The Euthanasia of the Saver
By Robert Higgs • Wednesday October 26, 2011 8:10 PM PDT • 38 Comments
In chapter 24 of The General Theory of Employment, Interest and Money, John Maynard Keynes laid out his screwball idea that capital might soon become, or be made to become, no longer scarce; hence no payment would have to be made to induce people to save, and that condition would be splendid inasmuch as it would entail the “euthanasia of the rentier.” This stuff really must be seen to be believed; here is the meat of Keynes’s discussion in his own words:
The justification for a moderately high rate of interest has been found hitherto in the necessity of providing a sufficient inducement to save. But we have shown that the extent of effective saving is necessarily determined by the scale of investment and that the scale of investment is promoted by a low rate of interest, provided that we do not attempt to stimulate it in this way beyond the point which corresponds to full employment. Thus it is to our best advantage to reduce the rate of interest to that point relatively to the schedule of the marginal efficiency of capital at which there is full employment.
There can be no doubt that this criterion will lead to a much lower rate of interest than has ruled hitherto; and, so far as one can guess at the schedules of the marginal efficiency of capital corresponding to increasing amounts of capital, the rate of interest is likely to fall steadily, if it should be practicable to maintain conditions of more or less continuous full employment—unless, indeed, there is an excessive change in the aggregate propensity to consume (including the State).
I feel sure that the demand for capital is strictly limited in the sense that it would not be difficult to increase the stock of capital up to a point where its marginal efficiency had fallen to a very low figure. This would not mean that the use of capital instruments would cost almost nothing, but only that the return from them would have to cover little more than their exhaustion by wastage and obsolescence together with some margin to cover risk and the exercise of skill and judgment. In short, the aggregate return from durable goods in the course of their life would, as in the case of short-lived goods, just cover their labour costs of production plus an allowance for risk and the costs of skill and supervision.
Now, though this state of affairs would be quite compatible with some measure of individualism, yet it would mean the euthanasia of the rentier, and, consequently, the euthanasia of the cumulative oppressive power of the capitalist to exploit the scarcity-value of capital. Interest today rewards no genuine sacrifice, any more than does the rent of land. The owner of capital can obtain interest because capital is scarce, just as the owner of land can obtain rent because land is scarce. But whilst there may be intrinsic reasons for the scarcity of land, there are no intrinsic reasons for the scarcity of capital. An intrinsic reason for such scarcity, in the sense of a genuine sacrifice which could only be called forth by the offer of a reward in the shape of interest, would not exist, in the long run, except in the event of the individual propensity to consume proving to be of such a character that net saving in conditions of full employment comes to an end before capital has become sufficiently abundant. But even so, it will still be possible for communal saving through the agency of the State to be maintained at a level which will allow the growth of capital up to the point where it ceases to be scarce.
I see, therefore, the rentier aspect of capitalism as a transitional phase which will disappear when it has done its work. And with the disappearance of its rentier aspect much else in it besides will suffer a sea-change. It will be, moreover, a great advantage of the order of events which I am advocating, that the euthanasia of the rentier, of the functionless investor, will be nothing sudden, merely a gradual but prolonged continuance of what we have seen recently in Great Britain, and will need no revolution. [pp. 375-76]
Given the Fed’s policy during the past three years of, first, driving short-term interest rates down almost to zero, and, more recently, undertaking Operation Twist, with the intent of driving longer-term interest rates down to levels that, in real terms, equal or fall below zero, we might seriously wonder whether Chairman Ben Bernanke and his colleagues have decided to give a shove to the wheel of history that Keynes longingly anticipated.
However that may be, no one can dispute that people who rely on the earnings on invested funds to support themselves—a situation in which many retired persons in particular find themselves—are now in a world of hurt. Bank savings accounts are paying interest rates of 1 percent or less. Certificates of deposit are paying 0.5 percent to 1.7 percent, depending on the term. U.S. Treasury bonds with terms of 5 to 30 years are yielding in the neighborhood of 1 percent to 3 percent.
In short, the highest yield available to ordinary investors who seek a simple, low-risk investment of their funds is, at best, roughly equal to the rate of inflation—and then, with a 30-year term to maturity, only with substantial risk of capital loss if interest rates should rise. To put the matter another way, all ordinary investors are now being progressively impoverished because the nominal return on their investments falls short of the loss of purchasing power of the dollar during the term of the investment. Getting a positive real rate of return is effectively impossible for the proverbial widows and orphans. Only investors with the knowledge of how to invest in gold, crude commodities, and other such esoteric assets stand any chance of earning positive real returns, and then only with great risk of substantial capital losses.
Given that the Fed’s official policy is to drive all interest rates to near zero, one may conclude that the Fed seeks to impoverish the widows, orphans, retired people, and all other financially untutored people who rely on interest earnings to support themselves in their old age or adversity. Can a crueller official policy be imagined, short of grinding up these unfortunate souls to make pet food or fertilizer?
The politicians constantly bark about their solicitude for those who are helpless and in difficulty through no fault of their own. Yet, the scores of millions of people who saved money to support themselves in old age now find themselves progressively robbed by the very officials who purport to be their protectors. There are many reasons to oppose the Fed’s policy. The reason brought to mind by the official enthanasia of the nation’s small savers deserves far more attention than it has received to date.
Tags: Economics, Family, Federal Reserve, Inflation, Money and Banking, Morality, Politics, Poverty, The State 
Dr. Higgs
I have a hard enough time trying to figure out the basics of economics, let alone the convoluted language of Keynes.
Was he saying that low interest rates would drive the economy toward full employment and that the rentier is an unfortunate casualty? Did he even anticipate an economy where so many were dependent on investment income for the “golden” years?
I’ve just started reading “The New Holy Wars.” One of the points the author makes early is that much of modern economics is theological, complete with dogma and a path to salvation. In your mind would Keynesians consider Lord Keynes the high priest of their new age?
Phil Dillon | Oct 27, 2011 | Reply
How would this situation be any different in a gold-standard economy for such poor people? Instead of having the same income with higher prices they’d experience lower income with stable prices – they’re still out of pocket.
Gil | Oct 27, 2011 | Reply
Phil,
Don’t feel bad. Keynes is difficult for anyone to understand. His obscure prose helps to explain why so many people argue about “what Keynes really meant.” On your second point, I think Keynes has served as a sort of high priest for the modern age of central state management of the economy.
Gil,
Under a gold standard, the central bank would be unable to drive real interest rates below the market level by manipulating the monetary base; nor could it manage the price level in one way or the other. People living on interest income could not be impoverished in the way that Fed policy currently impoverishes them.
Robert Higgs | Oct 27, 2011 | Reply
Dr. Higgs
Thanks. This helps me feel somewhat sane and normal.
To reinforce what you’re saying, my wife manages here mother’s portfolio. She got a sizeable inheratance when her sister died and my wife has been trying to find a safe investment that will give her some return on investment. When she started she put it into money markets. They are earning her mom next to nothing. My wife has a masters’ in finance and is now thinking about buying pillowcases and mattresses, withdraing the dough, and burying it out in the backyard, guarded by a pit bull.
Phil Dillon | Oct 27, 2011 | Reply
And having just read articles about aspects of US society that are, or lead to a police state, such as the Louisiana law recently passed preventing the use of cash in sales of used goods, it’s interesting to observe, for savers, that interest is a contractual obligation, whether it comes from a bank account, savings certificate or government bond. So the obligated out-go is being reduced. At the same time, the obligated in-flow (from the government perspective) known as taxes (of all kinds) only increases. Dividends are generally not legal obligations. Savers are thus at this point having to rely on non-obligated payments from private business, in search of yield. It’s a wild shift for anyone born before a few years ago.
Don | Oct 27, 2011 | Reply
Is this my Dr. Jack “Duck River” Higgs?
Dee Goodin | Oct 27, 2011 | Reply
“Can a crueler official policy be imagined, short of grinding up these unfortunate souls to make pet food or fertilizer?”
Soylent Green?
It could happen.
JahLove63 | Oct 27, 2011 | Reply
“Given that the Fed’s official policy is to drive all interest rates to near zero, one may conclude that the Fed seeks to impoverish the widows, orphans, retired people, and all other financially untutored people who rely on interest earnings to support themselves in their old age or adversity. Can a crueler official policy be imagined, short of grinding up these unfortunate souls to make pet food or fertilizer?”
Wait.
Ken | Oct 27, 2011 | Reply
Keynes is sensible on this issue though I don’t think optimal.
What he is saying is this:
If you are not at full employment then the Fed should lower interest rates until either you are at full employment or the overnight rate hits zero.
If you are at full employment then the government should run higher and higher budget surpluses until the overnight rate hits zero.
In any case – he argues – the overnight rate should always be zero.
This is the same kind of thinking that led Milton Friedman to say that the rate of deflation should be equal to the natural rate of interest.
Its fine as well as it goes but it ignores the fact that to achieve this policy requires that the government raise taxes above what they otherwise would be and that has a cost unto itself.
Karl Smith | Oct 27, 2011 | Reply
But, if the reduced payment were in Gold, the poor could hide in a vault in the back yard and so gain some profit as the price of gold rises.
As the Dollar is destroyed in fundamental worth over time in order to reduce the the size of the Federal Debt in its true value, the back yard safe would do better in preserving true value.
Don | Oct 27, 2011 | Reply
Keynes was a Fabian socialist – and the section above conclusive proves it. His goal was the socialisation of investment, and taking over the functions of the entrepreneur and investor by government – just a more subtle way of achieving Marxism.
I’ve written extensively re: Keynesian socialism on my blog. This one based on your blog post.
Sanjeev Sabhlok | Oct 27, 2011 | Reply
Dr. Higgs,
I confess I did not read the entire quote from Keynes, but I was immediately struck by the first sentence stating that a moderately high rate of interest was necessary to induce savings. The savings rate has skyrocketed in the last 3 years in the face of plummeting interest rates. Maybe he refutes the statement further down, but it is such a stark diversion from reality that I found it hard to read more.
Erik Olsen | Oct 27, 2011 | Reply
Phil, my parents are in the same terrible situation. It is the poorest elderly who are chewing through their savings the fastest. But then again, perhaps we need to be sent to a re-education camp to make us realise – forehead slap – that everybody wins with low interest rates!
J Cuttance | Oct 27, 2011 | Reply
We have a Tea Party, and #OWS, but we need a saver party so that they can stand up to the apparent vendetta the Fed Chairman has with savers and working classes. High stock prices help about 20% of the population, but high asset/commodity prices deteriorate the living standards of those whose food and energy costs area substantial portion of their net incomes. BTW I don’t buy the “official” inflation numbers. Prices according to Shadow Stats, or the Billion Prices Project, which show true inflation well north of “core inflation”.
Remember when seniors chased Dan Rostenkowski down the street re SS? I’m waiting for a similar event from savers re BlackHawk Ben.
Lark Williams | Oct 28, 2011 | Reply
These low interest rates have cost me plenty, that’s why I’m not spending.
Pup | Oct 28, 2011 | Reply
The reason for this is so the Feds can borrow the ridiculous sums of money to pay for benefits that couldn’t be paid for if 5 year rates were 3 or 4% and long term rates were 5-6%. That would result in additional US Govt debt payments of roughly the entire defense budget. The populace would go mad and riot like Greece. We have 5 years.
TBP | Oct 28, 2011 | Reply
On his deathbed, Keynes is said to have answered the question as to whether he had any regrets with the quip, “I wish I had drunk more champagne.”
Now, if it might have prevented Keynes from spreading such delusions as the above, *I* would favor his having drunk more, too.
Otherwise, possibly we might have benefited from his drinking LESS of it. And whatever else he was smoking, which, by all appearances, was REALLY good shirt.
N. Joseph Pots | Oct 29, 2011 | Reply
It seems to me that a big difference between Austrian economists and Keynesian ones is in the answer to this question: what is the source of loanable funds? For the Austrians it’s savings. For Keynesians it’s counterfeit money created by the Fed through monetary policy and banks through fractional reserve banking.
Tom E. Snyder | Oct 29, 2011 | Reply
Why hasn’t anyone filed suit against the Fed and Congress for Constitutional rights violations?
The Constitution says that only gold and silver are money. Yet our government says the fiat money is money.
The government can’t be socialistic without fiat money.
Get rid of fiat money. THAT will starve the beast!
In addition, isn’t inflation against the 5th amendment which says the government cannot take away private property without just compensation?
BeeKay | Dec 4, 2011 | Reply
The real problem is that only banks have access to the FED funds rate. The banks can borrow virtually unlimited money from the FED at near zero percent interest and then use that money to buy treasury bonds that pay near 3% interest. As long as interest rates on average remain below about 3%, (which they have done since the end of 2008), the banks with access to the FED funds essentially have access to free money. And all they are doing is transferring money from one hand of the federal government to the other.
Steven Elliott | Dec 5, 2011 | Reply
You are saying exactly what I wanted to say!I couldn’t say better. Thank you Steven.
incassobureau | Dec 6, 2011 | Reply
You hit the nail on the head. As a retiree who saved for decades and could have lived in perpetuity on those savings with even modest returns (based on, say, the past 50 years of returns) I am spending down the principal every time I leave the house. Fortunately for me, line 37 these days posts a big fat goose egg. I wonder if the IRS will think of some way of directly taxing me before I start drawing SS or start taking ret’ment fund withdrawals.
It’s all part of a mindset. Savers are not popular people for several reasons not the least of which is that distasteful concept of “responsibility” a word which has been respelled – now with four letters instead of 14.
And to drive the point home, you can’t even get a rebate anymore in a form that you aren’t forced to spend.
Somebody once said that a dollar not spent is a dollar that doesn’t exist. I guess that’s the premise upon which these policy makers base their actions
Arjay | Dec 29, 2011 | Reply