Frank Albert Fetter, Are Savings Income?—Discussion

Frank Albert Fetter’s contribution to the American Economic Association’s 1908 meeting, republished in 1977, challenges Irving Fisher’s definition of income through a distinction between monetary acquisition and psychic enjoyment. Its scope is a focused conference discussion: Fetter examines Fisher’s terminology, interprets the diagram supporting his argument, and tests the resulting definition against ordinary business transactions. His central contention is that an increment in capital value can constitute money income when it accrues, independently of whether its owner subsequently saves it or spends it on consumption. Treating enjoyment as the only income confuses the ultimate purpose of wealth with the monetary gains through which that purpose may eventually be realized.

Fetter begins by refusing to regard terminology as an inconsequential preliminary:

We are discussing a question of terminology but not a question “merely” of terminology.

The practical stakes emerge immediately. Fisher’s concept leads him to oppose taxing the unearned increment on land held for speculation, precisely where Fetter sees contemporary theory and fiscal practice moving toward taxation. Fetter does not develop a separate theory of tax justice here; the example establishes that definitions can govern substantive policy judgments. He also places Fisher’s position among economic paradoxes whose apparent sophistication depends on misleading verbal distinctions. Because Fisher acknowledges departing from the usage of economists, business people, and accountants, Fetter assigns him the burden of proving that the departure clarifies rather than distorts the problem.

The next move is to reformulate the question. Asking whether “savings” are income prematurely introduces the subsequent disposal of a gain. The relevant inquiry concerns whether an increase in capital value during a specified period constitutes money income. Saving and spending are later alternatives, not criteria for deciding whether income has already accrued.

Whether or not that increment of capital, when it is at the disposal of the owner, will be saved or spent is a later question and not involved in our present inquiry.

This separation of accrual from disposition organizes the whole discussion. Fetter defends business usage, in which income means an increase in business power expressed in money value. Fisher, by contrast, concentrates on psychic income, the gratification ultimately obtained through consumption. Fetter accepts that capital can represent the present worth of future psychic incomes. What he rejects is the inference that acquiring such capital cannot therefore be money income. A valuation grounded in future enjoyment does not erase a present monetary increment: the conclusion moves illegitimately between two meanings of income.

Fetter’s reading of Fisher’s diagram makes that conceptual substitution visible. Its detached income streams represent value converted into enjoyment, when capital is consumed and yields a realized psychic result. From the monetary standpoint, however, this is expenditure:

At that moment the line does not represent a monetary income, but a monetary outgo.

The same event can therefore be psychic income and monetary outgo without contradiction. Fisher looks toward the endpoint of valuation; business calculation measures the money value accruing within the accounting period. Fetter’s criticism is not that enjoyment is irrelevant, but that its analytical role cannot supply an exclusive definition for transactions measured in money.

The discussion then turns to accumulation and discounting. Recognizing an increment as income records what has accrued up to the present moment. If retained, that income becomes part of capital and contributes to subsequent increments. Fetter argues that capital sums at different dates can be actuarially equivalent when viewed from the present; similarly, a present money income can be equivalent to the larger future income generated by saving it. Such equivalence does not prevent the earlier increment from being income when it occurs. Nor does transferring a receipt to another capital account eliminate its contribution to future income. A new bookkeeping entry changes its recorded location, not the economic process of accumulation. On Fetter’s reading, Fisher’s detached streams can be treated as depicted only if they are consumed; retained receipts would instead extend the accumulation curve upward and onward.

Fetter condenses the disagreement into the contrast between income detached from capital and income attached to the owner’s capital. Detachment fits monetary expenditure and psychic enjoyment; attachment fits monetary acquisition. Business practice recognizes income within the period in which it accrues or is enjoyed as usufruct. This defense of monetary accounting nevertheless has an explicit limit:

It must be recognized that the capitalistic estimate and expression of incomes is not an ultimate psychological analysis of the problem of value.

The qualification matters: Fetter claims neither that accounting exhausts value theory nor that psychic income is unreal. Monetary estimation is a logically appropriate and practically indispensable perspective whose validity does not depend on being the final psychological explanation.

The closing questions test Fisher’s definition against gifts, legacies, wages, mortgage interest, and farm rent. Must these receipts cease to count as income merely because they have not yet become enjoyment? For Fetter, that consequence exposes the cost of using “income” ambiguously for both monetary gain and psychic satisfaction. The discussion’s enduring conceptual contribution is its insistence on distinguishing accrual, retention, expenditure, and enjoyment. Savings need not lose their character as income because they remain invested; they can be income when acquired and capital supporting further income afterward.