corresponding increase in the buying power of other units. The effect of such changes in buying power presumably depends on the particular conditions under which they occur. The magnitude of their possible effect is suggested by the fact that between 1929 and 1933, the money supply was reduced by practically 7 billions of dollars through the contraction of bank loans and investments while between 1933 and 1937 it was expanded by 12 billion dollars primarily through the expansion of bank credit. Such extensive withdrawals or injections of buying power cannot fail to have an effect on the flow of money and on economic activity.

Money Balances Held by

Different Economic Groups

Whatever the magnitude of the money supply at any given time, all the money outstanding must be in the possession of individuals, enterprises, governments or other economic units in the form of money balances. 18 These balances are important to the structure of the American economy because they reflect the power of the holders to put money into circulation by reducing their money balances and to withdraw money from current circulation by expanding their money balances. This power to start and stop the flow of money by varying money balances can have much the same effect on money flows and on production as have changes in the total money supply.

From the point of view of money flows, the most significant money balances are those held (1) by government, especially the Federal Government, (2) by producing enterprises, (3) by financial institutions other than banks, and (4) by individuals.

Actual data on the money balances of different economic groups are surprisingly scarce, considering their importance to the economy. The Federal Government regularly publishes its holdings of currency and demand deposits but for other groups only the very crudest data are available on the total money balances. Estimates are, however, available for 1933 and 1935 covering that part of money balances that is held in the form of demand deposits. Since demand deposits constituted over 75 percent of the total money supply in both these years, the figures on deposit holdings give a rough indication of the distribution of total money holdings even though currency was presumably not distributed in exactly the same proportions as demand deposits.

18 The terms "possession" and "held by" are used in this chapter to refer to al forms of money even though bank deposits cannot be in the possession of their owner or held by them in the physical sense that coins or notes can be in their owners' possession or holding.

It should also be noted that the money outstanding performs two quite different functions. It not only enters into transactions, passing from hand to hand in exchange for goods, labor, or securities, but between transactions it acts as a store of value in the form of a money balance which represents to its possessor a liquid asset which can be exchanged at a moments notice for other things.

The balances estimated to have been held by each of the different economic groups on December 31, 1933 and 1935, are given in table III. Of the total demand deposits of 21.9 billion outstanding in December 1935 approximately 7.6 billion were held by business enterprises, 5.0 billion by financial institutions and enterprises, 4.1 billion by public bodies and less than 5.2 billion by individuals. Of the amount held by individuals, over 430 million was held in deposit accounts of over $100,000 presumably for the most part the holdings of persons with larger incomes, while a very considerable sum must have been held by persons with intermediate incomes. Only a relatively small part could have been held by the individuals or families with smaller incomes who constitute the main source of consumer expenditure. Probably less than 14 percent 19 and possibly less than 10 percent of the total of demand deposits was held by consumers with incomes under $5,000 who provided over 88 percent of consumer expenditure in 1935-36. In contrast, business enterprises, financial institutions and investors between them held the great bulk of deposit money. Just how currency was divided between these groups can only be surmised. It is probable that a very much larger proportion of currency outside of banks was held by consumers than the proportion of demand deposits held by them. But even if half of the currency were held by individuals or families with incomes under $5,000, their total money holdings, deposits, and currency combined would amount at the very most to a fifth of the total money supply outstanding.

TABLE III.-Estimated distribution of demand deposits
1933 and 1935

funds and likely to use their money balances only to a minor extent to purchase goods for consumption. Only a relatively small proportion of the total money supply was held by the individuals who provide the bulk of consumer expenditures. Nearly a fifth was held by public bodies capable of directing funds either into current consumption or capital formation. It is thus apparent that the bulk of consumers live on a more or less hand-to-mouth basis so far as their money holdings are concerned. As a group As a group their money holdings could not have been sufficient to finance much more than a month of consumer expenditure at the 1935-36 rate. A very great percentage change in the money holdings of this group could occur without a very large contribution to current buying power. This is important for the functioning of the American economy because it means that great increases in expenditure on the bulk of consumers could not arise directly out of the use of money balances already held by consumers. They could arise only if consumers received increased incomes or if they either borrowed or trenched on previous investments. On the other hand, the small increases in consumer expenditure such as might arise if consumers depleted their money balances might have very important stimulating effects on economic activity much greater than their absolute magnitude, just as a relatively small increase in money holdings involved in what has sometimes been called a buyers' strike could have a cumulative depressing influence.

The very large changes which can occur in the relative money balances held by different economic groups is suggested by the comparison of the demand deposits of different groups in 1933 and 1935 already given in table III. While the total demand deposits increased nearly 7 billion or 45 percent between these two dates, money holdings of financial companies more than doubled, while the holdings of individuals increased only onethird. Of the total increase in money holdings nearly two-fifths was absorbed into the balances of financial institutions, less than one-fifth into those of consumers, and a fifth each by business and government. The magnitude of these shifts emphasizes the need for more extensive and exact information on money balances. The significance of the shifts will be discussed in the next section in connection with the proportioning of money flow between current consumption and capital formation.

The Proportioning of Money Flows
Between Savings and Consumption

The expansion or contraction of the money supply and the building up or depleting of money balances are not the only characteristics of the system of money flows which are of significance to the economic structure. The direction of money flows as between current con

79418-39--7

sumption and capital formation is a factor of major significance. As money flows through economic channels, there are certain points at which it is directed in such a way as either to finance current consumption or to finance new plants, equipment, and additions to inventory. Sometimes the determination is simple and direct, as where a consumer spends his income on consumption goods or invests a part of it in the construction of a new house or when a corporation invests undistributed income directly in the construction of a new plant. Sometimes the determination of the money flow is a complex matter involving a combination of decisions at many points, as when a consumer saves part of his income and hands it over for investment to some financial institution which, in turn, passes the money savings on to some business enterprise that uses the funds either to expand its plant or to extend credit to consumers. Or the funds may be loaned to some government unit and the latter may determine whether they will be used for public works, for social expenditure on consumption, or in some other manner. However complex the process by which funds are directed into one or the other use, the direction is of significance to the structure of production because it conditions the volume of productive activity going respectively into the supply of goods currently consumed and into new plant, equipment, and inventory.

No attempt can here be made to disentangle all the different channels through which money flows in the process of financing production nor can all the different points be indicated at which discretion can be exercised to direct the flow into the financing of one or the other of the two basic types of productive activity. The most that can be done in this report is to indicate certain major points at which such discretion can be exercised and to suggest some of the ways in which that discretion is exercised.

The groups having discretion over money flows that are of major significance for the structure of the whole economy are (1) consumers in their disposal of consumer income, (2) financial institutions through the direction in which they lend or invest funds, (3) business enterprises through the acquisition and disposal of funds, and (4) governmental units, particularly the Federal Government, through their acquisition and disposal of funds.

Directing of Money Flows by Consumers

In chapter II, the expenditure of consumers on current consumption was examined in considerable detail as an indication of the structure of wants. But little attention was given to the factors which affect the magnitude of the total expenditure on consumption, or on the other ways of disposing of consumer income such as through

tend to increase the amount of saving, thereby reducing the total expenditure on consumption.

A very rough idea of the magnitude of the changes in savings likely to result from changes in income distribution can be obtained by making the extreme assumption that the total consumer income in 1935-36 was spent by families having the average income of that period and comparing the resulting disposal of income with the actual disposal in 1935-36. The comparison is made in table IV, using the $1,250 to $1,500 income group to represent the average.23 This table clearly indicates the tendency for a smaller proportion of consumer income to be saved and a larger proportion to be spent on current consumption as a given consumer income is more evenly distributed. However, with the extreme assumption of equal distribution compared with the actual 1935-36 distribution the absolute shift over from savings to current consumption would amount to less than 5 billion dollars. A shift of 10 percent of the 1935-36 income from consumers with more than average incomes to those with less than average incomes, or the reverse, would be likely to produce a shift of less than 1.6 billion in the total amount saved by consumers. Such a shift in income distribution would not directly alter the aggregate of consumer expenditure to a significant extent compared with the magnitude of the changes associated with depression. It might, however, have a very significant effect on the balance between saving and consumption which make for expansion or contraction of economic activity and of total consumer income.

Of very much greater importance are the variations in savings and expenditures due to variation in the total amount of consumer income. In table V the disposal of consumer income is indicated for four different sizes

of income on the assumption that the distribution of the income was in the same proportion as the actual distribution in 1935-36, that prices were the same as in that year, and that the income disposal of each income group followed the pattern of the corresponding group in 1935-36. This table indicates that, under the assumed conditions, both expenditure on consumption and current savings could be expected to increase as consumer income expands, but that the increase in the latter would be likely to be very much more rapid. An increase of consumer income from the 1935-36 level of 60 billion to 80 billion might be expected to bring an increase of something like 13 billions in expenditure on consumption and an increase of nearly 6 billion in consumer savings. Thus an increase in consumer income of 33 percent under the assumed conditions could be expected to result in an increase of only 25 percent in expenditures on consumption and an increase of nearly 100 percent in savings. The assumptions underlying these figures are to arbitrary to make them directly applicable to the actual disposal of income, but they do indicate the character and magnitude of the changes in the proportion of income saved and spent on current consumption.

The evidence they give is clearly supported by the behavior of consumer income and expenditure during the depression as they are reflected in the indexes of chart V already presented. According to these indexes, expenditures on consumption dropped proportionately less from 1929 to 1932 than did consumer income whereas in the recovery period the behavior was reversed. Presumably taxes, gifts and savings together must have dropped proportionately more than income between 1929 and 1932 and recovered more subsequently. While there is no basis for separating out savings from taxes and gifts they must have constituted a sufficiently large proportion of the combined group in 1929 to dominate its behavior so that the greater stability of expenditure on consumption during the depression compared with consumer income must reflect the greater sensitivity to depression of consumer savings.

TABLE V.-Effect of changes in level of consumer income on consumer expenditures

50, 214

55, 756

889

2,178 5,978

12, 404 {

Percent 84.7 1.5

Percent

60 70 80 50 60 70 80 bil- bil- bil- bil- bil- bil- bil- billion lion lion lion lion lion lion lion dol- dol- dol- dol- dol- dol- dol- dollars lars lars lars lars lars lars

lars

94. 1

14.0

3.7

1,099

10. 1

1.9

Expenditures on consumption..

59, 259

59, 259

100.0

100.0

Gifts and personal taxes.. Net consumer savings...

Total.....

Source: Based on data given in Consumer Expenditures in the United States, National Resources Committee, 1939.

1 Breakdown of gifts and taxes by income levels not available.

50,000 60,000 70,000 80,000 100.0 100.0 100.0 100.0

Source: Consumer Expenditures in the United States, pt. III, National Resources Committee, 1939.

The tendency for a different proportion of consumer income to be spent on consumption at different levels of consumer income has major significance for the structure of the American economy. When both economic activity and consumer income are declining, the tendency for a larger proportion of consumer income to be spent on consumption must act to some extent as a force minimizing further decline. This influence could be counteracted by other forces, but in itself seems likely to be a significant factor at very low levels of economic activity. Conversely the greatly increased savings at the higher levels of consumer income suggest the possibility of oversaving in relation to expenditure on consumption. This possibility is one which calls for extensive study, both of the probable savings at different levels of consumer income and the opportunities for the effective use of savings.

Directing of Money Flows

by Financial Institutions

To the extent that consumers invest their savings directly in new capital goods such as the construction of new homes or the development of privately owned enterprises, or to the extent that they loan their savings to others for expenditures on consumption, consumers determine the direction of the flow of funds into captial formation or current consumption. But to a significant extent current consumer savings are either held in the form of money or are handed over to financial institutions-banks, insurance companies, and similar institutions. In either case the financial institutions are placed in a position to determine the direction of flow, providing funds to finance current consumption as in the case of installment sales or consumer credit, to finance business enterprise, to finance government activity, or to finance individuals or other financial institutions purchasing securities. Investment funds directed into these different channels have quite different effects, those made available directly to consumers and to business enterprises going largely to finance consumption and capital formation respectively. To the extent that government is financed or to the extent that other security purchases or lenders are financed, the determination of whether the funds flow into consumption or capital formation channels is passed along. No attempt can be made here to disentangle these flows. Much data on various phases are available but they have never been put together into a comprehensive analysis. There is much need for tracing through the magnitude and characteristics of the different money flows involved in the investment of savings to discover their structural significance.

In addition to the handling and direction of investment funds, financial institutions are also in a position to dispose of income and depreciation funds arising from

their current operations. Because the problems arising from the disposal of such funds are alike for all corporations whether financial institutions or producing corporations, they will be taken up under the heading of business corporations.

Directing of Money Flows by Business Corporations

In the course of their operations many if not most corporations receive more money from the sale of their products than they expend for the raw material, labor, supplies and services necessary to their production. Part of this sum is customarily allocated to depreciation, part is paid to government in taxes and part may be used to pay interest charges. The remainder represents net income which is within the disposal of the corporation. It can either distribute this money to consumers as income subject to their disposal or it can save the money, investing it in securities, using it to finance new plants or inventories, extending credit on the basis of it or holding it as an addition to the corporation's money balances. In addition, corporations which have accumulated undistributed income in prior years can dissave by declaring dividends, paying out money in excess of that received as income and depleting their cash balances, reducing their investments or reducing their capital assets in the process. A corporation may thus be in a position to save out of its current income or dissave out of prior income with much the same effect as the saving or dissaving of consumers. This ability of corporations to save or dissave is of importance to the structure of the whole economy because it means that corporations can exercise some control over money flows which is independent of the direct processes of production. By saving part of their income, corporations add to the total of national money savings which must find an outlet through investment channels.24 By dissaving through distributing dividends in excess of their current income, corporations can make a net contribution to consumer income.25 The magnitude of corporate saving or dissaving is not directly dependent on productive activity and is therefore a more or less independent factor in the determination of money flows.

The discretion of a corporation over the disposal of income is paralleled by a second discretion of a similar nature, that over the disposal of funds allocated to depreciation. In carrying on productive activity, corporations make use of plant and equipment whose remaining useful life is steadily reduced through this use and through obsolescence with the passage of time. Many corporations also use up reserves of natural re

24 There is presumably a net contribution only if the total funds allocated to depreciation are also invested in new capital formation.

25 If corporate income is distributed as dividends presumably some of the resulting consumer income would be saved but not all as would be the case with undistributed corporate income.