A Bubble That Broke the World: Quote List

The following is a list of quotes I found worth keeping, sharing, processing, writing about, or in general just enjoy. As is typical, I will attempt to write about these quotes. Either how they personally effected me, or just a couple interesting observations on it.

A Bubble That Broke The World – Garet Garrett

Ch1: Cosmology of the Bubble – Pg 1
Introductory Quote: “The Lord giveth increase, but man devised credit.”

Ch1: Cosmology of the Bubble – Pg 1
First, the idea that the panacea for debt is credit.

Ch1: Cosmology of the Bubble – Pg 2
Second, a social and political doctrine, now widely accepted, beginning with the premise that people are entitled to certain betterments of life.

Ch1: Cosmology of the Bubble – Pg 3
Third, the argument that prosperity is a product of credit, whereas from the beginning of economic thought it had been supposed that prosperity was from the increase and exchange of wealth, and credit was its product.

Ch1: Cosmology of the Bubble – Pg 20
With the American Government borrowing credit to lend at low rates of interest to people who will build ships, thereby to foster an American merchant marine, American credit is loaned in large sums to German shipping companies; they use it to build German ships in German shipyards, with German labor and German materials, to compete with American ships.

With American chemical science dimly in sight of its goal, which is to make this country independent of Germany’s synthetic chemistry, American credit is loaned to the German Dye Trust, whereby its offensive powers, in trade or in war, are strengthened.

If these are not cases in which we could not afford to lend American credit on any terms, still, where was the benefit to our own foreign trade? Lending very large sums of American credit to the Anglo-Chilean Nitrate Trust does neither increase the volume of American exports nor foreshorten the time in which we may hope by synthetic chemistry to free ourselves from dependence upon foreign sources of nitrogenous fertilizers and the essential chemical products of nitrate; and the same is to be said of loans of American credit to German and Italian corporations for the purpose of building nitrogen fixation plants. Lending forty million dollars of American credit to a foreign oil company, for drilling and exploration, can hardly be called an investment in our own foreign trade, nor a loan of one hundred and fifty million dollars of American credit to the Dutch East Indies to pay off its floating debt. It would be difficult to explain how lending large sums of American credit to the fabulous Swedish Match Trust, which in turn made loans to European governments in exchange for monopolistic trade concessions, benefited the sale of American goods in the foreign trade. Certainly a loan of American credit to a Latin-American republic to pay a debt it owed in Europe for armament had no beneficial trace in the American foreign trade. Or fancy any benefit to the American export trade from a loan of twenty millions to a German bank for the specific purpose, as stated by the bankers, “to finance German exporting corporations.”

Ch1: Cosmology of the Bubble – Pg 21
But of all the ways in which the lending of American credit in Europe did not increase the American export trade, the one most extraordinary was that of lending our debtors the credit with which to make payment to us on their debt. American loans to Germany enabled Germany to pay reparations to the Allies; reparations from Germany enabled the Allies to pay interest on their war debts at the United States Treasury, hardly touching their own pockets. We were paying ourselves. For a long time this simple construction was denied and concealed in the elaborate confusions of finance. The Senate Committee on Finance kept asking its banker witnesses to face it. One of the best answers was by Otto H. Kahn, who said:

“There is no doubt that if Germany had not been able to borrow money it would have been unable, long since, to pay reparations, and, therefore, to that extent, it is a generally correct statement to say that out of the money which Germany borrowed it did pay reparations.”

Ch1: Cosmology of the Bubble – Pg 22
Since John Law and his Mississippi Bubble, individuals have been continually appearing with the same scheme in new disguise. The principle is very simple. You have only to find a way to multiply your creditors by the cube and pay them by the square, out of their own money.

Ch1: Cosmology of the Bubble – Pg 22
The fatal weakness of the scheme is that you cannot stop. When new creditors fail to present themselves faster than the old creditors demand to be paid off, the bubble bursts. Then you go to jail, like Ponzi, or commit suicide, like Ivar Kreuger.

There is nothing new in the scheme. What is new is that for the first time the whole world tried it. The whole world cannot put itself in jail, nor can it escape the consequences by suicide.

When the delusion breaks, people all with one impulse hoard their money, banks all with one impulse hoard credit, and debt becomes debt again, as it always was. Credit is ruined. Suddenly there is not enough for everyday purposes. Yet only a little while before we had been saying and thinking there was a great surplus of American credit and the only thing we could do with it was to export it. How absurd it sounds in echo. It was absurd at the time.

Ch2: Anatomy of the Bubble – Pg 32-34
All of this may be seen, and will be easier to do than you would think. To see credit rising at its source, to see whose it is to begin with, to see how it moves from the spring to the stream and then anywhere, even to the maelstrom, and to see at the same time Sumner’s Forgotten Man, you have only to go to the nearest bank and sit there for half an hour in an attitude of attention. Any bank will do. The first one you come to.

Observe first the physical arrangements. There will be along the counter a series of little windows, each with a legend over it. Above one window it will be “Savings.” Over the next two or three it will be “Teller.” Then one, “Discounts and Collections.”  And at one side, where the counter ends, you will see behind a railing several desks with little metal plates on them, one saying “President,” another “Vice President,” and another “Cashier,” unless it is a very small bank, in which case the cashier will be behind one of the windows.

Then observe the people and what they come to do. Some go straight to the window marked “Savings.” These all bring money to leave with the bank at interest. One is a man in overalls. That is wage money to be saved. Another is a farmer’s wife, and that may be milk or butter money. Next the poultry man with some profit to be put aside. Then two or three housewives, evidently, such as regularly include in their budgets a sum to be saved. After these a foreman from the railroad and a garage mechanic, and so on. Each one puts money between the leaves of a little book and pushes it through the window; the man there counts it, writes the amount in the little book and pushes the book back to the depositor. That goes on all day. At the day’s end all the money received at this window is counted, bundled and tossed into the safe, and then written down in the big book of the bank as “Time Deposits.”
Those who go to the windows marked “Teller” are somewhat different. They represent local trade, commerce and industry. Their accounts are current, called checking accounts or credit balances. They bring both cash and checks to deposit; and besides making deposits they may tender their own checks to be cashed, often at the same time. For example, the man who owns the sash and blind factory brings nothing but checks to deposit; everybody owing him money has paid him by check. But he hires ten men and this is pay day. Therefore, needing cash to pay wages, he writes his own check for the amount of his pay roll and receives that sum in cash. But this money he takes away roll and receives that sum in cash. But this money he takes away presently comes back to the bank through other hands. The employees of the sash and blind factory spend it with the grocer and butcher and department-store keeper who immediately bring it to the bank and deposit it at the “Teller” windows where it came from. What the employees of the sash and blind factory do not spend they themselves bring back to the bank and leave at the window marked “Savings.” Such is the phenomenon called the circulation of money. The same dollar may go out of the bank and return again two or three times in one week. The speed with which a dollar performs its work and returns to the bank is called the velocity of money.

At the end of the day the men at the “Teller” windows count up in one column what they have received and in another what they have paid out, and the difference is written down in the bank’s books as an increase or decrease of “Demand Deposits.” The rule is that more will have been received than was paid out, so there is normally each day an increase of deposits. It is normal that all these people representing local business should bring to the “Teller” windows more than they take away, because their activities are severally productive, giving always some increase, more or less according to the state of the times.

Well, then, this daily increase of “Demand Deposits” from the “Teller” windows is tossed into the safe, along with those “Time Deposits” from the window marked “Savings.” Thus the bank accumulates deposits—that is to say, money. What does it do with the money? A bank pays interest; therefore, a bank must earn interest. It must earn more interest than it pays out, else it cannot make a profit for itself. So the bank must lend its deposits. To receive money on which it pays interest and to lend money on which it receives interest—that is a bank’s whole business

Ch2: Anatomy of the Bubble – Pg 34
Now, what proportion of its total deposits do you suppose a bank lends? How much would you think it was safe to lend? The half? Three quarters? All? The fact is—and even those who know it well and take it for granted are astonished in those moments when they stop to reflect on it—the fabulous fact is that a bank may lend ten times its deposits. That is to say, for each actual dollar of other people’s money it has received and locked up in its safe, it may lend or sell ten dollars of credit money.

Ch2: Anatomy of the Bubble – Pg 44
Now suppose a third man comes and borrows all of that money to build a toy in the meaning of a pyramid that has no economic value, or to make an unlucky speculation, or to buy something he is impatient to enjoy before he has produced anything of equivalent value and then afterward fails to produce the equivalent, so that it turns out that he is unable to pay interest or return the principal. We say in that case the money is lost. Really it is not. It still exists. But what the money represented is lost, and that was the amount of labor necessary to produce two cords of wood.

There is neither value nor power in money itself, only in what it represents. Every dollar of actual money should betoken that a dollar’s worth of wealth has been somewhere in some form produced; every dollar of credit multiplied upon that money by the banker should signify that somewhere in some form a dollar’s worth of wealth is in process of creation.

Ch5: Operating the Golden Goose – Pg 84
To make it clear, suppose you have at your bank two separate accounts. In one account you owe the bank a million dollars on a long-term promissory note which you have undertaken to pay off gradually with interest. The other account is current. You have there a credit, say, of fifty thousand dollars. That is the account in which you transact your daily business. Now suppose you go to your bank and say: “I cannot pay the interest on that million-dollar note. I am bankrupt if you make me pay.” Saying this, you put yourself in the hands of the bank. It can demand payment and sell you out, foreclose on your business, take all your property. But the bank does not want to do that. It says: “All right. These are hard times. Let the interest go for a year and let the note run.” You say: “But how about my current account in which I have fifty thousand dollars? What will you do with that?” The bank says: “Well, of course you have to go on doing business. We will treat that account as if you were solvent. Go on drawing your checks against it as before and keep your business going. All of this will work out in time.” Very good. It is a reasonable arrangement. But suppose the next day you walk into that bank and say: “I’m afraid of this institution. It’s too loose with its credit. I’m afraid my current account is not safe. I am closing it out. Here is my check for fifty thousand dollars and I want it in gold, please.”

Ch6: The Gold Invention – Pg 104
All of it has happened. It was not the gold standard that did it; it was breaking faith with the gold standard that did it, and the case would be the same if the standard were anything else.


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