April 26, 2011
April 14, 2011
April 13, 2011
Bastiat on Credit
Claude Frederic Bastiat wrote on the nature of credit 150 years before this last credit crisis. It is an amazingly poignant description of the characteristics of how credit is given, and the fallacies the school of easy credit foster in the economy.
"...What advantage is there in institutions of credit? It is, that they facilitate, between borrowers, and lenders, the means of finding and treating with each other; but it is not in their power to cause an instantaneous increase of the things to be borrowed and lent. And yet they ought to be able to do so, if the aim of the reformers is to be attained, since they aspire to nothing less than to place plows, houses, tools, and provisions in the hands of all those who desire them.
And how to they intend to effect this?
By making the State security for the loan.
Let us try and fathom the subject, for it contains something which is seen, and also something which is not seen. We must endeavor to look at both.
We will suppose that there is but one plow in the world, and that two farmers apply for it.
Peter is the possessor of the only plow which is to be had in France; John and James wish to borrow it. John, by his honesty, his property, and good reputation, offers security. He inspired confidence; he has credit. James inspires little or no confidence. It naturally happens that Peter lends his plow to John.
But now, according to the Socialist plan, the State interferes, and says to Peter, "Lend your plow to James, I will be security to its return, and this security will be better than that of John, for he has no one to be responsible for him but himself; and I, although it is true that I have nothing, dispose of the fortune of the taxpayers, and it is with their money that, in case of need, I shall pay you the principal and interest." Consequently, Peter lends his pow to James: this is what is seen.
And the Socialists rub their hands, and say, "See how well our plan has answered. Thanks to the intervention of the State, poor James has a plow. He will no longer be obliged to dig the ground; he is on the road to make a fortune. It is a good thing for him, and an advantage to the nation as a whole."
Indeed, it is no such thing; it is no advantage to the nation, for there is something behind which is not seen.
It is not seen, that the plow is in the hands of James, only because it is not in those of John.
It is not seen, that is James farms instead of diffing, John will be reduced to the necessity of diffing instead of farming.
That, consequently, what was considered an increase of loan, is nothing but a displacement of loan. Besides, it is not seen that this displacement implies two acts of deep injustice.
It is an injustice to John, who, after having deserved and obtained credit by his honesty and activity, sees himself robbed of it.
It is an injustice to the taxpayers, who are made to pay a debt which is no concern of theirs.
Will any one say, that Government offers the same facilities to John as it does to James? But as there is only one plow to be had, two cannot be lent. The argument always maintains that, thanks to the intervention of the State, more will be borrowed than there are things to be lent; for the plow represets here the bulk of available capital.
It is true, I have reduced the operation to the most simple expression of it, but if you submit the most complicated Government institutions of credit to the same test, you will be convinced that they can have but one result; vis., to displace credit, not to augment it. In cone country, and in a given time, there is only a certain amount of capital available, and all is employed. In guaranteeing the non-payers, the State may, indeed, increase the number of borrowers, and thus raise the rate of interest (always to the prejudice of the taxpayer), but it has not power to increase the number of lenders, and the importante of the totla of the loands.
There is one conclusion, however, which I would not for the world be suspected of drawing. I say, that the law ought not to favor, artificially, the power of borrowing, but I do not say that it ought not to restrain them artificially. If, in our system of mortgage, or in any other, there be obstacles to the diffusion of the application of credit, let them be got rid of; nothing can be better or more just that this. But this is all that is consistent with liberty, and it is all that any who are worthy of the name of reformers will ask."
"...What advantage is there in institutions of credit? It is, that they facilitate, between borrowers, and lenders, the means of finding and treating with each other; but it is not in their power to cause an instantaneous increase of the things to be borrowed and lent. And yet they ought to be able to do so, if the aim of the reformers is to be attained, since they aspire to nothing less than to place plows, houses, tools, and provisions in the hands of all those who desire them.
And how to they intend to effect this?
By making the State security for the loan.
Let us try and fathom the subject, for it contains something which is seen, and also something which is not seen. We must endeavor to look at both.
We will suppose that there is but one plow in the world, and that two farmers apply for it.
Peter is the possessor of the only plow which is to be had in France; John and James wish to borrow it. John, by his honesty, his property, and good reputation, offers security. He inspired confidence; he has credit. James inspires little or no confidence. It naturally happens that Peter lends his plow to John.
But now, according to the Socialist plan, the State interferes, and says to Peter, "Lend your plow to James, I will be security to its return, and this security will be better than that of John, for he has no one to be responsible for him but himself; and I, although it is true that I have nothing, dispose of the fortune of the taxpayers, and it is with their money that, in case of need, I shall pay you the principal and interest." Consequently, Peter lends his pow to James: this is what is seen.
And the Socialists rub their hands, and say, "See how well our plan has answered. Thanks to the intervention of the State, poor James has a plow. He will no longer be obliged to dig the ground; he is on the road to make a fortune. It is a good thing for him, and an advantage to the nation as a whole."
Indeed, it is no such thing; it is no advantage to the nation, for there is something behind which is not seen.
It is not seen, that the plow is in the hands of James, only because it is not in those of John.
It is not seen, that is James farms instead of diffing, John will be reduced to the necessity of diffing instead of farming.
That, consequently, what was considered an increase of loan, is nothing but a displacement of loan. Besides, it is not seen that this displacement implies two acts of deep injustice.
It is an injustice to John, who, after having deserved and obtained credit by his honesty and activity, sees himself robbed of it.
It is an injustice to the taxpayers, who are made to pay a debt which is no concern of theirs.
Will any one say, that Government offers the same facilities to John as it does to James? But as there is only one plow to be had, two cannot be lent. The argument always maintains that, thanks to the intervention of the State, more will be borrowed than there are things to be lent; for the plow represets here the bulk of available capital.
It is true, I have reduced the operation to the most simple expression of it, but if you submit the most complicated Government institutions of credit to the same test, you will be convinced that they can have but one result; vis., to displace credit, not to augment it. In cone country, and in a given time, there is only a certain amount of capital available, and all is employed. In guaranteeing the non-payers, the State may, indeed, increase the number of borrowers, and thus raise the rate of interest (always to the prejudice of the taxpayer), but it has not power to increase the number of lenders, and the importante of the totla of the loands.
There is one conclusion, however, which I would not for the world be suspected of drawing. I say, that the law ought not to favor, artificially, the power of borrowing, but I do not say that it ought not to restrain them artificially. If, in our system of mortgage, or in any other, there be obstacles to the diffusion of the application of credit, let them be got rid of; nothing can be better or more just that this. But this is all that is consistent with liberty, and it is all that any who are worthy of the name of reformers will ask."
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