Money and Markets: Essays in Honor of Leland B. Yeager

146 Robert L. GreenfieldOur increased holdings of money give concrete evidence of the saving that wedo. One-half of our saving, however, we do under duress. As a group, we get stuckwith $1,000 more money than we find it convenient to hold and have ten fewerchairs than we find it desirable to use. We’re forced to save.No trace of the forced saving – or what is the same thing, the excess supply ofchecking account money – shows up on the bank’s balance sheet. On the bank’sbalance sheet, your promissory note appears as an asset and, offsetting it, the community’schecking accounts appear as liabilities. After you spend it, every checkingaccount dollar that the bank creates to buy your promissory note winds up in somebody’saccount. The bank’s balance sheet has to balance.The accounting balance does no more, however, than confirm what everyoneknows about money, namely, that people will always accept money, even if they haveno intention of holding it. They can get rid of money that they don’t want to hold,of course, just by spending it. But their spending money just passes it along tosomeone else. The community as a whole can’t get rid of the money that the bankcreates when it too generously accommodates you, its borrower. The best thecommunity as a whole can do is to keep spending the enlarged money supply aroundand thus make it once again, through the permanently increased spending-andincomeflow, the equivalent of only two months’ income.Now, by the very definition of the balance sheet, the bank’s loan assets also mustbe the equivalent of two months’ income, and this accounting fact may seem tosuggest that the bank cannot transfer to its borrowers any more real capital (again,chairs) than the newcomers entrusted to it voluntarily. Such a conclusion would beincorrect, however, for the bank has transferred to you not just the two months’income (ten chairs) income that the newcomers wanted to relinquish but two moremonths’ income (another ten chairs) besides. 1 In earlier times, when economistswere more given than they are now to using verbal imagery, the teller of this talemight have described the bank’s balance sheet, no different in income-value termshere than in the previous case, as being like the cat sleeping innocently before thekitchen stove, after already having swallowed the canary.Wasted savingIt was with a concern with the opposite case, however, that this tale began: the birdescapes the cat’s clutches, the verbally artistic economist would have said, and thenheads right out the open window, gone forever.The wasted saving case begins as the two preceding cases began: each of our fivenewcomers wants to hold a $200 checking-account balance, the equivalent of twomonths’ income. You come up with a scheme for transforming an ordinary chair,which if used now will last only one year, into something better, a chair that will lasttwo years. Again, you need capital, and again, you go to the bank. This time, however,you’re not quite as confident in your abilities. You ask for and get just a $500 loan –not enough money to enable you to take over all ten of the chairs that the fivenewcomers want to relinquish in favor of money holdings, but only five of thosesacrificial chairs. The excess of the newcomers’ intended chair saving over your chair