FoC (11) - Hoarding or Saving

Many economists claim that saving is harmful during a recession. This incorrect view comes to us from the 1930s depression, when thousands of banks collapsed and the savings of many people were wiped out. A common response was to draw cash out of the bank and store it under the mattress. This was harmful, because while the cash was under the mattress it was out of circulation. This was hoarding, not saving.

In the current crisis, people are saving, but they are not hoarding. Those who have reduced their consumption are putting the money they have saved in their bank. This is good for the economy, because savings in the bank can be lent to businesses to buy machinery and other capital equipment, which makes them more productive. With the current deleveraging of debt, there is an enormous shortage of capital all over the world. Increased saving is the best way to provide the capital that is now required.

Saving is only a problem, if people hoard cash, because then the savings are not available to fund investment in productive capital.

Hoarding is different from saving. When I hoard something valuable, I do not use it, but I prevent others from using it. This is destructive. When put my savings in a sound bank, I make what I am not using available to other who can use it efficiently. Many economists who propound the fallacy of composition do not understand the difference between saving and hoarding.