TABLE 46.-Proportion of urban families1 owning and renting homes, by income

level, 1935-36

1 Excludes families receiving any direct or work relief at any time during year. Data also pertain only to those families who maintained the same tenure, either as renters or owners, throughout the entire schedule

year.

Source: Preliminary figures released to the Temporary National Economic Committee from forthcoming publication of the National Resources Planning Board on Family Expenditures in the United States.

About 20 out of every 100 urban nonrelief families with incomes below $1,000 owned homes, while about 64 out of every 100 families in the $5,000-$10,000 income level were home owners. If city families on relief were also included in the lowest-income groups, obviously the proportion of the total which could claim home ownership would be even smaller.

83

Moreover, very few homes currently constructed are available to lowincome families. Only 19 percent of the homes constructed under the Federal Housing Administration mortgage insurance plan cost less than $4,000. Thus only a small proportion of the new housing was available to the 76 percent among the nonfarm families whose incomes were less than $2,000. But more than 80 percent of the homes constructed cost more than $4,000, and were consequently available only to the 24 percent of the families whose incomes were $2,000 or more. In 1939 families with annual incomes below $1,500 constituted only 4 percent of all families who built homes under the F. H. A. plan.84 Even among the families who are at present homeowners, there are many whose properties are not debt free. Equity ownership of home property among those in the low-income groups is likely to be of an illusory character, if prior claims by creditors cannot be met. The status of the low-income mortgagor of home property is similar to that of the holder of industrial insurance, discussed in a previous section. In each case, if payments are lapsed, the ownership claim is lost.

83 Temporary National Economic Committee Monograph No. 8, Toward More Housing, pp. 26-27. 84 Sixth Annual Report of the Federal Housing Administration, 1939, p. 64.

Gross saving is the difference between current income and current expenditures, whether for an individual, a family, a nonprofit organization, a business, or a government. Subtracting from gross saving depreciation, obsolescence, and other charges necessary to keep the body of one's capital unimpaired, one has net savings. This chapter deals primarily with gross savings, for two reasons. In the first place, net savings are more difficult to estimate, either for individuals or for businesses. Most individuals and famílies either keep no accounts, or limit themselves to itemizing cash income and cash outgo. Also, there is little uniformity in business practice as to the proper charges for obsolescence and depreciation.

Furthermore, gross saving is the more important figure, so far as the flow of national income and the level of economic activity are concerned. It states how much is being subtracted from the current flow of national income-how much is not being spent for consumption goods. It states how much must be spent on other than consumption goods if the level of national income is to be maintained. It states how much is available for that new (gross) investment which maintains and expands productive capacity and modifies the structure of the economy.

These sums are substantial. In good years the gross savings of nonfinancial business enterprises range from 5.5 billion dollars (in 1927 and 1937) to 7.4 billion dollars (in 1929), and account for 35 percent of all gross saving. The bulk of this business saving is invested directly, and never passes through the capital markets.

gross_saving.2

Governmental savings, too, are substantial. Governments save that part of their revenue which exceeds current expenditure. Some of this gross saving goes into public construction, that is, is invested directly; governments transfer the balance to others in the community. The transfer is effected through retirement of the public debt; through purchases for the account of sinking, trust, and investment funds; or through building up bank balances. From 1921 through 1929 all governments-Federal, State, and local-spent an average of $2,000,000,000 per year for construction. If we add to this the average annual cash debt retirement by the Federal Government ($280,000,000) and subtract the increase in debt of the State and local governments ($800,000,000), we get a figure for gross savings of all

This chapter was originally written by Dr. Oscar L. Altman, senior economist, National Resources Planning Board. It was revised by Dr. Theodore J. Kreps, professor of business economics, Graduate School of Business, Stanford University.

Hearings before the Temporary National Economic Committee, Part 9, Savings and Investment, exhibit No. 586, p. 4041.

205

3

governments of about 1.5 billion dollars per year. Most of this saving was invested directly.

THE PROBLEMS OF HOARDING AND BANK CREDIT

Whether savings are invested or are siphoned into consumption is not important to the continuity and flow of the income stream. So long as savings are absorbed—that is, finally reach the hands of laborers and others who spend them-the levels of employment and national income are not materially affected.

But savings may be hoarded. They may be put in a mattress, a safe deposit box, or an idle bank balance. Whatever the form, hoarding breaks the flow of the income stream. According to Lauchlin Currie:

If we think of the national income as a stream of goods and services, all represented by their dollar equivalents, we can take the next step and consider the factors that tend to keep the stream going uninterruptedly, and the factors that tend to obstruct and divert the stream. When a person earns wages and spends them for living expenses as rapidly as he receives them, there is no interruption. When a corporation takes in money in exchange for the goods it produces and disburses it at the same rate for wages, materials, power, and dividends, there is no interruption.

When, however, a part of the wages received or of money realized for sales is not disbursed but is retained by the individual either in the form of cash or of deposits, or is used to pay off debts, or even if it is invested in securities, there may be an interruption in the even flow of the money stream. Whether there is or is not depends on whether the money thus withdrawn is kept idle, or hoarded, or whether it is returned to the stream through disbursement for new plant and equipment, or for renovation or enlargement of existing plant, or offset by the expenditure of an equal amount.*

If savings are not returned to the income stream, if they are hoarded, the community's expenditure for consumption and investment is reduced, and the decrease in expenditures makes it impossible to sell the output at current prices.

Hoarding may easily have serious consequences for the functioning of the economy. Business enterprises have to reduce prices, or output, or both. Employment is curtailed. The rate of operations is decreased. Many of the persons who are currently saving-whether their savings are being invested or hoarded-find that with the changed conditions their income falls. As their income drops, their savings are either curtailed or take a larger amount of income away from the amount devoted to consumers goods. Savings decreases both in dollar amount and in proportion to national income. The reasons for this are clear. Profits decline or turn into losses; the incomes of wage and salary workers are reduced. Unemployed workers, and bankrupt and other business enterprises are forced to sell their possessions, thus absorbing a good part of the savings of more fortunate individuals. Many people go into debt to pay for food, rent, clothing. Hence the amount of new saving decreases, while an increasing amount of new saving is canceled by drawing upon old saving. The process of contraction, in other words, is not a voluntary one. It will, in fact, continue until the whole community has reduced its saving to an amount that can currently be absorbed. Thus depression forces people to reduce their saving by the poverty and distress it creates. There is always a certain amount of hoarding in the community.

3 Temporary National Economic Committee Monograph No. 37, Saving, Investment, and National Income, by Oscar L. Altman, pp. 24-25.

Hearings before the Temporary National Economic Committee, Part 9, pp. 3521-3522.

There is always a certain amount of income which for the time being is subtracted from current income. Yet the community has frequently operated at very high levels of employment and output. There are two explanations for this. In the first place, the importance of hoarding changes greatly according to the stage of the business cycle. At some stages it may be negligible, or it may be more than offset by more rapid spending. But the second, and more important factor is the creation of new money by the banking system. Some individuals may have been reducing the net income stream by hoarding, but others were swelling it by persuading the banks to create new money for them.

In some periods hoarding is offset by the creation of new money. The income stream remains unchanged, and except for minor dislocations, the economic machine continues to operate at its current level. But bank credit and hoarding do not usually maintain such a nice balance. When bank credit increases, during the upswing, it tends to be greater than hoarding. Then the income stream swells, and the level of economic activity rises. Here it is precisely the creation of new money which makes it possible for hoarders to subtract current purchasing power without throwing the economic machine into low gear.

But the community pays dearly for its bank credit supercharger. This supercharger is erratic. On the one hand, it may accelerate the climb into a stratosphere of inflation; on the other, and more important, it throws deflation into a power dive. For the bank credit mechanism may, and in periods of downswing does, reinforce hoarding. Part of the current income stream is diverted to pay off bank loans, and the supply of money decreases. The balance of current income cannot take all the currently produced output off the market at current prices. Prices fall. Output decreases. Credit requirements become increasingly stringent. The first cycle is repeated; and the economic recession becomes a rout.

5

It is impossible here to go into an exhaustive discussion of the role of bank credit; it is sufficient for our purposes to indicate that the creation of new money may offset hoarding in some periods, increasing the income stream, and stimulating investment. At other times it acts with economic perversity to reinforce the effects of hoarding. By decreasing the income stream, and particularly the savings segment, it depresses investment, induces deflation, and accentuates the problems of unemployment and idle capacity.

WHO SAVES?

The best available data on who does the saving are summarized in tables 47 to 50. In prosperous years all three groups, business enterprises, governments, and private individuals, contribute to the pool of savings.

5 One of the most thorough expositions of this phenomenon may be found in D. H. Robertson, Banking Policy and the Price Level, King, London, 1926. The eccentricities of the banking system have given impetus to a system for the elimination of manufacture and destruction of money. (See Hearings before the Temporary National Economic Committee, Part 9, pp. 3706-26.) For one discussion of the possible direction of banking reform, see Henry Simons, A Positive Program for Laissez-Faire, University of Chicago Press, 1934. The proposal for a capital credit_bank by A. A. Berle, Jr. (Hearings before the Temporary National Economic Committee, Part 9, pp. 4066-79) is based in part upon the possibility of using bank credit to raise the level of economic activity to full employment.

Note that business is by no means the sole source of savings, nor does it provide even half of the savings. The percentage is usually slightly less than two-fifths. During depression, however, both business enterprises and governments draw upon past accumulations and upon the savings of the community.

6

These figures are aggregates. Not all business enterprises save in prosperous years. By no means all lose money in periods of depression. The same is true for governmental units. Some States, like Nebraska, are saving, while others are going into debt to a greater or lesser extent. The same is likewise true for individuals. But in all three categories the notable feature is the fact of concentration.

TABLE 47-Components of savings, 1925-29 and 1935-39

1 Gross capital formation, as estimated by Simon Kuznets in National Income and Capital Formation1919-35, New York, National Bureau of Economic Research 1937, p. 40, and Commodity Flow and Capital Formation in the Recent Recovery and Decline, 1932-38, Bull. 74, National Bureau of Economic Research, New York, 1939.

2 See table 48.

3 See table 49.

4 Gross savings minus business and governmental savings. Other estimates of individual savings are not precisely comparable with this one. For purposes of convenience, however, several other estimates may be summarized:

The estimate of Maurice Leven, H. G. Moulton, and Clark Warburton, America's Capacity to Consume, Washington, Brookings Institution, 1934. was 17.8 billion dollars for 1929. Excluding 6.2 billion dollars of capital gains, their estimate is 11.6 billion dollars (pp. 96, 260, 261, 265).

The estimate by the National Resources Committee was 6 billion dollars in 1935-36. (Consumer Expenditures in the United States, Washington, 1939, p. 51.)

The estimates by W. H. Lough were (in billions) 1925, $10.6; 1926, $10.6; 1927, $10.4; 1928, $8.5; 1929, $9.3. (High Level Consumption, N.Y., McGraw Hill, 1935 p. 306.) Lough's method would tend to eliminate capital gains.

The estimates by Clark Warburton were (in billions) 1925, $9.7; 1926, $11; 1927, $11.2; 1928. $10.9: 1929, $11.6. ("The Trend of Savings," Journal of Political Economy, vol. 43, 1935, p. 84.)

The estimates of R. W. Goldsmith with the assistance of Walter Salant, converted to a gross savings basis excluding consumers' durable goods except houses, were (in billions) 1935. $2.4; 1936, $7.8: 1937, $5. 5 Estimated.

As is explained in Temporary National Economic Committee Monograph No. 37, the data on business enterprises are difficult to interpret, particularly in depression years when business, through revaluations of inventories and accounts receivable, reports losses whica are not really current dissavings. The loss of income on the part of the partially or wholly unemployed is not charged against the savings of individuals. If it were, the aggregate losses of individuals would far exceed the bookkeeping losses of business.