Chapter dzǴ: Land, Money, and Capital Formation ȁȁȀreal investors (a role of money explained in McKinnonȀȈȆȂ, ShawȀȈȆȂ,
and YeagerȀȈȈȆ). Ļis possibility hinges on the nature of the particular
monetary system.
Allais’s objection to nontaxed and noninflationary money is best inter-
preted, then, not as denying money’s financial-intermediary function but
as emphasizing that certain types of money perform that function imper-
fectly. Allais himself recognized that creating new money in ways that
tended to favor real investment, as through bank-credit expansion for that
purpose, could more or less neutralize the anti-capital-formation effect
that he worried about (ȀȈȃȆ, vol.ŕ: chap.Ţŕŕŕ, esp. pp.ȂȂȇ–Ȃȃǿ). Ļe very
issue of new money to meet a strengthened demand for money (instead
of letting price deflation increase the real value of the existing nominal
supply) could help convey to real investors the command over resources
released by savers acquiring the new money.
Ļis effect is a mild version of “forced saving” (cf. HanssonȀȈȈȁ),
although the term may be inexact in the mild and noninflationary case
considered here. In the prototypical case, new money loaned to investors
enables them to bid resources away from other people, who are forced
to consume less as inflation shrinks the purchasing powers of their
incomes, money holdings, and other nominal claims. In the present
mild case, new money appears merely in amounts that meet a growing
demand at the existing price level (for example, a growing demand for
real money balances associated with economic growth). Ļe manner in
which additional real and nominal money comes into circulation more
or less corrects for the consumption-promoting divergence between the
private and social views of money as wealth. An increased willingness
to wait, even by way of holding money, does then promote capital con-
struction.
Ļis result can arise from the mereexistenceand not just theexpansion
of money that is matched on the asset sides of its issuers’ balance sheets
by loans to real investors. As new investment-related loans replace old
ones being paid off, even with their total amount unchanged, the money
matching them continues serving as a vehicle of intermediation. Ļe con-
tinuing opportunity to hold savings in that form promotes rather than
deters waiting devoted to maintenance or replacement of capital goods.
Like other instruments of intermediation, money helps hold down the
spread between the effective interest rates (nominal rates plus and minus
pecuniary and nonpecuniary advantages and costs) that lenders receive
and that borrowers pay.