
So long as the money remains buried it provides nothing
for the saver. Burying the money will benefit all spenders of
money. By taking the money out of circulation the saver
increases the purchasing power of all money that remains in
circulation. The total money supply still in circulation will buy
as much as the previous larger supply of circulating money.
Each unit of money will buy a little more than before.
The farmer who put his savings into cleared land and a
barn faces a problem if he wants to retire. The land and barn
will produce something only if someone continues to use them.
This isn't an insurmountable problem When he retires, the
farmer might sell the land and barn to someone else who will
continue producing with them. The farmer can use the money
from the sale to buy goods to consume during retirement.
As a practical matter most of us don't want to put our
savings into something we have to use and maintain ourselves
for productive purposes. Besides, the savings of one person
often will not be enough to build a very elaborate productive
facility such as a factory or railroad.
This problem is easily solved too. We can put our
savings into ownership of small interests in productive facilities.
This is what investors do when they buy stock in a business.
Another option is to lend our savings to others for the
building of productive facilities. The loans don't have to be
direct. We can deposit the money in a bank and let it make the
loans.
If the bank lends the money to consumers for purchase of
consumer goods, there is no real savings. The overall effect is
the same as if we spent the money on our own consumption.
Nothing is invested in future production. All we get is the
borrower's promise that he will produce something in the future
and repay the loan. If the borrower fails to produce, the loan
will not be repaid.
The problem we face today is that much of our attempted
savings is being borrowed by government and spent, either
directly or indirectly, on consumption. Such "savings" produce
nothing for future consumption. They are only an illusion of
saving. Thus, government borrowing and spending has the
potential to put us all in the poorhouse for lack of investment in
future production.
* * * * *
* * * *
* * *
* *
*
Copyright 2012
Albert D. McCallum
18440 29-1/2 Mile Road
Springport, Michigan 49284
Column for May 21, 2012
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