4. The Self-Destructive Nature of the Artificial Booms Caused by Credit Expansion: The Theory of "Forced Saving"

In the broad sense of the term, “forced saving” arises whenever there is an increase in the quantity of money in circulation or an expansion of bank credit (unbacked by voluntary saving) which is injected into the economic system at a specific point. If the money or credit were evenly distributed among all economic agents, no “expansionary” effect would appear, except the decrease in the purchasing power of the monetary unit in proportion to the rise in the quantity of money. However if the new money enters the market at certain specific points, as always occurs, then in reality a relatively small number of economic agents initially receive the new loans. Thus these economic agents temporarily enjoy greater purchasing power, given that they possess a larger number of monetary units with which to buy goods and services at market prices that still have not felt the full impact of the inflation and therefore have not yet risen. Hence the process gives rise to a redistribution of income in favor of those who first receive the new injections or doses of monetary units, to the detriment of the rest of society, who find that with the same monetary income, the prices of goods and services begin to go up. “Forced saving” affects this second group of economic agents (the majority), since their monetary income grows at a slower rate than prices, and they are therefore obliged to reduce their consumption, other things being equal.¹⁰

Whether this phenomenon of forced saving, which is provoked by an injection of new money at certain points in the market, leads to a net increase or decrease in society's overall, voluntary saving will depend on the circumstances specific to each historical case. In fact if those whose income rises (those who first receive the new money created) consume a proportion of it greater than that previously consumed by those whose real income falls, then overall saving will drop. It is also conceivable that those who benefit may have a strong inclination to save, in which case the final amount of saving might be positive. At any rate the inflationary process unleashes other forces which impede saving: inflation falsifies economic calculation by generating fictitious accounting profits which, to a greater or lesser extent, will be consumed. Therefore it is impossible to theoretically establish in advance whether the injection of new money into circulation at specific points in the economic system will result in a rise or a decline in society's overall saving.¹¹

In a strict sense, “forced saving” denotes the lengthening (longitudinal) and widening (lateral) of the capital goods stages in the productive structure, changes which stem from credit expansion the banking system launches without the support of voluntary saving. As we know, this process initially generates an increase in the monetary income of the original means of production, and later, a more-than-proportional rise in the price of consumer goods (or in the gross income of consumer goods industries, if productivity increases). In fact, the circulation credit theory of the business cycle explains the theoretical microeconomic factors which determine that the attempt to force a more capital-intensive productive structure, without the corresponding backing of voluntary saving, is condemned to failure and will invariably reverse, provoking economic crises and recessions. This process is almost certain to entail an eventual redistribution of resources which in some way modifies the overall voluntary saving ratio that existed prior to the beginning of credit expansion. However unless the entire process is accompanied by a simultaneous, independent, and spontaneous increase in voluntary saving of an amount at least equal to the newly-created credit banks extend ex nihilo, it will be impossible to sustain and complete the new, more capital-intensive stages undertaken, and the typical reversion effects we have examined in detail will appear, along with a crisis and economic recession. Moreover the process involves the squandering of numerous capital goods and society's scarce resources, making society poorer. As a result, by and large, society's voluntary saving ultimately tends to shrink rather than grow. At any rate, barring dramatic, spontaneous, unforeseen increases in voluntary saving, which for argument's sake we exclude at this point from the theoretical analysis (which furthermore always involves the assumption that other things remain equal), credit expansion will provoke a self-destructive boom, which sooner or later will revert in the form of an economic crisis and recession. This demonstrates the impossibility of forcing the economic development of society by artificially encouraging investment and initially financing it with credit expansion, if economic agents are unwilling to voluntarily back such a policy by saving more. Therefore society's investment cannot possibly exceed its voluntary saving for long periods (this would constitute an alternative definition of “forced saving,” one more in line with the Keynesian analysis, as F.A. Hayek correctly indicates).¹² Instead, regardless of the final amount of saving and investment in society (always identical ex post), all that is achieved by an attempt to force a level of investment which exceeds that of saving is the general malinvestment of the country's saved resources and an economic crisis always destined to make it poorer.¹³