7. Savings and investment

People will not hold savings in a depreciating currency without the incentive of interest if they have alternative methods of retaining the value of money not required immediately, e.g. by purchasing durable goods, land or buildings etc. solely for the purpose of resale later. This is grossly inefficient and wasteful because these assets are withdrawn from use or production. Saving is a natural human activity because some large purchases cannot be afforded immediately; the desire to put something aside for retirement can be harnessed to enable others in the community to invest in the productive assets and resources needed by all its members. 

Currently most LETS currencies are too new and have insufficient turnover to support much of this kind of use, but there have been cases where individuals have taken on large debits to build their own houses, and then repaid these debits more quickly than would be possible using an interest-burdened currency. Macroeconomic theory states that savings must always equal investment; savings being the money put aside for future use while investments represent that which is spent on lasting assets, means of production or stocks i.e. what is not currently being consumed or lost through depreciation. This follows from the fact that expenditure is split between consumption and investment, while income, which equals expenditure for the community as a whole, is split between consumption and savings. Now clearly not everything thought of as being saved is actually saved if the money is not invested in something productive or of intrinsic value by the savings institution. One example of this is where the manager of a bank is stealing and spending the money and presenting false accounts. A far more serious problem for most people concerns the money thought of as savings which are used to purchase the bonds sold to individuals, banks and pension funds by a government which simultaneously sells public assets to pay for its current account deficit.

Traditionally state borrowing was only acceptable when governments invested the money in schools, roads and state-owned industries. Now that these bonds are simply sold to finance the public deficit the savings supposedly secured by government bonds should no longer be considered as such either by the person who puts money into them or for the purpose of understanding the state of the economy. Public deficit financing ruins the economy in two ways; firstly by taking much of the money people intend to save and using it for consumption rather than investment and secondly by driving up interest rates to the point where few investments can pay the cost of financing them.

Savings and investment are activities generally carried out by different people, though they share common objectives. For example, if one person wants to build a home while another wants to put something aside for retirement then both can benefit from a sound money system which enable credits being accumulated for retirement to mirror debits accumulated while a house is built by someone else. The retired person should later be able to spend these credits reflecting regular reductions of debit or repayments made by the house purchaser. 

Before LETS type currencies become real vehicles for economic regeneration they will need to become a credible means for channelling savings towards investment. It will probably take a few years for the users of a new currency to trust it for long term savings. This does not need an interest incentive for the saver so long as the currency can maintain or improve its real value over a period of a few years and be expected to continue doing so. 

Not everyone involved in LETS schemes wants to see them used to finance substantial investments; some see no value in having money unless it is spent. They are welcome to continue forming smaller LETS schemes where this use for investment purposes is less likely or to spend the currency of the larger schemes as soon as they earn it. Enough people are likely to want to use the new currencies to channel their savings towards other's investments to ensure that this will happen. 

Version #001 20-12-94

Written by Richard Kay  rich@driveout.demon.co.uk