The Central Banks' War on Savers

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whilst there may be intrinsic reasons for the scarcity of land,
there are no intrinsic reasons for the scarcity of capital. . . . It
will be, moreover, a great advantage of the order of events which
I am advocating, that the euthanasia of the rentier, the functionless
investor, will be nothing sudden, merely a gradual but prolonged
continuance of what we have recently seen in Great Britain, and
will need no revolution.

John Maynard Keynes
, p. 376

was the most influential economist of the twentieth century, which
speaks poorly of the twentieth century. He left behind three widely
quoted phrases: gold as a "barbarous relic," "the
euthanasia of the rentier," and "in the long run, we’re
all dead." He also left behind an utterly incoherent but widely
accepted theoretical justification for high marginal tax rates,
government make-work projects, and government budget deficits. His
Theory of Employment, Interest and Money
(1936) is read
by few, understood by fewer, and is the Das
of our era: widely respected by academics who have
not read it.

clearest refutation of Keynes is Henry Hazlitt’s book, The
Failure of the "New Economics"
[1959]. Hazlitt
never went to college, so he was not taken in by Keynes.)

legacy was a theory of the free market that argues that the state
must intervene into the operations of the free market in order to
keep depressions from taking place. The free market cannot be trusted.
Keynes believed that the national government’s fiscal policy is
the key to leading a nation out of recession: taxing, spending,
and running deficits. The common phrase regarding this theory of
government intervention is one applied to Franklin D. Roosevelt:
"He saved capitalism from itself." (Keynes and Roosevelt
met once in 1934, but they didn’t think highly of each other.)

Friedman has always agreed with Keynes regarding the inability of
the free market to be reliably productive apart from government
intervention, but he has focused on monetary policy rather than
fiscal policy. Friedman has long promoted the idea that a central
bank should constantly increase the money supply by 3% to 5% per
year by buying government debt. This of course requires a long-term
increase in government debt. His disciples, the monetarists, agree
with him regarding both the legitimacy and the necessity of central

there are the supply-siders. They are verbal anti-Keynesians, at
least when tax rates are on the downward slope of Arthur Laffer’s
famous tax revenue curve, i.e., where the government’s fiscal policy
produces lower revenues at high marginal tax rates because of legal
tax avoidance programs that are less economically productive, people’s
unwillingness to work, and reduced entrepreneurship and profit.

recommend tax rates set at whatever rates produce the greatest revenues:
the top of the revenue curve. Former Congressman Jack Kemp is the
spokesman for "practical" supply-side economics. As for
monetary policy, they are anti-monetarists. The faintest trace of
an economic slowdown produces cries from the supply-side camp —
Jude Wanniski excepted — for "more liquidity, now!" They
will have none of Friedman’s penny-pinching 5% limit. "Get
the printing presses rolling!" is the supply-siders’ invariable
call to action. This means, "Get the Federal Reserve buying
more government debt."

slogan unites all three camps of economists: "Deficits
don’t matter." All three are convinced that if governments
adopt the correct taxation policies, and the central bank adopts
the correct monetary policy, economic growth will overcome the negative
effects of government debt.

government debt grows larger, so do business debt, consumer debt,
and mortgage debt. Everybody joins in the economists’ chorus: "Deficits
don’t matter!" Problem: any serious recession threatens the
economy with widespread default on debt. This in turn threatens
the fractional reserve banking system: cascading
cross defaults
among banks, Greenspan calls the threat. That
was what happened in 1930—32. The money supply shrank. Anything
that threatens the debt-based monetary system is anathema to Establishment

protection of the banks (e.g., the FDIC), government fiscal policy,
and central bank policy have pumped up the money supply through
the expansion of bank-purchased government debt. Therefore, the
free market — bank depositors — is now a threat to both the expanded
money supply and the structure of invested capital that monetary
inflation has produced. Depositors who withdraw currency can pull
the plug on the fractional reserve banking system. This is what
is happening in Japan today. The central bank’s response is to open
the spigots even more to keep the tub filled with money.

economists cry, "Deficits don’t matter," but because a
portion of these deficits is funded by central bank credit money
creation, depositors’ decisions to withdraw currency matter a great
deal. This is why all Establishment economists hate the free market
when it comes to money and banking. They all believe that "central
bankers know best." They therefore hate those depositors who
grow suspicious of the banks and withdraw currency. They recommend
government intervention into the economy in order to overcome the
interests of these depositors. The war against savers is basic to
modern economic theory.

agreed-upon anti-recessionary monetary policy of all three schools
of Establishment economic opinion was summarized perfectly in four
words by Martin Feldstein, who served as Reagan’s chairman of the
Council of Economic Advisors, in an article that appeared on the
opinion page of the Wall Street Journal (Feb. 2, 1992). That
was an election year, an election that President Bush lost in November
because of a recession. Here is the Establishment economists’ universal
solution, which was the title of Feldstein’s article: "Goose
the Money Supply."

for the Austrian school of economics, its members want no government
control over the money supply beyond the fulfillment of contracts
between banks and depositors. They also don’t trust any government-licensed
monopoly, including the most powerful of all government-licensed
monopolies, the central bank. As for fiscal policy, they call for
tax cuts even on the upward slope of Laffer’s revenue curve. With
Laffer, they insist that taxes should be cut until they produce
maximum government revenue. Then taxes should be cut some more —
quite a bit more, actually. So, nobody in government pays any attention
to them.


has all this got to do with the plight of savers? A
great deal.

Keynesians have an underlying contempt for the private saver who
acts in his own self-interest. The government can allocate capital
more efficiently, they believe. Anyway, pure Keynesians believe
this. The practical Keynesians — most academic economists over age
50 — think that savers are tolerable, but not when they prefer
to save so much money that the prices of most retail goods begin
to fall. When consumers do this, the government must sell more debt
to investors, including the central bank, and spend more money on
employment-generating projects. Keynes literally called for the
construction of pyramids, if necessary, to supply jobs (General
Theory, p. 220). Keynesians are demand-siders. They regard consumption
as the key to economic growth, not private saving and private capital

monetarists and supply-siders are favorable in general to savers,
but not so favorable that they don’t call for more monetary expansion
whenever a recession appears. Friedman made his academic reputation
by arguing in
Monetary History of the United States
(1963) that the Great
Depression was the fault of the Federal Reserve System, which did
not pump up the money supply, 1930—32. The FED actually allowed
insolvent banks to go bankrupt. In other words, Friedman opposes
the effects of the free market in wiping out bad debt, including
poor entrepreneurs called bankers. His view of banking is promoted
by 99.9% of the introductory economics textbooks used in every college
on earth, and all of the textbooks in money and banking classes.

(again, not Wanniski) are knee-jerk inflationists. Their solution
to every recession is always monetary expansion at whatever rate
it takes to lower interest rates and get businesses borrowing again,
plus a little more money, just to make sure. They have great faith
in businessmen as the source of society’s wealth, and they want
the central bank to subsidize businesses with artificially low rates
of interest whenever the free market calls into question prior monetary
inflation-generated malinvestments by businessmen, i.e., during
a recession. Supply-side economists are to monetary policy what
mercantilists were to international trade policy: Subsidizers
Of Business.

the government taxes savers to get the government into accelerated
spending mode (Keynesianism), this hurts savers. When the central
bank buys government debt with newly created money in order to keep
prices from falling (monetarism), this hurts savers, i.e. creditors,
who are then repaid with money of reduced purchasing power, i.e.,
lower than what the free market would have determined was efficient.
When the central bank pumps new money into the government debt market
to lower commercial interest rates (supply side), it hurts savers,
especially holders of short-term certificates of deposit, money-market
fund owners, and passbook savings account holders.

short, the saver gets blamed for the recession by all three schools
of Establishment economic opinion. His interests are the first to
be sacrificed on the altar of government intervention in order to
"save capitalism from itself."

is happening today, all over the world.


is an old line, "You should save for a rainy day." The
problem is, for the last sixty years, governments in the West have
promised perpetual sunshine.

the United States, the personal savings rate went negative in 2001.
During recessions, the savings rate historically has risen because
people are reminded that income is not a sure thing. They get worried
about losing their jobs, so they save more. This time is no exception;
the personal savings rate has climbed back to a little over 3% of
disposable income. This is not exactly confidence-building. In previous
recessions, it has hit 10%.

I went to the Web site of the St. Louis Federal Reserve Bank. This
site is probably the best source of economic charts that are issued
by any single organization. In any case, they’re free. Far be it
from me to turn down a free lunch. (Economagic is even better, but
it’s a compilation of sources.)

was curious about the rates of savings in various countries. So,
I clicked on International Economic Trends, the SL FED’s
quarterly publication. I have read it, or at least glanced at it,
for many years. Its data page has a nation-specific list of topics:
"Output and Growth," "Inflation and Prices,"
etc. You can check data for nine major countries. I clicked "Saving
and Investment." This took me to a page with a chart on "Hourly
Earnings and Output Per Worker." This was not what I had in

due diligence, I sent an e-mail to the SL FED, telling them of the
glitch. I received this reply the next day:

sorry for any confusion our webpage caused. The Savings and Investment
charts were replaced with Inflation (depicting CPI and PPI) charts.
I am correcting the webpage now to reflect the change.

returned to the page. Sure enough, there was no longer any listing
for "Saving and Investment." I sent back a reply:

sure will miss Saving & Investment. Maybe when both are disappearing,
it’s time to drop them.

got a million of ‘em! Rodney Dangerfield, don’t look behind you.
I’m gaining on you.

I received this response:

Yes, that
is exactly why we discontinued them. Unfortunately, several of
the countries that we were reporting savings and investment data
for were no longer updating their files with the OECD (our source
— the Organization for Economic Cooperation and Development),
and we felt that it would be better to include charts that had
current data. Hence we chose the CPI and PPI to represent inflation.

response got me to thinking. We are in the midst of a worldwide
slowdown of economic growth. Europe is in what appears to be permanent
economic stagnation. Stock markets in the West and Japan are way
down, and none of them looks healthy.

is any population’s commitment to long-term thrift, which alone
can restore both productivity and the stock markets? If the 20%
of the population that supplies 80% of the capital (Pareto’s Law)
refuses to save, then the capital necessary to enrich the other
80% will be absent. We will then experience a secular decline in
the rate of economic growth. As capital consumption spreads, we
could even see a contraction of the West’s share of the world economy.

is already taking place. Capitalism is spreading to mainland China
and India. As the two largest nations on earth abandon their old
economic views — Chinese Communism and Indian Fabianism — the masses
of these two countries are entering the modern world. Between these
giants, there are at least two and a half billion people. Hundreds
of millions of them work for less than a dollar an hour.

low wage rates will not last. Capital expansion will raise their
wages, along with their productivity. That’s what capitalism always
does. But the West’s politicians have yet to come to grips with
twin economies whose foreign trade sectors are larger than most
nations’ entire economies.

the balance of payments deficit continues at its present rate of
4% of the U.S. economy — unlikely, of course — then what will happen
to the ownership of capital in the United States? This surplus 4%
in the hands of foreigners gets invested in dollar-denominated assets.
Orientals are not inscrutable. They are investors in search of currency-risk
diversification. They are saving by purchasing dollar-denominated
assets. This is what sustains our consumer goods buying spree. As
Asians increase production in comparison to Europeans, Asians will
begin to dominate America’s capital markets. The trend is clear:
Asians are steadily securing legal ownership of America’s wealth-producing
assets. Because Europeans and Americans are reducing their savings
rate, they are being replaced by Asians.

once led the way. It set the example: export, and invest the surplus
abroad. But Japanese policy-makers in government bought Keynesianism:
hook, line, and economic sinker. The result since 1990 has been
economic stagnation or worse. Japan has a commercial banking sector
that looks exactly like any government-licensed, central-bank-protected
monopoly does after a generation of fiat-money-generated good times:
paralyzed with fear and bad debts.


follows freedom. Where taxes are low, economies are competitive.
This is another reason why Japan is suffering today. It has too
many taxes and too many regulations on business. State bureaucrats
are making too many decisions regarding the allocation of capital.
Other Asian nations are steadily replacing Japan as the source of
low-cost goods and ready capital in American markets.

Cato Institute’s Alan Reynolds wrote a piece for the Washington
Times on October 13. He identifies Japan’s problem.

problems began with the 1988 Basle Accord that created tough new
rules for the world’s banks. By the early 1990s, those heavy-handed
capital standards began to force banks to slash loans to business
and boost their holdings of government IOUs. Japan’s banks were
compelled by the Bank of Japan to severely ration credit.

the Bank of Japan was working hard to "burst the bubble"
in stock and land prices, the Japanese Treasury decided to do
the same with new taxes on retail sales, capital gains and land.
The capital-gains tax made it far less attractive to hold stock,
shoving stocks down further. The land tax had the same depressing
effect on land prices, and nasty ripple effects on stocks and
banks. Land had been a key asset behind corporate stock and important
collateral for bank loans. Stocks, in turn, were a significant
portion of bank capital. When stocks the banks owned dropped in
value, the Basle rules required an even tighter squeeze on business
and consumer loans.

monetary and tax policies sank the value of Japanese
land and stocks, and wiped out bank capital and loan collateral.
The mandated cutbacks in bank lending to businesses slaughtered
many companies. Good loans became "bad loans" because
of a bad economy. Meanwhile, the government wasted huge sums on
costly public works schemes that saddle future taxpayers with
a gigantic public debt. As the Economist put it, "Japan’s
policymakers appear to have followed the Keynesian textbook."

fiscal policy produces economic stagnation and rising government
deficits. It assumes that the free market needs assistance from
the government. Keynesianism is the primary academic source of the
theology of government-guaranteed sunshine.

Japan’s banks have long been on the verge of collapse, with $423
billion of bad debt, fearful Japanese take money out of the banks
and hoard currency. This bank run in slow motion forces banks
to keep extra cash in reserve, in case too many depositors cash
at once.

is the inescapable curse of fractional reserve banking. Bad loans
eventually threaten the solvency of the banks, which leads depositors
to withdraw currency, which hastens the erosion of bank solvency.
This has been going on in the West for five centuries.

of requiring 100% reserves for banking — no issuing of IOU’s to
money metals that are not backed up by money metals in the vault
— government policy-makers have insisted on establishing state-chartered
monopolies, central banks. These agencies are supposed to serve
as lenders of last resort to insolvent commercial banks. This is
ancient policy stretching back to the creation of the Bank of England
in 1694. So, I cannot understand why Reynolds thinks that the following
recommendation is anything but business as usual.

currency the Japanese are stuffing under mattresses plus the extra
bank reserves add up to the "monetary base." The Bank
of Japan could increase the monetary base by buying Japanese or
U.S. securities and paying for them by adding to banks’ reserves.
Once the banks had enough reserves to feel comfortable, they could
increase profits by using extra reserves to create new checking
accounts by buying bonds or making loans.

read this and think, "Keynesianism with a Wall Street face."
(Note: when he says “securities,” he means government debt.) He
then laments the fact that the Bank of Japan is holding back.

the Bank of Japan just doesn’t get it. So the demand for cash
keeps outpacing supply. The result shows up in rapid growth of
currency, which is hoarded, but very slow growth of broad measures
of the money supply. Over the past year, the broadly defined money
supply grew by 8.3 percent in the United States but only 3.5 percent
in Japan.

of horrors: the central bank is not inflating fast enough. The extension
of newly created credit money to the government is being restricted
by the Bank of Japan’s policy not to debase the currency too fast.
This hampers the banking system’s ability to defraud depositors
through inflation. No, no, no: let’s get those digital printing
presses running!

to Reynolds, the Bank of Japan is inflating like mad. The adjusted
monetary base is up by more than 20% since last year. M-1 is up
by 30%. (This panic-level increase in money began in 2000.)

Bank of Japan is at fault. The CD rate is just slightly over 0%.
Government bonds pay a little above 1%. In short, the Japanese saver
is getting reamed by the Bank of Japan.

it any wonder that bank depositors are withdrawing currency? Why
shouldn’t they? It is costing them almost nothing to get into currency,
which leaves no records, and which will appreciate if banks collapse.
Prices are falling, so the hoarding of currency leads to increased
purchasing power, meaning increased wealth. What rational person
wouldn’t do this in Japan, where hardly anyone uses credit cards
or debit cards?

the M-2 rate is not growing by much: a little over 3%. That’s because
people are reducing their bank savings accounts, which pay no interest,
in favor of increasing their holdings of currency.

Bank of Japan is following Reynolds’ recommendations to the letter.
It isn’t working. The sovereign consumer is bringing the bankers
to their knees. The Old Boy Network in Japan — large firms, large
banks, the BoJ, and the Liberal Party — is getting its head bashed
in by individual citizens, who are voting no against mass monetary
inflation, which the BoJ is producing precisely because the banks
are rotten. And the economists all wring their hands. "Naughty,
naughty depositors. Have faith in the banks."

economists had any sense of irony, they would choose one singer
from each Establishment school — Keynesian,
monetarist, and supply side — and do a reworked version of the Beach
Boys’ "Fun, Fun, Fun." The chorus:

And they’ll
have fun, fun, fun
inflation takes the T-bills away!

again, let me remind you: only the Austrian School of economics
stands fast against the deliberate debasement of the monetary unit
by a government-licensed, monopolistic central bank. All other schools
are cheerleaders of the central banks. They all call for "restrained"
counterfeiting. And every time recession looms, the language of
restraints disappears.

inflation rather than thrift is the hope of Western economists and
policy-makers. Instead of calling for a radical reduction of taxes,
to be accompanied by a comprehensive abolition of government regulations
on business, both of which would help restore Japan’s faltering
productivity, the policy prescription is more fiat money. Reynolds
blames the consumer.

get the cash they crave, the Japanese have no choice but to liquidate
goods and assets at distress-sale prices. The result is falling
prices — deflation. The real burden of old debts rises because
producers have to sell more widgets to raise the same amount of
yen. Consumers and businesses are slow to buy, because everything
is expected to be cheaper if you wait.

used to be a monetarist. He launched his career in journalism back
in 1971 with an attack on Austrian monetary theory, which he said
was not accommodative enough, i.e., not expansionist. Years later,
he switched to supply-side economics. He still promotes the same
old solution to recession: more fiat money. His tune has changed,
but the lyrics remain the same.

a recession appears, Friedman’s words in 1965 are ratified by Establishment
economists: "We are all Keynesians now." He meant
, but there is no question that he also meant
at the fundamental level: an acceptance of the state’s role as the
primary activist agency for overcoming recessions. The debate is
over how: fiscal policy (Keynes) or monetary policy (Friedman).
Reynolds presents the familiar analysis that has plagued the West
ever since the Great Depression: Keynes’
"liquidity trap." Oh, that short-sighted, self-interested,
unreliable depositor, who does not fully trust the banking system,
and who therefore hoards currency whenever the central bank’s policy
of money-creation reduces the interest rate to approximately zero.
The policy-makers and the economists go into St. Vitus Dance just
thinking about price cuts for anything except borrowed money.

all laud Adam Smith’s central concept of the growing wealth of nations
as the product of the self-interested individual, but only up to
the point when this individual walks into a bank and says, "I
want my money, in small bills please." At that point, he becomes
a public menace.

fact is, Japan’s mild reduction of prices is granting to consumers
some relief from seven decades of price increases. There is no "deflationary
spiral" in Japan. Richard Katz has warned against seeing Japan’s
situation as anything even remotely like the Great Depression. In
the Oriental Economist (March 2002), he wrote:

deflation is quite mild. The GDP deflator has been falling about
1.5% to 2% since 1999. The consumer price index is falling at
an even milder, 0.5% rate. In the US, incidentally, wholesale
prices fell 2.6% last year, yet the economy is in recovery.

key point: while weak demand is causing prices to fall in Japan,
those falling prices are not, in turn, causing demand to weaken
further. (There is also a bit of "good deflation" —
a drop in monopolistic prices in a few products, such as food,
clothing and long-distance phone calls.)

is a symptom of Japan’s problems, not their cause. Deflation does
have some side-effects, but these are marginal in the overall
picture. Excessive focus on deflation is like trying to cure a
fever by putting ice on your thermometer.

officials at the BoJ are floating this unorthodox idea: the BoJ
should create money and buy depressed equities that are held by
the banks. This is a whole new way of turning economic power over
to central bankers. Instead of becoming the lender of last resort,
the central bank should become the speculator of last resort. Instead
of confining itself to buying certificates of future wealth-confiscation
by the state, it should buy control of the entrepreneurial process
itself — businesses. It should gain the legal authority to choose
who will sit on the boards of directors. It should decide directly
which businesses deserve capital rather than using the commercial
banks as intermediaries. In short, it should make official what
the Old Boy Network has been doing unofficially in Japan since 1868.

transfer of power to the Bank of Japan would lead to the final removal
from the corporate decision-making process of all those pesky, quirky,
profit-seeking private investors. This is what the Old Boy Network
has been after for a century . . . and not just in Japan.


in Japan are now playing Joe Bfstplk for the government’s guaranteed
sunshine. Maybe you aren’t old enough to remember Joe Bfstplk. He
was a character in Li’l Abner who wandered through the world with
his own built-in rain cloud, which hovered above him, raining. Wherever
he went, disaster followed. He remained untouched by these disasters.
Wet, yes, but unscathed. For a picture of Joe, click here:

the Old Boys want is for bank depositors to be schmoon (plural of
schmoo), those fat, ham-shaped little creatures that laid eggs,
gave milk, and would drop dead whenever a hungry person looked at
them. But cartoonist Al Capp understood the implications of such

the lovable and selfless Shmoos ultimately brought misery to humankind
because people with a limitless supply of self-sacrificing Shmoos
stopped working and society broke down. Seen at first as a boon
to humankind, they were ultimately hunted down and exterminated
to preserve the status quo.

same is true of savers who are willing to roll over and play dead
every time a recession threatens. When savers stop saving, misery
will result. The Establishment economists have never accepted this
universal fact of economic life.

bankers have not yet grasped the implications of the substitution
of fiat money for thrift. They expect savers to roll over and play
dead. They ask rhetorically, "Who needs savers when you have
the legal authority to create digits and print pieces of paper with
politicians’ faces on them?"

who worries about imminent price deflation has not thought through
the Old Boy Network and its solution to every economic slowdown:
more fiat money. In contrast, anyone who worries about the long-term
decline of productivity due to the euthanasia of savers has indeed
thought through the Old Boy Network’s solution.

13, 2002

North is the author of Mises
on Money
. Visit
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