The credit bubble and its consequences
[Note to the reader: In these times in which the whole world is mad with the disease of excess spending and debt, it behooves us to examine critically and dispassionately, our present plight through the eyes of an observer who lived in such times as these and who knew first hand the consequences that attend a debt bubble. To that end, we are presenting a series of installments examining Freeman Tilden's classic economic work, A World in Debt, which has as much application at the present time as did in his own more than 60 years ago. What follows is Part I of a four-part installment.]
Part I
In the grand panorama of history, no single theme is more common or looms more conspicuously than does the phenomenon of debt. Like a broad ubiquitous shadow, the phenomenon of debt covers every page in the annals of human affairs and has been responsible for the collapse of more civilizations than we care to enumerate.
"Nations easily recover from disaster such as war, famine, or plague," wrote Freedman Tilden in his 1935 classic, A World in Debt. "What nations seem unable to recover from," he contends, is prosperity "without first tasting the bitterness of a slump." He goes on to question this contention and comes to a rather surprising conclusion:
"This is in itself perplexing; for, were not some definite toxic factor at work, it should be just the other way. What is that factor? A little reflection will reveal that it must be debt. If the first visible effect of a panic or depression is the deflation of debt; then debt must have caused the panic or depression."
Tilden believes that credit operations tend to destroy wealth; that capital passes from strong hands into weaker ones; "from the man who showed he can create, by creating, to a man who merely says he can." Note his assertion that wealth tends to pass "from strong hands into weaker ones;" it contradicts the more common assertion that wealth passes from weaker hands into stronger ones, and this argument underlies his entire thesis on debt.
Tilden described debt using terms such as the "Institution of Debt" and the "Pathology of Debt." His original writing in 1935, later updated in 1980 shortly before his death, is as current now as it was then:
"The whole world is, at the moment of writing, bankrupt. There is a fiction of solvency being maintained. How much longer it can be maintained I do not guess, and nobody knows. The world has several times, perhaps many times, squandered itself into a position where a total deflation of debt was imperative and unavoidable. We may be entering one more such receivership of civilization. It is a curious fact that in all such periods, men and governments persist in behaving, as creditors, as though the world was operating for cash; and as debtors, as through an economy of pure credit sufficed for all purposes. When one such passionate belief encounters another, the result is never very happy."
In writing this critical appraisal of Tilden's work, we are not unmindful of his own confession in A World in Debt that "monstrous economic delusions have never once, in history, been removed by being exposed in printed form by thinkers upon the subject." Indeed, the present state of our debt-drunken world is such that anyone with a modicum of discernment can readily apprehend. Rather, we wish to highlight Tilden's timeless observations on this important subject. We would also point out, as Tilden himself did, that "monstrous delusions remove themselves from the scene by a slow process of proving themselves injurious to the dull comprehension of the mass, or by a smash-up followed by a reorganization."
Tilden points out that nowhere is the use of politically correct "imposter terms" used with greater facility than in the realm of debt. To begin with, the term "credit" itself is foremost an imposter term since it really is a disguised form of the world "debt." Tilden makes sure to impress this truism in the reader's mind by entitling his first chapter, "Credit is Debt." Since credit, or debt, is a national (and even a global) phenomenon, he brings to our attention the fact that "we are all in this together" when it comes to the problem of debt. Karl Marx himself understood this much, as he once wrote, "The only part of the so-called national wealth that actually enters into the collective possessions of modern peoples is?their national debt." Hence, as a necessary consequence, the modern doctrine that a nation becomes the richer the more deeply it is in debt. This is the basis on which Tilden begins his work, and he would have us in no wise ignorant by asserting up front, "The essence of credit is that a debt has been created. The essence of debt is that there has been a transfer of wealth with the promise of future repayment."
One of the extraordinary attributes of debt which makes it truly universal and devastating in scope, is its tendency to spread itself over the affairs of men in fungus-like fashion. Debt has, in the words of Tilden, an ability to lure men into extricating themselves into its rapacious tentacles with the siren song of ease and prosperity now in advance of actual wealth. Says Tilden: "The easier we make the possibility of debt, the more failures there will naturally be; consequently the greater depletion of economic wealth. Thus surplus is always tending to destroy itself. The urgency of capital to always be at work profitably overcomes its timidity and blinds it to risk." He continues:
"In modern times, when capital's craving for investment becomes increasingly imperious, the money tends to seek men," wrote Tilden, in what can easily be applied to today's bank credit orgy and easy consumer credit. "Borrowers (debtors?users of credit) gradually become employees of capital, being deliberately sought out as prospective workmen. In the flush false-prosperity of the later twenties, banks in the western United States, and perhaps elsewhere, suggested to farmers and others that they borrow money to extend operations, purchase land, stock and commodities. Every large city bank realizes the importance of soliciting business from "good" borrowers. A frequent, quick-turning, large-balance debtor is a source of great profit to a bank. He speaks of "employing capital": he does not realize that capital is really employing him. But, of, necessity, this hot-breathed desire on the part of capital to be "making money" results in colossal errors of judgment that strip society of just so much of its accumulation of wealth. It is natural for reports of successful ventures to be cried abroad, and just as natural for disappointed capital to nurse its wounds in the privacy of its closet. It is only in times of great stress that people fall into the habit of admitting their losses. It is normally true that men would rather confess a felony than admit they are the victims of a bad investment.
"One of the reasons, then, for the surprising poverty of mankind, is that so great a part of its surplus is being constantly frittered away in delusory and defeated projects. A single instance may serve. There is gold in the world to the present value of, say, twenty-nine or thirty billion dollars [in 1936]. But if the sum total of wealth that has been deducted from man's realized efforts, in order to acquire this gold, could be computed, it might be that gold would not be overpriced at a thousand dollars an ounce."
Continuing our quotation of Tilden at length: "A pathetic side of the manipulation of credit in modern times is that the owners of capital, especially the little capitalists, are swept into a pool of adventure, in which the actual lending of the capital is on a great scale and performed by central agencies alleged to be so expert in debt-trading that it is better to entrust all to them?It is supposed that the great professional leaders are vastly experienced, and possess almost magical discretion. The truth is that these pompous egotists throw money around, in prosperous times, with as much abandon as though it were confetti."
In writing in one of the first natural consequences to proceed from the inevitable implosion of a debt bubble, Tilden addresses the subject of hoarding money in time of panic: "Soon after the depression began in 1929, the President of the United States, Mr. Hoover, was found begging his people not to hoard money, for by doing so they were destroying, for every dollar so hoarded, many dollars of invaluable credit. Of course they were. What did the great manipulators of credit suppose would happen when they had piled obligation upon obligation in an inverted pyramid that rested upon the final right of some original creditor to claim the wealth he had lent to his debtor? Did they think the time would never come when, from panic brought on by a sense of the top-heaviness of the structure, the actual owners of the goods would suddenly say: "Pay me"?
Tilden leaves us with this sobering thought: "There is one cause, and only one cause, of all panics and depressions in the economic world. That cause is debt. Credit is debt. If you can imagine a commonwealth in which nobody owed anybody else, and where the commonwealth owed no exterior commonwealth, it would follow that, though there would be lean times and fat times?and although the individual would fare better under some conditions than others; yet if no credit had been extended, which is the same as saying no debt had been contracted, there would be nothing to cause a panic or bring a monetary or exchange depression. It is the fear of capital for its safety that precipitates a panic, and it is the attendant rush to cancel debt that brings about the ensuing depression."
Next week: Part II of our examination of the debt phenomenon and its consequences. Be sure to visit our new web site at www.tapetellsall.com
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