1. 

   5 out of 5

   Kamal – July 20, 2012:

   Well, 1st run is due to kickoff from the cluboorms tomorrow but with the way the weather is ..I’ve just spent an hour shoveling the road outside so the chances of the roads of East and Mid Lothian being clear enough to ride tomorrow could be slim. Some more snow is forecast and it’s gonna be chilly !

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1. 

   5 out of 5

   Jeffrey Tucker – August 28, 2012:

   I’m not going to be shy about saying what I think about Garet Garrett. He was one of the finest stylists in the English language. His prose is precise like a machine, tough like leather, hard like steel, adventurous like the frontier and so evocative you can nearly taste and smell it. It is an absolute delight to read.

   He was a writer for The Saturday Evening Post, and he knew his economics like few professional economists at the time. He had a novelist’s heart, but in this great book, he put it to work explaining the world around him. What cried out for an explanation was the Great Depression. He summarized the core problem as unchecked debt accumulation made possible by the Federal Reserve System of central banking.

   As Garrett writes:

   “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. Then, for a while, you are Nabob….

   “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.”

   That’s where the central bank came in. It guaranteed the debt. It kept hiding its costs in new places. It kept printing money through the banking system to keep the collapse at bay. It distorted the risk associated with lending. It removed the market penalties associated with overextensions of loans and debts. It created an illusion of productivity that was unsustainable. But when the market would try to correct, it enabled the illusion to perpetuate itself a bit longer.

   This process began in World War I and continued with the rebuilding effort in Europe. The United States was banking to the world. The correction didn’t play itself out as it might have in the past. The malinvestments continued, which Garrett explains by reference to the pyramids of Egypt: structures that provide temporary employment but do nothing productive for society after they are completed. The roar of the 1920s was fueled by credit and by a banking system that had lost its sense of limits.

   Garrett’s explanation of the Great Depression has an Austrian School character to it. You won’t find money-supply tables or chronicles of aggregates that rise and fall as you might find in a monetarist-style treatment. Instead, you find a qualitative focus: Are the investments taking place sound, rooted in economic reality, and backed by real savings and sacrifice, or are they sustained by illusion? This is the core of the Austrian business-cycle theory, with its emphasis on economic coordination and the signaling mechanism of the interest rate and price system.

   For this reason, economist Murray Rothbard was a champion of this book. It originally appeared in 1932 as a collection of articles that had appeared over the two previous years. The existence of the book alone gives lie to the claim that common people and professionals were completely clueless about what hit them in 1929 and, hence, vulnerable to the charlatan ravings of the New Deal regime. Some people knew, because Garet Garrett told them.

   Garet Garrett spoke the truth at a time when few others dared. He continued in the same way all throughout the New Deal, eventually getting himself in trouble with the government itself. FDR denounced him personally. When the war came and Garrett spoke out again, warning that nothing good came from the last war, that pretty much ended his career. He was suddenly a nonperson, and he remained that way until his death in 1954.

   It frightens me how a person’s whole literary legacy can be wiped out by politics in this way. Garrett was an enormously popular novelist in the 1920s. His four novels remain some of my favorites. They all had a huge impact on my life, and I read them again and again. His nonfiction is just as great. Every article and book deserves careful attention. Yet he died in total obscurity. Incredible.

   May this reprinting of this wonderful book help rehabilitate him. He explained the Great Depression, not 50 years late, but even as it was going on. He chronicled it in real time and put his work out there for anyone to critique. He was right when 10,000 pundits, economists, politicians, and hacks were completely wrong. He bears listening to again today, for he never failed to teach universal lessons as he wrote.

   There are whole passages in here that you will want to commit to memory. But if you only remember his listing of the three great delusions, that will be a good enough takeaway: 1) the idea that the panacea for debt is credit, 2) the political doctrine that people are entitled to certain betterments of life, and 3) that prosperity is a product of credit. What a summary of the delusions of our time!
2. 

   5 out of 5

   Jeffrey Tucker – May 4, 2013:

   Here is a book summary from Cameron Belt:

   A Bubble that Broke the World by, Garet Garrett – Summary

   Credit can be like a drug. If you have too much, it can become addictive, create dependency, and waste resources. In 1932, no one seemed to know this better than Garet Garrett. In this timeless work, Garrett explains the economic and political errors behind the international post-war credit bubble which led to world-wide depression.

   As Garrett explains, the bubble was brought on by three different ideas which shaped American economic and political policies: 1) the belief that credit is a cure-all for debt, 2) the idea that people are entitled to certain betterments of life, and 3) the theory that prosperity is a product of credit.

   Credit was seen as beneficial because without it, Europeans weren’t able to buy American exports. Credit was also seen as beneficial if it was used to fund production goods to compete with ours, because without some industry the debtors couldn’t pay us back (no one seemed to pay attention to the fact that tariffs defeated this purpose). For all economic problems, the answer de jour was more credit.

   Credit is the product of the accumulation of wealth beyond what one chooses to consume. Garrett defines it as the command of labor and materials. The goal in the use of credit, then, should be to produce more wealth, so credit can be continued. Somehow, this was forgotten. The adopted policy at this time was to create credit to create more wealth.

   This led to a reckless extension of over $15 Billion of American credit, both public and private, to foreign countries from 1917-1932. America brought the bubble upon itself.

   In 1917, Europe was in the midst of war and the Allies needed supplies. In order to do this, they needed American credit. After the U.S. declared war, Congress and the Treasury responded by selling Liberty Bonds to the American public and loaning the proceeds. Throughout the course of the war, the U.S. loaned over $7 Billion to the Allies, but the U.S. government’s lending didn’t stop there.

   After the armistice, the U.S. was lending to Germany and the Allies. Germany’s economy was wrecked, but they had to pay out reparations to the Allied nations. America supplied Germany credit so their post-war obligations could be met. The money was then used by the Allies to pay America back for their war debts. The U.S. government was paying itself through its credit to Germany.

   After giving out $10 Billion, the U.S. government credit gravy train came to a halt in 1920, the European nations turned to the American private sector for funding. The new Federal Reserve played a substantial role in allowing the issuances of credit.

   Wall Street started to add to the credit debacle by brokering sales of foreign government bonds to the American public. Eventually European private debt to America outweighed their debts to the government. Americans were looking for ways to invest their money, and foreign government bonds had high interest rates and were “guaranteed.” In addition, there was the added benefit of knowing that the money was going to help the Old World “get back on its feet.”

   Garrett makes the point that this notion of “surplus credit” Americans believed they had and needed to loan out was simply a failure of our productive imagination. To the unimaginative, it seemed as if all of the present needs of the economy were being met. However, this did not mean there weren’t other domestic investments, like low income housing in cities, which could have been funded instead. The cultural pressure to “think internationally,” as Garrett puts it, influenced the private investments to instead go abroad. We made Europe’s recovery our emotional concern.

   The decision to invest in a project generally depends on what the investment is going to create. With local investments, the projects are easy to see – restaurants, industrial plants, railroads – and the profitability can be easily judged. Foreign government bonds, on the other hand, offer no explanation as to what is being funded. All an investor receives is a promise to pay, not an explanation as to what the debtor will create in order to pay back the debt.

   The only responsible use of credit is to create something of lasting economic value. If nothing of economic value is created, then the debt cannot be paid back, and the labor and materials are lost forever. These wasteful projects provide temporary employment and stimulus of consumption, but produce nothing of economic value. Garrett calls these frivolous pursuits, pyramids. There is nothing valuable you can do with a pyramid.

   This is what the credit given to Europe was used for. They borrowed to fund public works, to postpone balancing their budgets, avoid increasing taxation, and to artificially prop up their inflated currencies. None of these uses produced wealth; they propped up an overextended system.

   By 1926, the Fed had loaned the largest sum during peace time up until this point and the U.S. had cancelled much of the foreign war debts. But the Europeans claimed the discounts weren’t enough (even though no country owed the U.S. more than 1.5% its national income per year). Many called for a complete forbearance on the debt (they couldn’t outright repudiate the debt for fear of it happening to them with their own debtors). In reality, no country had been actually burdened by the debt payments. For every payment they made, they borrowed an equal, if not greater, share from the American private sector.

   All economic statistics showed that the economies of the world were growing by 1929. But, as the world soon found out, credit’s ugly other face is debt. It seemed too good to be true, and as usual, it was.

   In 1931, America loaned over $1.25 Billion spaced over a 3 month time span. The bubble had burst. It started with the Hoover Plan. The plan placed a moratorium on war debt payments to the American government for a year, so Germany could suspend their reparation payments. America floated loan payments totaling $300 Million for that year. A few weeks later, we extended the moratorium to private debt payments as well (freezing over $4 Billion in private funds in Germany alone), which cost us another $600 Million. Then, the Bank of England suffered a run on its gold and we loaned another $350 Million to them. England turned around and demanded the dollars in gold. When we finally stopped loaning, Britain went off the gold standard. American holdings of pounds were almost instantly devalued by 25%. The English, however, could still cash in gold for the dollars we loaned them. All the debtor nations could, and they all did.

   Foreign governments began to sell their short-term American holdings (their stocks and bonds) and demand payment in gold. American banks had to do the same with their securities. Since their assets in Europe were frozen or grossly devalued, all they had left to remain solvent were their domestic investments. This contributed to the internal investment liquidation panic that was already crippling the nation.

   In the end, everyone wanted something more. The English wanted to ease the burden of all international indebtedness through forbearance. France threatened to cash in over $600 Million of their assets for gold (thereby easily bankrupting us) if we didn’t reduce their war debt interest rate. Germany simply continued to ask for more credit. By 1932, Germany wasn’t saved, which meant Europe wasn’t saved, which meant America simply walked straight into the trap it had set for itself.

   The health of an economy comes from what is produced, and when you produce nothing but pyramids, you’re doomed to leave multitudes of other satisfactions left unfulfilled, and labor left wasted, lost forever.

   .

   Takeaways

   Credit is the command of labor and materials.

   The other face of credit is always debt.

   The main function of gold within a money economy is to limit the amount of credit that can willingly be made.

   When labor is used, it is gone forever. The product of the labor is what endures. If it produces a pyramid, something of no discernable economic value, then it has been prevented from being used to produce something that is of value and that satisfies future wants.

   Economic bubbles are caused by the irresponsible use of labor and materials in ways that turn out to be unproductive. Expansion of credit is the easiest road towards this end result.

   The basis of credit is production and sacrifice. That is to say, credit is a product of producing a good or service of value, receiving monetary payment for the good or service, and choosing to not spend all of the money on present consumption goods.

   Money is a vehicle to facilitate trade, and credit is a transfer of a present claim to command labor and materials from one party to another.

   The only viable amount of credit is that amount which is backed up by valuable economic goods and services. The process of all credit misallocation begins with the multiplication of credit by the banker.

   Through 1917-1932, the United States loaned over $15 Billion of private and public funds to Europe in order for European countries to save their own currencies, fund public works, withdraw gold from American banks, avoid taxation of their own citizens, balance their budgets, and to make payments on their loans from the U.S.

   Important Quotes

   “The beginning of all modern credit phenomena is this act of multiplication, performed by the banker.”

   “That debt need never be paid, that it may be infinitely postponed, that a creditor nation may pay itself by progressively increasing the debts of its debtors — such was the logic of this credit delusion.”

   “In the nature of economic consequences strange to say, the motive does not matter. A pyramid is a pyramid still.”

   “Money is not things. It is merely the token of things. Destroy the token and there are the things still, physically untouched by a financial crisis.”

   “While American banks had been putting deposits in European banks, especially German banks, because the rate of interest was high, Eurpoean banks at the same time had been putting deposits in American banks for an opposite reason. They wanted safety.”

   “But in the view of the American Treasury at the time almost anything tending to promote the morale and welfare of the Allies, even the welfare of their industry and commerce, were considered germane.”

   “Yet you will be almost persuaded that tariff barriers as such were the ruin of foreign trade, not credit inflation, not the absurdity of attempting to by credit to create a total of international exports greater than the sum of international imports, so that every country should have a favorable balance out of which to pay its debts, but only this stupid way of people all wanting to sell without buying.”

   “The overbuilding of industry beyond any probable demand for the product represents devoured credit”

   “It should be borne in the mind that the investor is the man who has done without something.”

   “We had only ourselves to blame. One-way grace; no means of self-protection reserved. We were caught by our gold heel in a trap we had built for ourselves. We made it and walked straight in.”

   “But of all the ways in which the lending of american credit in Europe did not increase 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.”

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