ȁȀȇ Partʺ: Economicsprobably more familiar than Allais’s quite different worry. Ļe effect of
monetary wealth on the propensity to save can in principle solve any sup-
posed problem of unemployment and idle productive capacity due to over-
saving and deficiency of effective demand. In the absence of any other
solution, price and wage deflation would eventually make the real value
of the nominal money supply adequate to support a full-employment vol-
ume of effective demand. (For familiar reasons, of course, this “automatic”
solution is not the easiest or best one.)
More important in the present context, the real-balance effect illumi-
nates Allais’s worry. Saving and real capital formation may be curtailed
not just from a deflationary increase in the real value of a given nominal
money supply but even from the availability of money as an alternative to
holding capital goods and stocks and bonds. ( James Tobin’s version of the
argument,ȀȈȅȄ, is better known than Allais’s.)
Ļe reason for this worry about money is similar to the reason for
worry about land. If people can postpone consumption by holding money
or land or Old Masters as well as by holding man-made capital goods
or securities that finance them, then part of their propensity to save or
wait is diverted from channeling resources into capital-goods construc-
tion. Money is wealth from the point of view of the individual owner,
and holding it contributes to satiating his overall propensity to save or
wait; but it is not wealth in the same way and to the same extent for the
economy at large.
Ļe phrase “in the same way and to the same extent” is a hedge. Even
from the social point of view, money is not mere fictitious wealth. It elim-
inates the frustrations and costs of barter. It facilitates financial interme-
diation and capital formation. It renders services to its holders. A larger
cash balance permits less attention to synchronizing payment inflows and
outflows and less use of labor and materials in managing the holder’s cash
position. What renders these services is real and not merely nominal cash
balances. Real money is peculiar in that its quantity is determined on the
demand side. Ļere is no way of simply supplying more real money to an
economy unless holders are somehow induced to demand more of it (as
they would be induced when nominal money expansion helps restore a
depressed economy to full employment). (An exception is rather trivial:
monetary inflation can increase the real money stock temporarily until
prices have caught up.) Ļe just-mentioned hedge applies to land as well
as to money. Land is socially useful, of course, as are Old Masters. But
they have a socially fictitious wealth aspect also.