Monday, December 26, 2011


From mine of the 22nd... from Wikipedia:

Within mainstream economics, levels and flows of public debt (government debt) are a cause of concern, while levels and flows of private debt (especially households and corporations) is not seen as being of central importance.

Okay. But there is "economic evolution". The economy changes all the time. Private debt has become a problem of central importance.

Consider that the Federal Reserve was not created until 1913. Fed policies have been developing since that time. And the U.S. was still on a gold standard until the 1930s. So the door was wide open for economic evolution in the decades after WWII.

As things stand today, there can be no doubt that private debt has become a problem of central importance. But perhaps there was a time when private-sector debt was never a problem. As I wrote in my series on the Free Banking era of 1836-1863:

money being tied to gold would have changed the nature of the problem. It would have changed the way the problem worked itself out.

"The early panics," Rothbard wrote, "seemed to be ten years apart: 1837, 1847, 1857..."

In those days, gold was money. Money was gold. Banks issued paper money that was exchangeable for gold. You'd come home from the market, or come home on payday, take the money out of your pockets, and put it on the kitchen table.

If it was mostly gold, that was obvious.

If it was mostly paper, that was obvious too.

When the money started to be mostly paper, people got concerned. They started taking their paper to the bank to get hard money for it. To get gold.

Zoom out and look at that, and you can see a "panic" develop.

In the 19th century there never got to be an extreme imbalance between money and debt like there is today, because it was easy to tell the difference between money and debt. If it was gold it was money. If it was paper it was somebody's debt. And panics flushed debt from the system frequently.

When money was gold it was easy to see the difference between money and debt. It is not so easy to see the difference anymore, because money is paper and debt is paper. Or today, both are "notations". Even harder to see.


In the Free Banking Era, there were frequent panics, too frequent to permit debt accumulation like the bizarre, inexplicable debt accumulation we have today. Those panics kept recurring every few years, flushing debt from the system. In the 19th century, frequent panics prevented debt from accumulating the way debt has been accumulating for us since World War Two.

So perhaps it is true that in the 19th century, private debt never became a problem. Or at least it was a self-correcting problem.

I'm quite certain it is true also that the great body of Western economic thought originated in that same 19th century. Oh, sure, there was Adam Smith a little early, and Maynard Keynes a little late. But in the years between those two men, the foundation of what we think of as "modern" economics developed.

Look at recent thought: It's mostly based on Say's law and Ricardian equivalence and on what Keynes called "classical" economics. It's mostly based on economic thought from a time when gold and recurring panics prevented debt from becoming a problem.


It's time to flush 19th century thinking from the system. It's time to accept the fact that private debt accumulates until it becomes a problem. People know it already. Debtors know it, and creditors know it too. The only people who don't seem to know it are our modern day 19th-century economists.

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