There Is One Way Out: Saving--Not Spending--Will Bring Reëmployment


NEVER before in the history of this country has there been such a conflict of economic thinking. In all the welter of nostrums, isms, and theories advanced as panaceas for our economic ills, there seems to be only one point on which nearly everyone is in agreement. That point is that the solution to the problem of unemployment is the solution of the depression.

There may be a few people who hope that unemployment will continue, so that continued unrest will later give them an opportunity to impose some new social and economic system upon the country. But, with the exception of this small group, nearly all thinking men and women realize that our millions of unemployed people must be put back to work if we are to achieve economic recovery.

This is the test of all recovery efforts and policies. Obviously no country, no matter what its trade volume, can be said to have achieved recovery with one sixth of its working population unemployed. Conversely, if everyone has a job, the worst features of depression disappear, even though the total trade volume and total income of the country may not be at a peak.

The point on which people disagree so violently is how this objective of reëmployment can best be achieved. The theory enjoying the greatest vogue at the moment is the Spend-YourWay-Out theory. Proponents of this philosophy tell us that, if everyone will only loosen up and spend a little more, great gains in employment will follow. We are confronted on all sides by slogans, such as ‘Spend and Put Men Back to Work,’ ‘Buy Now and Lick the Depression.’ The man who lives well within his income has come to be regarded as unpatriotic and as a slacker in the fight against the depression.

Now this theory of spending till it hurts sounds extremely plausible and logical. If you spend $5.00 more (so the argument runs) instead of saving it, someone has to make the article you purchase. If a million other people each spend $5.00 more, an additional $5,000,000 worth of goods must be produced, and this creates new work for which people must be employed.

It sounds foolproof. A child can see the point. And the argument can be presented in A B C language. So naturally it has become an extremely popular point of view.

The average man, however, although he has perhaps accepted this theory, has been a little puzzled by the sudden fashion in which thrift, which was formerly regarded as a virtue, has now been classified as a vice. He was taught all his life to be thrifty and save, and it is something of a shock to him to discover now that saving is detrimental to public welfare.

Like so many unorthodox economic theories, the Spend-Your-Way-Out theory is only superficially plausible. Its fallacy lies in its failure to recognize two important facts. The first of these is that the great bulk of existing unemployment is in industries which make things that the individual consumer does not buy. The second is that savings do not represent sterile, locked-up funds, but funds which go into immediate circulation through some medium of investment. It might be well to consider the significance of these two facts before we blithely discard the national habit of saving. Perhaps a little sober reflection may even indicate that a dollar of saving can create more employment than a dollar of consumer spending.


The frantic exhortation of the public to spend more money is presumably based upon the belief that the consumption of goods by individuals has declined severely, and must be greatly increased if we are to achieve economic recovery. The actual facts do not support that contention.

A study made by the Harvard School of Business, and published in August 1933, presents some very illuminating comparisons for consumption in leading classifications of goods during 1932 — which is still the low for the depression — as compared with 1928. This study shows that in 1932 consumption of various classes of goods expressed in percentage of 1928 consumption was as follows: wheat and flour, 90 per cent; butter, 105.6 per cent; silks and velvets, 90.6 per cent; hosiery, 137.6 per cent; popular-priced dresses, 117.7 per cent; infants’ wear, 91.4 per cent; cigarettes, 97.8 per cent; gasoline, 113.2 per cent.

There has been, then, during the depression, a relatively constant consumption of goods of the sort purchased by individuals. On the other hand, the consumption of capital goods — that is, durable goods, such as machinery, building materials, and so forth — was found to have declined almost 65 per cent. When consideration is given to the fact that during normal periods the value of capital goods produced in this country every year is approximately equal to the total value of all goods consumed by individuals, the significance of the 65 per cent decline in the output of capital goods becomes apparent. Furthermore, it would seem logical that most of the country’s unemployment must be centred in the capital-goods industries. This is the case. For, while employment in industries making goods for individual consumption has declined only 16 per cent, employment in the capital-goods industries has declined more than 50 per cent.

From these facts it becomes apparent that the primary problem is to create reëmployment in the capital-goods industries. Advocates of increased spending believe that this can be done by stimulating consumer purchases. If everyone will buy more clothing, they argue, more machinery and equipment will be needed to produce such additional clothing. The purchase of such equipment will directly increase the volume of business in the capitalgoods industries, and will permit such industries, in turn, to employ more people.

Unfortunately it does n’t work that way in most cases. Nearly all of the businesses which produce goods for individual consumption can greatly increase their present production without adding to their productive facilities.

This is not merely a theoretical argument; actual experience confirms it. In the spring of 1931, for instance, the Government paid one billion dollars to Veterans in the form of a cash bonus. Immediate increases occurred in the sale of automobiles and other types of consumer goods. But no corresponding increase in the sale of capital goods resulted, nor did the increased consumer spending increase employment in the capital-goods industries. This same failure of increased consumer spending to stimulate demand or employment in the capital-goods industries has again been apparent in the past two years. Aided by forced-draft methods, consumer spending has increased. But again no corresponding increase has been felt in the capitalgoods industries. Unemployment in such industries continues at almost record levels.

The immediate demand for capital goods may not arise from any need for greater productive capacity in existing businesses. It will probably arise chiefly from the need to replace obsolete or inefficient equipment, and as a result of investments made by newly organized industries or businesses. Hence an overnight increase in the use of consumer goods to an all-time peak would probably not reëmploy even 25 per cent of the workers now idle. Saving — not spending — is the only thing that can achieve the objective.

The reason for this is that capital goods — or durable goods, as they are sometimes called — are not bought by individuals. They are bought by industry and business. The purchase of homes by individuals represents the only important exception to this rule. But in this case it is important to note that the purchase of homes is usually financed by other people’s savings in the form of money lent on mortgage security.

Capital goods comprise such products as steel, building materials, machinery, and equipment. And their very name, ‘capital goods,’ implies the method by which they are usually purchased.

Rarely does a corporation modernize a plant or replace obsolete equipment and charge the cost against the company’s earnings. Such purchases represent additions to capital assets and are properly chargeable to the corporation’s capital account. In most cases, when substantial amounts of capital goods are purchased, new capital must be raised by the corporation. This is where the savings of the nation’s individuals enter the picture in a most important way. For the small savings of millions of individuals, invested directly, or pooled in life insurance companies, savings banks, and other fiduciary institutions, supply the bulk of the funds that industry uses to finance its purchases of capital goods.


The reader here may well say that, despite repeated urging to spend more money, consumers on the whole have recently increased their savings. He may therefore ask why such increased savings have not already promoted recovery in the capital-goods industries.

It is freely admitted that such savings as are now available have not as yet been used to the best advantage. The reasons for this will be discussed in later articles. The burden of the present argument, however, is that such savings should be encouraged, because, if properly used, they can be converted into a great force for needed reëmployment.

Savings do not represent hoarded money, which brings the community no benefits. Savings are spent — not necessarily by the saver, but by others who borrow his surplus or in whose business the saver’s funds are invested either by him directly or by institutions acting in his behalf. Thus, a nation’s savings do not represent a sterile, static factor in its economy, but, rather, an exceedingly dynamic one. Moreover savings, when invested, are not usually spent for goods which are immediately consumed. They are spent for goods which in turn produce more goods and more wealth which enriches the community as a whole. The distinction is the same as between corn which is eaten and seed corn which produces the next year’s crop.

Men’s minds have confused savings with money. Savings are not money. They are merely expressed in terms of money. But actually they have their basis, not in money, but in goods and services. They are reserves out of present or past production of some goods or services, set aside for future enjoyment or for the purpose of producing more things in the future.

The conversion of such surpluses into money gives to savings a mobility that benefits the community as a whole, by permitting their efficient use through the medium of investment. The cattleman cannot save the hind quarter of a cow for some distant date of enjoyment. Nor can he invest the hind quarter of a cow. So he sells it, and the money he receives for it he sets aside as savings.

The same thing is true of the laborer who works in a locomotive factory, but who does not himself produce a finished article. He is not paid in locomotives for his services, for he has no use for locomotives. He therefore receives money obtained from the sale of the locomotives he has helped to produce; and a part of this money he sets aside as savings. Likewise the miner, for his services, is paid not in ore but in money, some of which goes into savings. But in all cases these savings arise from reserves created by the production of goods or services. They are merely converted into terms of money.

The savings of millions of such people, representing goods or services, but converted into money, can then be used to finance business and industry. If one million people save $5.00 each, instead of spending it, the benefit of that $5,000,000 of purchasing power is not lost, as the advocates of consumer spending would have us believe. That money is spent, just as surely as if those who saved had spent it themselves. But it goes in the form of loans or investments to business and industry, which in turn purchase capital goods with the amounts so received. And, as has been previously explained, it is in the capital-goods industries that reëmployment of workers is most needed.

A further benefit also accrues by reason of the fact that, after people’s savings have thus created employment by financing the purchase of industrial construction and equipment, additional employment is automatically created in consumer’s goods industries as well, through the subsequent need for the operation of such equipment and facilities.

Machines, in the long run, do not take men’s jobs away. Machines create jobs. This is not merely a belief; it can be proved. The period from 1879 to 1929 was characterized by an amazing mechanization of industry in America; but whereas manufacturers were providing only 49,000 jobs per million of population in 1879, they were able to provide 73,000 jobs per million of population in 1929. These figures are taken from a study of the National Industrial Conference Board.

The automobile industry provides a classic illustration of this trend. Thirty years ago automobiles were made almost entirely by hand. To-day the production of automobiles is very highly mechanized. The greater value offered to the public as a result of this mechanization has put the automobile within reach of people of moderate income and has made possible a great increase in production. Consequently, although labor plays a relatively less important part in the production of a given car, we find many more people employed by the industry than was formerly the case. In addition, collateral employment has been created in industries supplying raw materials, in the oil industry, the rubber industry, and in road building. Such collateral employment in itself far more than offsets any loss of jobs that could conceivably result from mechanization.


The greatest employing power in our society has always been this thing that we call savings. The availability of sufficient savings in the past has permitted the expansion of old industries and the creation of new ones, and over a long period of years has resulted in tremendous increases in the number of people gainfully employed. Under our competitive system, the result has been better goods at lower prices. This trend over a long period of years was responsible for the great improvement in the American standard of living.

We are told now by skeptical people that, although this method admittedly worked in the past, it cannot be effective in our present situation. Such people point out that our present productive facilities are already excessive as compared to our present ability to consume, and claim that therefore there will be no future demand for new capital investment. They also state that the development of new industries has always aided us in recovering from previous depressions, but that no such new industry, which might require great amounts of new capital investment, is now in sight.

Fortunately there are two serious fallacies in this dismal line of argument.

The despair over temporary overproduction and the apparent failure of any important new industry to appear on the horizon is not a new point of view. It has been expressed by various groups in almost every major depression during the last one hundred and thirty years. As far back as 1819, the famous Swiss economist, Sismondi, held almost the identical point of view. Grover Cleveland’s Secretary of Labor expressed much the same thought. And as recently as 1922 a group of American economists advanced the same theory. Every time in the past that this point of view has been expressed, subsequent events have proved it to be wrong, for each depression has been conquered by the increased production of capital goods.

No living man can be certain that no new industry will arise to create a new demand for capital goods. To make such a prediction is to admit that man has reached the limit of his capacity to harness natural forces and natural resources for his own welfare. All experience teaches us that new industries will arise. The great strides made in recent years in the field of industrial research give greater assurance of this than perhaps ever before.

But, irrespective of such historical arguments and precedents, it is important to note that increased consumption of capital goods is not necessarily dependent upon the development of new industries or even the further expansion of old ones. The factor of replacement is a most important element in the demand for capital goods. The best estimates indicate that during normal periods approximately 40 per cent of capital investments have been made for replacements rather than for new facilities. Such replacements comprise the rebuilding of antiquated plants, and the replacement of obsolete machinery and almost every other conceivable form of relatively permanent or semipermanent goods.


The rapid rate of replacement in the industrial field is not widely appreciated. In few industries do machinery and equipment last as long as ten years without becoming obsolete. In many industries the life of equipment runs only four to five years.

Since 1930, there has been little capital invested in such replacements. This is natural during the early stages of a depression when prices are falling rapidly and business men are concentrating their attention upon the problems of protecting working capital, meeting debts, and avoiding bankruptcy. But as a result there has been built up a tremendous backlog of replacement demand. Even the editor of Today is reported to have said that there exists a potential demand for replacement alone in the amount of more than $19,000,000,000.

If this pent-up demand can be released and made effective by the investment of individual savings, the greatest void in our present economy will be filled. Workmen by the million will be reëmployed in the very industries in which present unemployment is the worst. It is to the accomplishment of this task that all recovery efforts of the Government should be directed.

The objective can never be accomplished by pleas to the public to buy just a little more butter, meat, or clothing. In the light of the facts, such efforts to spur consumer buying at the sacrifice of savings seem not only unsound, but futile. The problem of unemployment obviously centres in the capital-goods industries, which continue to languish. It is clear also that increased purchases of consumer goods cannot revive those industries. Increased purchases of capital goods are the essential factor, and a great pent-up demand for such goods is known to exist.

But common sense and every precedent show that, if that demand is to be released and financed, the investment of additional savings will be required. Hence it looks painfully clear that, in our present predicament, the investment of a dollar of savings can do more to relieve unemployment than can a dollar of additional consumer spending.

Thrift is still a virtue.

(The conditions which must be satisfied before savings can resume their natural flow into the capital-goods industries will be discussed by Mr. Douglas in succeeding papers)