-->Cantillon, Raguet, Hawtry & Persons:

We today face a torrent of disinformation, propaganda, imaginative"analysis" and a slew of wishful thinking when it comes to the true state of our financial and economic systems. At this manic stage of the Credit Bubble, we should expect nothing less. And I guess it is of no coincidence that we have a full-fledged monetary quack about to take the helm at the Federal Reserve. But, most fortunately, economic history offers us a wealth of pertinent insight to help keep us"grounded." I hope readers enjoy tidbits of wisdom from John Law's contemporary and profiteer from the collapse of Law's Bubble, the Irishman Richard Cantillon (1697-1734); a brilliant American merchant and statesman Condy Raguet (1784-1842); the English statesman, monetary economist and Keynes' contemporary Ralph G. Hawtrey (1879-1975), and little known but clearly exceptional American economist Charles E. Persons. I wish everyone a Merry Christmas and Happy Holidays!

"The proportion of the dearness which the increased quantity of money brings about in the State will depend on the turn which this money will impart to consumption and circulation. Through whatever hands the money which is introduced may pass it will naturally increase the consumption, but this consumption will be more or less great according to circumstances. It will be directed more or less to certain kinds of products or merchandise according to the idea of those who acquire the money. Market prices will rise more for certain things than for others however abundant the money may be."

"If more money continues to be drawn from the mines all prices will owing to this abundance rise to such a point that not only will the landowners raise their rents considerably when the leases expire and resume their old style of living, increasing proportionably the wages of their servants, but the mechanics and workmen will raise the prices of their articles so high that there will be a considerable profit from buying them from the foreigner who makes them much more cheaply. This will naturally induce several people to import many manufactured articles made in foreign countries, where they will be found very cheap; this will gradually ruin the mechanics and manufacturers of the state who will not be able to maintain themselves there by working at such low prices owing to the dearness of living."

Richard Cantillon, excerpt from"Essai sur la nature du commerce en general," 1730-1734

"The suspension of specie payments by all the banks in the United States, south of New England, in the year 1814, and of all, with a very few trifling exceptions, in the year 1837, has strongly impressed the public mind with the belief that there is something defective in the present banking system of this country; and it is not, perhaps, venturing too much to assert that there are now elements at work, which will ultimately overthrow the whole fabric, unless those who have the power to remedy the evil, shall introduce the reforms which can alone render a repetition of such a calamity impossible.

It must be evident to every observant mind, that a dislike to hear the truth, when opposed to one's interests or prejudices, is the principal cause of a large portion of the mischievous errors which so generally prevail. Men of education and capacity, who are best qualified to investigate and understand the important principles which belong to the science of public economy, are too apt to view them as of no account, or to despise them when they come in conflict with their purses, or with their political promotion; and hence that knowledge, which is the most entitled to regard, because most intimately connected with the prosperity of a country, is of all other the most neglected. I assert it, and in so doing, I think I do not overestimate its value, that political economy is the most important of the sciences; and if its practical branches were introduced as a study into all our colleges and principal schools, it would do more towards exempting the country from erroneous and destructive legislation, than any other study to which the attention of our youth could be directed.

Of these practical branches, the science of banking is one, but it is one, to the attainment of a knowledge of which there is no 'royal road' any more than there is to any other species of learning. He who wishes to understand it, must study and reflect, and this not with the feelings of a partisan, but in the true spirit of philosophy, unbiased by self-interest, or by any other consideration than a pure love of the truth...

That the interests of a country are best to be promoted by a stable currency, precisely as they are by a fixed standard of weights and measures, will hardly be disputed; and if it can be shown, that a defective, or mismanaged banking system, produces exactly the same results upon the pursuits of industry and property of individuals, as would the decrees of a despot, who should alter, at his pleasure, without any previous notice, as often as he thought it expedient, the weight of the pound, or the length of the yardstick, it is to be hoped that there is not a patriot in the land, who would hesitate to assist in the entire eradication of such a monstrous evil. That such is the effect of our present system, as it has been of late conducted, must be obvious to all who have closely examined its operations, and hence the necessity, before it is too late, of an application of the appropriate remedy."

Condy Raguet, excerpt from"A Treatise on Currency and Banking," 1839

"The probability of a contrary variation, an expansion of credits and a depreciation of the unit of value, is, however, at all times much greater. And this movement is even more unlimited in scope. Self-interest prompts both the enterprising trader ever to borrow more, and the enterprising banker ever to lend more, for to each the increase in his credit operations means an increase in his business. Suppose some of the merchants, in the hope of extending their business, give increased orders to the manufactures. The manufactures forthwith borrow more than usual from their bankers. They will urge on the business of manufacture, will pay more to their employees and will receive greater profits in proportion to their output. They and their employees will have more to spend; the retailers will dispose of more goods, and will take over more from the merchants; the merchants will give yet further orders... The manufactures, finding their productive capacity constrained, will quote higher prices... The general rise in prices will involve a proportional increase of borrowing to finance a given output of goods, over and above the increase necessitated by the increase of output. This increase of borrowing, meaning an increase in the volume of credit, will further stimulate trade. Where will this process end? In the case of curtailment of credit the self-interest of the bankers and the distress of the merchants combined to restore the creation of credits, though not to its pre-existing level. But in the case of the expansion of credits there is no such corrective influence at work. An indefinite expansion of credit seems to be in the immediate interest of merchants and bankers alike.

The continuous and progressive rise of prices makes it profitable to hold goods in stocks, and the rate of interest which the merchant who holds such goods is prepared to pay is correspondingly high. The merchant and the banker share between them a larger rate of profit on a larger turnover. The credit created for the purposes of production becomes purchasing power in the hands of the people engaged in production; the greater the amount of credit created, the greater will be the amount of purchasing power and the better the market for the sale of all kinds of goods. The better the market the greater the demand for credit. Thus an increase in the supply of credit itself stimulates the demand for credit, just as a restriction in the supply of credit leads to a decline in the demand for credit. Either the expansion or the contraction of credit may therefore proceed absolutely without limit, and the corresponding fall or rise in the value of the monetary unit would therefore also proceed without limit. In each case all standards of value will be completely lost."

Ralph George Hawtrey, excerpt from"Currency and Credit," 1919

"The thesis of this paper is that the existing depression was due essentially to the great wave of credit expansion in the past decade. There is a lamentable lack of comprehensive and accurate data concerning this process of debt creation. But highly suggestive information may be assembled regarding the growth of bank loans and investments; the increase in mortgage indebtedness, urban and rural; the increasing volume of securities outstanding; and the expansion of installment credit... [I]n the six years after 1922, loans and investments held by banks had increased over $18 billon. This is over 45 per cent...

The great field of credit expansion in the last decade lies in the realm of urban real estate mortgages... We have undoubtedly expanded the credit structure, spending today and postponing the accounting until tomorrow. We have been guilty of the sin of inflation. And there will be no condoning the sin nor reduction of the penalty because the inflation is of credit rather than a monetary one...

Thus the area covered by credit sales enlarges and the volume of credit expansion increases. As in monetary inflation the immediate results seem favorable. Credit expansion results in business activity, in full employment, in optimistic outlook and in a flood of gratulatory literature proclaiming us wiser than our predecessors... But the evidence is consistent and cumulative. The past decade has witnessed a great volume of credit inflation. Our period of prosperity in part was based on nothing more substantial than debt expansion.

Several financial devices of recent invention have contributed to this process of debt inflation... The Federal and Joint Stock Land Banks refinanced a growing proportion...of rural land mortgages into long term paper. This gave the borrowers security... Of similar tendency but more obvious in its recent developments is the newly originated and rapidly introduced device of urban real estate bonds. As a method of credit inflation this plan could hardly have been bettered... The volume successfully sold rolled up with the speed of the proverbial snowball traveling down a steep hill. The fruits of such sales gave us building activity and contributed to the flush times of the decade...

The fundamental question regarding installment sales is of this sort. The method per se is unexceptional. Granting that sound credit principles are applied such sales are safe. But it is highly probably that a considerable volume of the sales recently made were based on credit ratings only justifiable on the theory that flush times were to continue indefinitely... It so happened that this new credit method coincided in the time of its introduction with the origination of new consumption goods of the widest popular appeal... This process of debt inflation went on apace... Temporarily we have spent, enjoyed and stimulated business activity. When the process of expanding credit ceases and we return to a normal basis of spending each year no more than we earn that year, there must ensue a painful adjustment period...

When the accounts are footed we shall have learned new lessons respecting the evils of credit inflation. This dear bought wisdom we may place beside our knowledge of the evils of monetary inflation purchased at an equally dear price. And we may venture a pious hope that the joint lessons will induce growth of the wisdom to foresee, caution to move less rapidly and more surely in the path of progress...

The essential point here is that during the period of introduction of these new financial devices and while the newly opened reservoirs of credit are filing, we have a temporary increase in the nation's purchasing power. A combination of circumstances has rendered this expansion of large dimensions in the decade just closed...

The check to expansion is sharp and is intensified by the excesses inevitably associated with periods of over-rapid expansion. Such a course of events is clearly proven by the evidence as to credit expansion in the period 1920 to 1929. The depression into which the nation fell in the latter year was undoubtedly due in part at least to these developments in our complicated economic structure. Manifestly these events are too recent and our records too incomplete to attempt to measure their relative importance as compared with other factors of great weight. But there can be no doubt that their influence was large."

Charles E. Persons, excerpt from"Credit Expansion, 1920 to 1929, and its Lessons," November 1930, The Quarterly Journal of Economics. ("The writer makes grateful acknowledgement of generous assistance given him in his research for information by Miss Aryness Joy and Mr. F.R. Garfield of the Federal Reserve Board staff.")


Doug Noland
The Credit Bubble Bulletin