The Disastrous History of Money : Part 5 - Credit
"Prosperity was assisted, too, by ... stimulants to purchasing, each of which mortgaged the future but kept the factories roaring while it was being injected ... People were getting to consider it old-fashioned to limit their purchases to the amount of their cash balance; the thing to do was to 'exercise their credit' ... 15% of all retail sales were on an instalment basis ...It was fun while it lasted." - Only Yesterday, an informal history of the 1920's, F.L.Allen (published 1931).
These 'stimulants' of the 1920s were benign by comparison to our own.
Credit has now been promoted to the status of a fundamental human right. Consumers are liberated by their personal loans, credit cards, and re-mortgages on their probably overpriced homes. So important is credit to modernity that western governments even create new public banks to grant ever more of it to those excluded by the private banking sector's wicked prejudice against people who have little prospect of paying anything back.
But although current consumer indebtedness is bigger than it has ever previously been it is easily beaten. Corporate consumption of credit is far greater.
The numbers from the publications of the IMF and the Bank for International Settlements show the world bond market grew by 43 times from $800bn in 1970 to over $35,000bn in 2001. It now equates to $7,000 per living human. It is still growing rapidly, but even this colossus is of no consequence; because next to it is the world of derivatives.
Our cleverest brains have for twenty years been constructing arrangements which allow corporations to get things without paying for them. The BIS estimated the main financial derivatives markets at $1,100bn in 1986. Recently it went through $150,000bn and a further $98,800bn in Over The Counter (OTC) derivatives have to be added as well. So in 16 years or so the notional sum of derivatives outstanding grew by about 250 times, to about $50,000 per living human.
In the minds of the investment bankers who earn their fees from inventing these schemes every cent of the credit exposure is perfectly secure. But J.K.Galbraith - who wrote the definitive account of the events preceding the Great Depression of the 1930s - had this to say:-
"One of the paradoxes of speculation in securities is that the loans that underwrite it are among the safest of all investments. They are protected by stocks which under all ordinary circumstances are instantly saleable, and by a cash margin as well....A few firms made this decision: instead of trying to produce goods with its manifold headaches and inconveniences, they confined themselves to financing speculation...This was, possibly, the most profitable arbitrage operation of all time." The Great Crash - published in 1954
When the arbitrage unwound shortly afterwards R.L.Smitley, who could never happily resist the chance to poke fun at conventional wisdom, offered this :-
"The complexity of this era of credit liquidation is far too great for the mob mind to grasp. It is hardly possible for them to see the picture wherein about 700 billion dollars of physical and intangible wealth is attempting to be turned into about 5 billion dollars of money" Popular Financial Delusions - published in 1933
Never mind seven hundred billion dollars! Today seven thousand billion dollars has been borrowed by just one credit addict. Five years ago its financial plan projected a succession of substantial surpluses which would pay back an already serious debt. You can click here (www.publicdebt.treas.gov/opd/opdpenny.htm) to review its progress against that plan.
September 27, 2004
Paul Tustain - Editor - www.galmarley.com
editor@galmarley.com
Enjoy learning about the history of gold's role in money and international trade and make your own comparison to the world around you. Articles in the series include :-