The Disastrous History of Money : Part 5 - Credit

By: Paul Tustain | Sat, Sep 25, 2004
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Like cocaine, consumer credit comes in lines and is dangerously habit forming. It has been around a long time:-

"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 is now elevated to the status of a fundamental human right. It lifts up consumers with personal loans from the bank, credit cards through the mail, store-cards at the till, and on the back of any imagined increase in the value of overpriced homes. So important is credit to modernity that some western governments even create new banks to grant ever more of it to those unfortunates excluded by the prejudice of a wicked banking sector which reckons, not unreasonably, that it is daft to lend money to people who have no real prospect of paying anything back.

But although current consumer indebtedness is bigger than it has ever previously been it is still only the tip of the iceberg. Corporate consumption of credit is far worse.

The numbers from the publications of the IMF and the Bank for International Settlements show the world bond market, i.e. debt which has been issued in the form of traded bonds, grew from $800bn in 1970 to over $35,000bn in 2001. This is 43 times. 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 giant corporations to get things which they cannot pay for. 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, and still it marches on.

Not surprisingly in the minds of the investment bankers who earn fees from these derivatives every cent of the credit exposure is perfectly secure. But J.K.Galbraith - who wrote the definitive account of the events surrounding 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

Meanwhile his contemporary R.L.Smitley, who could never happily resist the chance to rubbish a 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

Seven hundred billion dollars? Try seven thousand billion dollars - the amount issued by just one of our modern credit addicts. Click here http://www.treasurydirect.gov/NP/BPDLogin?application=np to review its progress in paying it back.

Articles in the Disastrous History of Money series include :-

* Athens - Housing the Gods (on borrowed money) [500 - 300BC]
* The Carthaginian National State Lottery [450BC]
* Rome - Monetary Expansion & Republican Militarism [200BC]
* Chinese Credit Derivatives after Ghengiz Khan [1200AD]
* Why Sweden's Central Banker was Beheaded [1719AD]


 

Paul Tustain

Author: Paul Tustain

Paul Tustain
Founder & CEO
BullionVault

Paul Tustain is founder & CEO of BullionVault, the world's largest store of privately-owned investment gold bullion.

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