Purchasing Power Guarantees for Deferred Payments

Abstract

A MEASURE INTRODUCED in Finland in May 1955 appears to be one of the first steps taken by a banking system to introduce, in its pure form, a device that has long been advocated by theoretical economists. Most savings banks in Finland introduced at that time a new form of time deposit for their customers. In future, money could be deposited for one year, and at the end of the year the bank would undertake to credit the account with the amount that the cost of living index indicated was necessary to restore the account's original purchasing power.' The account would bear 434 per cent interest, 13/2 per cent below the prevailing rate on deposits without the purchasing power guarantee. Since this step was taken at a time when there was, in other countries, a rising practical interest in the device, it seems useful to re-examine closely the advantages claimed for such an arrangement and to study the practical problems and fears that have made such experiments rare. The theoretical support among economists for a purchasing power guarantee for deferred payments is most impressive. Marshall in 18862 strongly advocated the use of a standard unit of purchasing power in contracts for deferred payments, and reaffirmed this view in 1911.3 Jevons4 even earlier thought so much of the proposal that he suggested that it be made compulsory, after a short transition period, for "every money debt of, say, more than three months' standing [to] be varied according to the tabular standard"5 of purchasing power. Keynes6