FROM A TREATISE ON MONEY TO THE GENERAL
THEORY: JOHN MAYNARD KEYNES’ DEPARTURE
FROM THE DOCTRINE OF FORCED SAVING
by Ho-Po Crystal Wong
CHOPE Working Paper No. 2013-14
August 2013
, From A Treatise on Money to the General Theory: John Maynard
Keynes’ Departure from the Doctrine of Forced Saving*
Ho-Po Crystal Wong
University of Washington
August 5, 2013
Abstract
I examine John Maynard Keynes’ struggle with the doctrine of the classical forced saving
during the period 1924-1936 from when he worked on A Treatise on Money to the
completion of his General Theory. The forced saving notion has been developed as a key
mechanism of how monetary expansion results in wealth redistribution and change in
production in the classical school. I primarily focus on the role of discussion and criticism in
the development of Keynes’ thought. I investigate what led John Maynard Keynes to
completely abolish ideas related to forced saving and place his emphasis on effective
demand in the General Theory and its process. I provide evidence suggesting that the
development of the General Theory is closely linked with the abolition of the forced saving
doctrine and argue that such notion is internally inconsistent with Fundamental Equations
and subsequent theory of effective demand in the explanation of the problem of
unemployment.
JEL Classification: B22, B31
Key Words: forced saving, hoarding, lacking, General Theory, Treatise on Money, quantity theory of
money, John Maynard Keynes, fundamental equations, production time lag
*
I am very grateful to Joe Chan who brought the variorum of drafts of Chapter 23 which did not exist in later
revisions of the Treatise on Money to my attention. I also thank him for his inspiration on the topic. I thank Simon
Bilo, Thomas Cate, Harald Hagemann, Kevin Hoover, Donald Moggridge, Gary Moon-cheung Shiu and participants
in the History of Economics Society conference 2012 for their very helpful comments.
Correspondence can be sent to: Ho-Po Crystal Wong, UW Economics, Savery Hall, Room 305, Seattle, WA98195,
USA (email: )
1
,I. Introduction
John Maynard Keynes described his own General Theory of Employment, Interest and Money as
“a long struggle of escape,… a struggle of escape from habitual modes of thought and
expression.…The difficulty lies, not in the new ideas, but in escaping from the old ones, which
ramify, for those brought up as most of us have been, into every corner of our minds” (JMK,VII,
xxiii). In this paper, I examine his struggle in the classical doctrines of forced saving, the quantity
theory of money and study how he “escaped” from such established notions to formulating a new
integrated framework of money and real variables. Although the historical aspects of the
development of Keynes’ thought undoubtedly play an important part in the formulation of
Keynes’ monetary theory, it is out of the scope for this paper. 1 Instead, this study primarily
focuses on the role of discussion and criticism in the development of Keynes’ thought. In
particular, I show how Keynes’ skepticism over the doctrine of forced saving led him to challenge
the arguments implicitly built upon the full employment assumption in the classical regime in the
explanation of credit cycles and question the importance of the time lag in production theory, both
of which had been heavily emphasized by his Cambridge colleague Dennis H. Robertson. I argue
that his new formulation in the General Theory is closely related to his debates with Dennis
Robertson over these doctrines and the criticisms of A Treatise on Money from Ralph G. Hawtrey
that shed light on the importance of expectation and demand in determining employment and
output. This analysis contributes to the existing literature on Keynes’ monetary thought by adding
to the understanding of the nature of the revisions of the Treatise related to the forced saving
doctrine and the weight he put in the discussion of different forms of capital and their relevance to
the formulation of his General Theory.
II. Forced Saving
1
See Clarke(1988) for a comprehensive historical account of the development of Keynes’ thinking.
2
, The doctrine of forced saving or similar terminologies used to describe the idea such as Jeremy
Bentham’s “forced frugality”, John Stuart Mill’s “forced accumulation” or “imposed lacking” as
termed by Dennis H. Robertson has appeared in various schools of economic thought from the
British classical school to the Austrian school. In general it refers to a mechanism through which
capital for the productive sector is created by increasing the money supply or banks’ expanding
credits, which would induce a redistribution of real resources in favor of the entrepreneurs and
thus enhance employment. This doctrine can be dated back to as early as Jeremy Bentham
([1816], 1839) who wrote on the effect of a rise in money supply and described it as an
“unprofitable income tax upon the income of fixed incomists” (Bentham [1816] 1839, 45). He
argued that increasing money supply would enhance national wealth but at the expense of
national comfort and justice. The mechanism, which he called “forced frugality”, is described as
follows:
If on the introduction of the additional money into the circulation,… if before it come into
any hands of that description, it have come into hands by which it has been employed in the
shape of capital, the suffering by the income tax is partly reduced and partly compensated.
It is reduced, by the mass of things vendible produced by means of it:…Here, as in the
above case of forced frugality, national wealth is increased at the expense of national
comfort and national justice. (Bentham [1816] 1839, 45)
III. Dennis H. Robertson and Forced Saving
In particular, Dennis H. Robertson (1933) conceptualized the relation between forced saving and
the course of industrial fluctuation by adopting a Marshallian “day” analysis approach and the
classical advanced wage fund theory. The influence of Robertson’s ideas on saving and hoarding
on Keynes’ work is remarkable. As Keynes put it in the preface of the Treatise: “Mr. D.H.
3
THEORY: JOHN MAYNARD KEYNES’ DEPARTURE
FROM THE DOCTRINE OF FORCED SAVING
by Ho-Po Crystal Wong
CHOPE Working Paper No. 2013-14
August 2013
, From A Treatise on Money to the General Theory: John Maynard
Keynes’ Departure from the Doctrine of Forced Saving*
Ho-Po Crystal Wong
University of Washington
August 5, 2013
Abstract
I examine John Maynard Keynes’ struggle with the doctrine of the classical forced saving
during the period 1924-1936 from when he worked on A Treatise on Money to the
completion of his General Theory. The forced saving notion has been developed as a key
mechanism of how monetary expansion results in wealth redistribution and change in
production in the classical school. I primarily focus on the role of discussion and criticism in
the development of Keynes’ thought. I investigate what led John Maynard Keynes to
completely abolish ideas related to forced saving and place his emphasis on effective
demand in the General Theory and its process. I provide evidence suggesting that the
development of the General Theory is closely linked with the abolition of the forced saving
doctrine and argue that such notion is internally inconsistent with Fundamental Equations
and subsequent theory of effective demand in the explanation of the problem of
unemployment.
JEL Classification: B22, B31
Key Words: forced saving, hoarding, lacking, General Theory, Treatise on Money, quantity theory of
money, John Maynard Keynes, fundamental equations, production time lag
*
I am very grateful to Joe Chan who brought the variorum of drafts of Chapter 23 which did not exist in later
revisions of the Treatise on Money to my attention. I also thank him for his inspiration on the topic. I thank Simon
Bilo, Thomas Cate, Harald Hagemann, Kevin Hoover, Donald Moggridge, Gary Moon-cheung Shiu and participants
in the History of Economics Society conference 2012 for their very helpful comments.
Correspondence can be sent to: Ho-Po Crystal Wong, UW Economics, Savery Hall, Room 305, Seattle, WA98195,
USA (email: )
1
,I. Introduction
John Maynard Keynes described his own General Theory of Employment, Interest and Money as
“a long struggle of escape,… a struggle of escape from habitual modes of thought and
expression.…The difficulty lies, not in the new ideas, but in escaping from the old ones, which
ramify, for those brought up as most of us have been, into every corner of our minds” (JMK,VII,
xxiii). In this paper, I examine his struggle in the classical doctrines of forced saving, the quantity
theory of money and study how he “escaped” from such established notions to formulating a new
integrated framework of money and real variables. Although the historical aspects of the
development of Keynes’ thought undoubtedly play an important part in the formulation of
Keynes’ monetary theory, it is out of the scope for this paper. 1 Instead, this study primarily
focuses on the role of discussion and criticism in the development of Keynes’ thought. In
particular, I show how Keynes’ skepticism over the doctrine of forced saving led him to challenge
the arguments implicitly built upon the full employment assumption in the classical regime in the
explanation of credit cycles and question the importance of the time lag in production theory, both
of which had been heavily emphasized by his Cambridge colleague Dennis H. Robertson. I argue
that his new formulation in the General Theory is closely related to his debates with Dennis
Robertson over these doctrines and the criticisms of A Treatise on Money from Ralph G. Hawtrey
that shed light on the importance of expectation and demand in determining employment and
output. This analysis contributes to the existing literature on Keynes’ monetary thought by adding
to the understanding of the nature of the revisions of the Treatise related to the forced saving
doctrine and the weight he put in the discussion of different forms of capital and their relevance to
the formulation of his General Theory.
II. Forced Saving
1
See Clarke(1988) for a comprehensive historical account of the development of Keynes’ thinking.
2
, The doctrine of forced saving or similar terminologies used to describe the idea such as Jeremy
Bentham’s “forced frugality”, John Stuart Mill’s “forced accumulation” or “imposed lacking” as
termed by Dennis H. Robertson has appeared in various schools of economic thought from the
British classical school to the Austrian school. In general it refers to a mechanism through which
capital for the productive sector is created by increasing the money supply or banks’ expanding
credits, which would induce a redistribution of real resources in favor of the entrepreneurs and
thus enhance employment. This doctrine can be dated back to as early as Jeremy Bentham
([1816], 1839) who wrote on the effect of a rise in money supply and described it as an
“unprofitable income tax upon the income of fixed incomists” (Bentham [1816] 1839, 45). He
argued that increasing money supply would enhance national wealth but at the expense of
national comfort and justice. The mechanism, which he called “forced frugality”, is described as
follows:
If on the introduction of the additional money into the circulation,… if before it come into
any hands of that description, it have come into hands by which it has been employed in the
shape of capital, the suffering by the income tax is partly reduced and partly compensated.
It is reduced, by the mass of things vendible produced by means of it:…Here, as in the
above case of forced frugality, national wealth is increased at the expense of national
comfort and national justice. (Bentham [1816] 1839, 45)
III. Dennis H. Robertson and Forced Saving
In particular, Dennis H. Robertson (1933) conceptualized the relation between forced saving and
the course of industrial fluctuation by adopting a Marshallian “day” analysis approach and the
classical advanced wage fund theory. The influence of Robertson’s ideas on saving and hoarding
on Keynes’ work is remarkable. As Keynes put it in the preface of the Treatise: “Mr. D.H.
3
