p. 31 ” In a Second World War debate on monetary systems, Lord Addison, a Labour peer, remarked that he was not convinced that ‘to dig gold out of the ground in South Africa and to bury it, refined in a cellar in the United States, in fact adds to the wealth of the world’.”
p. 58 “Industrial workers also required credit. A house in town, however humble, required furniture – bed, table and chairs. Few could afford the expense upfront… Cowperthwaite & Sons, a New York furniture retailer, was one of the first to adopt the practice. The Singer sewing-machine company took up the idea with enthusiasm later in the century. The idea of instalment plans was far from new … John Law sold shares in the Mississippi Company in instalment form. But a system based on regular payments was suited to an industrial age where workers received regular income. Instalment selling greatly widened the potential market for a retailer’s goods, and the financing charges more than offset any bad debts. … when they did default, buyers had usually made several payments, usually ensuring loss was limited.”
p. 71 “The [gold] standard ‘worked’ in the sense of keeping prices stable. … outside times of war, long-term inflation did not exist in the British economy in the 18th and 19th centuries, although prices did fluctuate, usually in response to changes in the supply of food… In The Death of Inflation, Roger Boodle cites the cost of a Hackney carriage. In 1694, the same year the Bank of England was founded, the cost was set at one shilling a mile. Two centuries later, the rate was at the same level. In 1932, the average level of prices in Britain was slightly below what it had been in 1795, during the Napoleonic Wars. … Low inflation also meant low interest rates …. What the gold standard also helped to create was the first great era of globalisation. This was particularly true in Great Britain … Low yields on British government debts gilts caused the prosperous middle classes to buy bonds in Argentine railways in search of higher incomes (an early version of the ‘search for yield’ that would be seen in the current era).”
p. 74 “In a sense this was all a confidence trick. Britain’s gold reserves rarely exceeded £40 million, a figure that was only 3 per cent of the country’s total money supply … Had foreign creditors demanded the conversion of their claims into gold, Britain could not have met the bill… there were some hairy moments. When Baring Brothers, what was then called a merchant bank, came close to failure in 1890, the Bank of England had to borrow gold from France and Russia in the face of a run on its reserves… what kept the system going’ there was international cooperation between central banks.. Central bankers were generally of a similar class (the upper or creditor classes) … the Reichsbank in Germany borrowed money from Britain and France in 1898.. they did not compete for funds via interest rates; the level of rates in the big countries tended to move in tandem. … the gold standard was accompanied by general prosperity so countries were keen to see it last. Or, to qualify that statement, the leaders of those countries were keen to see it last … sound money has a price. Maintaining a sound currency often required a central banker to push up interest rates, or find some other way of restricting demand, when gold reserves were falling. The lack of democracy insulated politicians and central bankers from the anger of those thrown out of work in the resulting recessions.”
p. 145 “The great moderation was accompanied by an extraordinary boom in asset markets. Share prices had really suffered in the 1970s, under pressure from double digital inflation and falling output; the real value of US shares fell by 42% between 1972 and 1982… In 1979, the cover of Business Week proclaimed “The Death of Equities”. … shares offered a dividend yield of 6%, as high as it had been in the depths of the Great depression. The price-earnings ratio was in single digits. The market was like a Labrador dog after an hour in the car, bursting to run wild. Not only did profits boom but valuations soared: moving from a 6% dividend yield to a 3% means a doubling in price. By the middle of 1987, the Dow had risen almost threefold from the low….What followed was, in retrospect, the defining moment of the bubble era. On 19 October 1987, the Dow fell by almost 23% in one day (Black Monday)…. it seemed eerily reminiscent of the crash of 1929, the event popularly assumed to have ushered in the Great Depression. Central banks, led by Alan Greenspan … resolved to head off this calamity. They vowed to lend money to any bank or broker who had been caught out … and they cut interest rates in order to encourage spending, discourage saving, and make owning shares look more attractive than holding cash. Investors learned an important lesson … if asset markets fell far and fast enough, central banks would ride to the rescue. In a sense, the central banks had insured investors against enormous losses. This policy became known, in a nod to the technical intricacies of the options market, as the ‘Greenspan put’. In the long run, protecting investors served to encourage speculation. … US economic output was $3.5 trillion in 1984 and private sector credit was about the same amount. By 2007 output had grown to $14 trillion but credit had soared to 425 trillion. Not that households were worried, since their net work had risen from 412 trillion to 464 trillion. … Output had quadrupled, asset prices had quintupled and debt had risen sevenfold… the implicit message of higher asset prices is that future income streams will be strong.”
p. 152 “Borrowing money is an expression of confidence on the part of either the lender or the borrower (or both). Nothing is more likely to inspire confidence than economic growth, which tends to raise incomes, profits and prices both of goods and assets, making it easier for debtors to repay … the bull market in assets began in 1982. In the century prior to that date, US GDP growth had averaged 3.4% a year while debt had hovered in the 100-150% of GDP range. After 1982, GDP growth has slowed to 2.4% a year, while to debt-to-GDP ratio has soared to more than 300%.”
p. 160 “The prospect of regulatory arbitrage – companies migrating to countries where they would be treated more leniently – may also explain why regulators were unwilling to crack down on the banks, and why post-crisis reform programmes have been so mild. …. Paul Wolley, a former fund manager, has set up a centre to study what he calls ‘capital market dysfunctionality’ at the London School of Economics. He describes his former industry in harsh terms. ‘Why on earth should finance be the biggest and most highly-paid industry when it’s just a utility, like sewage or gas? It is like a cancer that is growing to infinite size until it takes over the entire body.”
p. 185 “Consumer credit has grown at an exponential rate since the Second world war. … consumer debt in mature countries (defined as Canada, France, Germany, Italy, Japan, South Korea, Spain, Switzerland, the US and UK) rose by $10.8 trillion or 66% between 2000 and 2008. That was the largest single component in the near 440 trillion increase in total debt over that same period. When JK Galbraith updated his book The Affluent Society in 1984, her noted that increased demand and increased consumer debt were inexorably tied together. He predicted that ways would be found to extend the process … eventually, however, Galbraith warned the process would have to come to an end. And what would happen then, he wondered, given than ‘an interruptions in the increase in debt means an actual reduction in demand for goods’.”
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