Wednesday, May 9, 2012

The Original Cato on Public Credit

In early posts, I posted selections from Cato's Letters critical of the South Sea Company especially, and of government ministers who participated in the schemes that led to the South Sea Bubble. Lest readers conclude that Cato opposed capitalism, finance, and commerce, I plan to post several additional selections from Cato's Letters that influence the thought of America's founders.

Eighteenth-century economic analysis obviously is not as sophisticated as what can be accomplished today. In   letter no. 4, however, Cato offers some common sense observations about credit, the value of money, and consumer and investor confidence:

To set this matter in a due light, it is necessary to enquire what is meant by the publick credit of the nation.

First, credit may be said to run high, when the commodities of a nation find a ready vent, and are sold at a good price; and when dealers may be safely trusted with them, upon reasonable assurance of being paid.

Secondly, when lands and houses find ready purchasers; and when money is to be borrowed at low interest, in order to carry on trade and manufacture, at such rates, as may enable us to undersell our neighbours.

Thirdly, when people think it safe and advantageous to venture large stocks in trade and dealing, and do not lock up their money in chests, or hide it under-ground. And,

Fourthly, when notes, mortgages, and publick and private security will pass for money, or easily procure money, by selling for as much silver or gold as they are security for; which can never happen, but upon a presumption that the same money may be had for them again.

In all these cases, ’tis abundantly the interest of a nation, to promote credit and mutual confidence; and the only possible way effectually to do this, is to maintain publick honour and honesty; to provide ready remedies for private injustice.

And what subverts the public credit? In Cato's era-- and in our own-- it is often speculative bubbles.

"But national credit can never be supported by lending money without security, or drawing in other people to do so; by raising stocks and commodities by artifice and fraud, to unnatural and imaginary values; and consequently, delivering up helpless women and orphans, with the ignorant and unwary, but industrious subject, to be devoured by pick-pockets and stock-jobbers; a sort of vermin that are bred and nourished in the corruption of the state.

This is a method, which, instead of preserving publick credit, destroys all property; turns the stock and wealth of a nation out of its proper channels; and, instead of nourishing the body-politick, produces only ulcers, eruptions, and often epidemical plague-sores: It starves the poor, destroys manufactures, ruins our navigation, and raises insurrections, &c."

Just like the South Sea Bubble had a far reaching impact on the eighteenth-century British economy, so we witnesses how the bursting of the housing bubble created an economic tsunami that swept away economic activity throughout the economy.

I suspect, however, that our current leadership has learned as little from the experience as those leaders in Cato's generation.


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