The second missed opportunity was the adoption of the Euro by the European Community. It should have been an occasion for initiating a reform of the international monetary system. Unfortunately, European politicians were motivated by greed more than by a desire to pull the world out of the morass. They created a monetary system which appears to be a carbon copy of the defunct dollar system, trying to capture part of the 100 percent seigniorage the Americans collect as a tribute from the rest of the world on global monetary reserves.
I build on the monetary theories of Ludwig von Mises. However, I wish to point out to my audience that where I find myself in disagreement with him, I will be bound neither by false admiration nor by false devotion, but will state the truth as I see it. I am convinced that Mises would not want me to act in any other way. I have already touched upon my disagreement with Mises on the question of the Quantity Theory of Money. I shall mention two others later in this Lecture.
Uses and Abuses of Credit
This long introduction to my topic on hand was necessary to set the stage. According to an old saying, a text-book on pathology makes you feel sick: in a healthy world you are bombarded with pictures of worst-case diseases. I may add that a text-book on credit will make you even sicker. In the real world as it exists today, there are only pathological varieties of money and credit to which we have all been thoroughly conditioned. In a sick world you are bombarded with pictures of healthy and wholesome varieties of money and credit. The experience will make you sick with jaundice. To lessen the shock you must be debriefed.
Credit is one of the great creative forces of civilization and one of the supporting pillars of human welfare. Next to knowledge and capital, credit is the paramount engine of progress. It can hardly be doubted that most of the prodigious amenities and inventions, technological and therapeutic advances available to modern society owe their origins to credit. To see this we have only to remind ourselves of the role of credit in capital accumulation and in capitalizing income. While capital accumulation would still be possible in the absence of credit, the amounts involved would be reduced to a pittance, subject to the physical limitations of their primitive form: hoarding. Not only would quantity be limited by physical factors, but also the reward would be far removed from effort, giving rise to psychological forces that would militate against saving. One of the great merits of credit is in the manner it works upon the time-element in the means-ends chain, shortening the effort/reward nexus, prompting the individual to work and save harder.
Credit abuse is one of the most difficult problems economics is called upon to study. Exactly the same factors that make credit a great creative force and an engine of humanprogress will, when abused, render it a most dangerous and obreptitious agent of destruction. With credit, just as with any sharp instrument, the more beneficial the uses, the more devastating are the abuses. Yet precisely because of the way credit operates on the time element in the means-ends chain of human action, abuses obscure the causality nexus and corrupt the feedback mechanism. Consequently, abuses persist and penalties are deferred. While deferred, they are certainly not forgiven. When the credit system can take no more abuse, cumulative penalties are meted out all at once. If it were not for compounding, penalties would be lighter and immediate adjustment would avert further punishment. There would be self-correction. But as the feed-back mechanism has been corrupted, a veritable disaster in the form of credit collapse is periodically visited upon society. There is also a tendency to confuse the issue: a man-made disaster such as inflation (more appropriately called deliberate currency depreciation) is described as a natural disaster that mortal man can hardly control, still less eliminate.