It was quiet. For the week, the Dow and S&P500 were about unchanged. The Transports jumped 3% to a new record high, increasing y-t-d gains to 12%. The Utilities declined 1.4%. The Morgan Stanley Cyclical index added 1%, while the Morgan Stanley Consumer index was unchanged. The broader market was stronger than the big cap indices. The small cap Russell 2000 added 0.5%, and the S&P400 Mid-cap index rose 1% (up 12.8% y-t-d). Technology stocks lagged somewhat. For the week, the NASDAQ100 and Morgan Stanley High Tech indices both dipped about 0.3%. The Street.com Internet Index added 0.2%, while the Semiconductors dipped 0.7%. The NASDAQ Telecommunications index was unchanged. The Biotechs jumped 2.4%, increasing 2005 gains to 24%. The Broker/Dealers added 1%, with y-t-d gains rising to 30%. The Banks added 0.2%. With bullion about unchanged at $502.80, the HUI gold index jumped 4%.

Interest rate markets easily absorbed some strong data. For the week, two-year Treasury yields added 0.5 basis points to 4.355%. Five-year government yields declined 3.5 basis points to 4.315%, with yields inverting versus the two-year. Bellwether 10-year yields dropped 7 basis points for the week to 4.37%. Long-bond yields fell 10 basis points to 4.55%. The spread between 2 and 10-year government yields dwindled to 1.5bps. Benchmark Fannie Mae MBS yields declined 2 basis points to 5.75%, this week underperforming Treasuries. The spread (to 10-year Treasuries) on Fannie's 4 5/8% 2014 note was about unchanged at 38, and the spread on Freddie's 5% 2014 note widened slightly to 39. The 10-year dollar swap spread increased 0.75 to 54.75. The implied yield on 3-month December '06 Eurodollars was unchanged at 4.765%.

Corporate bond issuance slowed to $7.5 billion (from Bloomberg). Investment grade issuers included Vodafone $2.6 billion, Citigroup $2.0 billion, and News America $1.15 billion.

Junk bond funds posted outflows of $161 million this week. Junk bond issuers included Mirant North America $850 million, Paxson Communications $800 million, and Omega Healthcare $175 million.

December 21 - Bloomberg (Rodrigo Davies): "European government bonds slid, sending two-year yields to their highest since December 2002, on speculation European Central Bank policy makers will keep raising interest rates next year. Traders are betting on at least two increases in 2006, interest-rate futures show."

Japanese 10-year JGB yields added 2 basis points this week to 1.545%. Emerging debt and equity markets maintained their head of steam. Brazil's benchmark dollar bond yields sank 19 basis points to 6.97%. Brazil's Bovespa equity index increased 1%, with a y-t-d gain of 27.2%. The Mexican Bolsa was slightly positive, with 2005 gains rising to 37.8%. Mexican govt. yields dropped 14 basis points to 5.33%. Russian 10-year dollar Eurobond yields dipped one basis point to 6.48%. The Russian RTS equity index jumped 2.4%, increasing y-t-d gains to 83.4%.

Freddie Mac posted 30-year fixed mortgage rates declined 4 basis points to 6.26%, an increase of 51 basis points from one year ago. Fifteen-year fixed mortgage rates fell 6 basis points to an 8-week low of 5.79%, yet were up 61 basis points in a year. One-year adjustable rates jumped 7 basis points to 5.22%, an increase of 105 basis points from one year ago. The Mortgage Bankers Association Purchase Applications Index declined 5.2% last week. Purchase Applications declined 3.4% from one year ago, with dollar volume down 1.3%. Refi applications dipped 1.6%. The average new Purchase mortgage rose to $238,500, and the average ARM increased to $352,400. The percentage of ARMs slipped to 32.6% of total applications.

Broad money supply (M3) surged $27.3 billion (week of December 12) to a record $10.148 Trillion. Over the past 30 weeks, M3 has inflated $523 billion, or 9.4% annualized. Year-to-date, M3 has expanded at a 7.3% rate, with M3-less Money Funds expanding at an 8.2% pace. For the week, Currency added $0.4 billion. Demand & Checkable Deposits fell $5.6 billion. Savings Deposits gained $8.3 billion. Small Denominated Deposits gained $2.0 billion. Retail Money Fund deposits increased $2.7 billion, and Institutional Money Fund deposits jumped $17.2 billion. Large Denominated Deposits gained $5.5 billion. Year-to-date, Large Deposits are up $267.8 billion, or 25.8% annualized. For the week, Repurchase Agreements slipped $4.6 billion, while Eurodollar deposits gained $1.3 billion.

Bank Credit was about unchanged last week to $7.466 Trillion. Year-to-date, Bank Credit has inflated $702 billion, or 10.8% annualized. Securities Credit fell $9.3 billion during the week, with a year-to-date gain of $128.6 billion (7.0% ann.). Loans & Leases have expanded at a 12.6% pace so far during 2005, with Commercial & Industrial (C&I) Loans up an annualized 14.9%. For the week, C&I loans increased $2.5 billion, and Real Estate loans gained $3.9 billion. Real Estate loans have expanded at a 14.6% rate during the first 50 weeks of 2005 to $2.89 Trillion. For the week, Consumer loans rose $3.2 billion, while Securities loans dropped $6.4 billion. Other loans rose $6.4 billion.

Total Commercial Paper jumped $27.4 billion last week to $1.654 Trillion. Total CP has expanded $240.3 billion y-t-d, a rate of 17.3%. Financial CP surged $32.5 billion last week to a record $1.514 Trillion, with a y-t-d gain of $230 billion, or 18.3% annualized. Non-financial CP declined $5.0 billion to $139.7 billion, with a y-t-d gain of 8.0% annualized.

ABS issuance slowed to about $9.0 billion last week (from JPMorgan). Year-to-date issuance of $784 billion is 25% ahead of comparable 2004. Home Equity Loan ABS issuance of $513 billion is 23% above comparable 2004.

Fed Foreign Holdings of Treasury, Agency Debt increased $3.8 billion to $1.514 Trillion for the week ended December 14. "Custody" holdings are up $178.5 billion y-t-d, or 13.6% annualized. Federal Reserve Credit jumped $5.6 billion to $817.2 billion. Fed Credit has expanded 3.4% annualized y-t-d.

International reserve assets (excluding gold) - as accumulated by Bloomberg's Alex Tanzi - were up $533.4 billion, or 15.2%, over the past 12 months to a record $4.039 Trillion.

Currency Watch:

The dollar index gained better than 1% this week. On the upside, Brazil's real jumped 2.8%, the Chilean peso 0.8%, the Peruvian new sol 0.8%, and the Mexican peso 0.4%. On the downside, the New Zealand dollar fell 2.0%, the Uruguay peso 1.7%, the British pound 1.7%, and the Swedish krona 1.60%.

Commodities Watch:

December 21 - Bloomberg (Claudia Carpenter): "Global shortfalls of nickel, copper and other base metals will remain until at least 2007 because of environmental restrictions and other costs, Morgan Stanley said. Supply constraints will 'affect copper and nickel the most, but aluminum is also affected, [said] Wayne Atwell... 'We think it will be three to five years before the industry can accommodate rapid growth in demand.'"

January crude oil slipped 62 cents to $58.43. January Unleaded Gasoline fell 1.4%, and January Natural Gas sank 10.5%. For the week, the CRB index was unchanged, with y-t-d gains of 14.9%. The Goldman Sachs Commodities index fell 2%, reducing 2005 gains to 37.0%.

China Watch:

December 22 - Bloomberg (Nerys Avery): "China's economy may expand 9.4 percent this year, the National Bureau of Statistics said... Inflation may be 1.7 percent and fixed asset investment may increase by as much as 26 percent in 2005, the bureau forecast. Retail sales may rise as much as 13 percent..."

December 21 - Bloomberg (Alan Purkiss): "China wants to use its enormous appetite for raw materials to screw down prices paid to suppliers, the Wall Street Journal reported. In the short term, the country aims to improve its procurement system, coordinating separate purchases made in global markets; longer term, it hopes to use its futures markets to control global prices for commodities of all kinds, the newspaper said. China imports almost 30 percent of its oil, 45 percent of its iron ore and 44 percent of its requirement for 10 non-ferrous metals, the Journal said..."

December 19 - Bloomberg (Lee Spears): "China's national fiscal revenue is expected to top 3 trillion yuan ($370 billion) this year, an increase of 15 percent from 2004, state-controlled Xinhua News Agency reported, citing Finance Minister Jin Renqing."

Asia Boom Watch:

December 22 - Financial Times (Francesco Guerrerain): "Investment banks had their best ever year in Asia in 2005, with total fees estimated to have surpassed $7bn as the fast-growing region witnessed unprecedented levels of equity, takeover and fixed income deals. The performance is likely to translate into record bonuses for senior bankers based in Asia... Asia's share of global investment banking fees has doubled since the financial crisis of 1997-98, as the development of its capital markets and companies enabled revenues in Asia to grow faster than in the West... Senior bankers in the region said 2005 was exceptional because of strong volume growth in all the key products offered by financial firms: equities, M&A, fixed income and syndicated lending. 'Globally we have seen advisory and underwriting revenues up almost 30 per cent and 10 per cent, respectively [on 2004],' said Mike Berchtold, head of investment banking for Morgan Stanley in Asia-Pacific."

December 20 - Bloomberg (Kartik Goyal): "India's economy is expected to expand 7 percent to 8 percent in the fiscal year ending March 31, finance minister P. Chidambaram said in a parliament discussion. The economy, Asia's fourth-largest, grew 6.9 percent in the year ended March 31, 2005."

December 23 - Bloomberg (James Peng and Theresa Tang): "Taiwan's export orders grew at the fastest pace in almost a year in November amid rising global demand for personal computers and liquid-crystal display panels. Orders, indicative of actual shipments in one to three months, gained 25 percent from a year earlier to $24.6 billion after climbing 22 percent in October..."

December 21 - Bloomberg (Anuchit Nguyen and Laurent Malespine): "Vehicle assemblers in Thailand, Southeast Asia's largest production site for Toyota...and Ford... made 1 million units for the first time... About 73 percent of the vehicles produced were one-ton pickup trucks. 'Thailand is really becoming the heart and soul of the Asian auto industry, Ford Chief Operating Officer Jim Padilla said... Vehicle production may rise 26 percent to a record 1.17 million units in the country this year..."

Unbalanced Global Economy Watch:

December 22 - Reuters (Julie MacIntosh): "Corporate merger and acquisition volume boomed worldwide during the final quarter of the year, making it the fourth-largest quarter on record and helping turn 2005 into the biggest year for merger deals since 2000, a report says. The value of merger deals announced worldwide this year rose 38 percent to $2.9 trillion compared with $2.1 trillion last year, a preliminary review by investment banking analysis firm Dealogic showed. The United States and Europe each recorded $1.1 trillion in announced merger deals in 2005, a 30 percent increase for the United States versus last year and a 49 percent rise for Europe."

December 22 - Bloomberg (Theophilos Argitis): "Canadian existing home prices rose to a record in November as buyers snatched up a declining number of dwellings for sale. The average price for a residential home rose to C$256,126 ($219,578) in November, up 11 percent from last year..."

December 20 - Bloomberg (Simon Kennedy): "The European Commission raised its forecast for the economy of the dozen nations sharing the euro and predicted 'solid growth' in 2006. The commission predicted the $9 trillion economy will grow around 0.6 percent in the fourth and first quarters, matching the pace of the third quarter. The economy hasn't grown that fast over a nine-month period since the end of 2000 and start of 2001."

December 19 - Bloomberg (Simone Meier): "European Central Bank Chief Economist Otmar Issing expressed concern about 'ample' liquidity in the euro region after the bank raised interest rates for the first time since 2000. 'Money growth has been high for quite some time and credit growth has continuously increased, supporting our assessment of the risks to price stability,' Issing [said]... 'Liquidity in the euro area is more than ample. A central bank with a mandate to maintain price stability cannot ignore these signals.'"

December 21 - BBC: "[UK] Mortgage lending has continued to show an unseasonal pickup as the year draws to a close. The Council of Mortgage Lenders (CML) said gross lending rose by 5% in November to £28.5bn. The CML said this was the second highest figure on record and was 30% higher than a year ago."

December 22 - Bloomberg (Fergal O'Brien): "Ireland's annual economic growth accelerated to 4.8 percent in the three months through September, the fastest pace in six quarters, as rising employment helped boost spending on clothes, cars and property."

December 22 - Bloomberg (Jacob Greber): "Swiss imports and exports rose to records in November, and employment increased last quarter, adding to evidence an export-led expansion is fuelling domestic spending and hiring. Imports increased an inflation-adjusted 4.4 percent to 13.1 billion Swiss francs ($9.97 billion) from a month earlier and exports rose 4.1 percent to 14 billion francs..."

December 21 - Bloomberg (Jonas Bergman): "Sweden's economy will grow 3.6 percent next year as consumer spending and exports accelerate, the National Institute of Economic Research said."

December 21 - Bloomberg (Marta Srnic): "Russian economic growth probably will accelerate to 7 percent next year from an estimated 6.4 percent in 2005 as higher government spending helps raise salaries and stoke consumer spending, Merrill Lynch & Co. said... 'The strong increases in fiscal expenditure should translate well into consumer spending,' analyst Vladimir Gersamia wrote... 'Domestic demand will likely continue in its role as the main driver of growth.'"

December 22 - XFN: "New Zealand's gross domestic product increased 0.2% in the September quarter, slowing from a 1.2% rise in the three months to June and 0.7% in the three months to March... In the year to September 2005, the economy grew 2.7%, down from the 4.3% growth in the September 2004 year."

Latin America Watch:

December 20 - Dow Jones: "Argentine economic growth marched forward in October, soundly beating expectations as the country's recovery continues to see solid momentum in its third year... The data showed a 9.3% year-on-year increase and an 0.7% gain on the month... For the 10 months through October, accumulated growth was up 9.2% from the year-earlier period."

December 21 - Bloomberg (Andrea Jaramillo): "Colombia's exports rose 17.4 percent in October, the statistics agency said. Exports rose to $1.79 billion..."

December 22 - Bloomberg (Andrea Jaramillo): "Colombia's economy expanded at its fastest pace in 10 years in the third quarter as interest rates near a three-year low and the currency's appreciation led to a surge in construction and consumer spending. Gross domestic product, the broadest measure of a country's output of goods and services, grew 5.75 percent in the July-through-September period from the year-earlier period..."

Bubble Economy Watch:

December 16 - Bloomberg (Alison Fitzgerald): "The U.S. Treasury received $61.4 billion in estimated corporate taxes yesterday, a 33 percent increase over a year earlier and a fourth-quarter record. It was the second-biggest quarter for corporate tax receipts, the Treasury said... The record was $63 billion in September, which eclipsed the previous high mark of $49 billion in June."

December 20 - Bloomberg (Eddie Baeb): "U.S. state finances improved in 2005, buoyed by higher-than-projected tax revenue, state officials said... The National Governors Association and the National Association of State Budget Officers in a joint report said revenue beat 45 states' estimates in the current fiscal year... Revenue in fiscal 2005, which ends June 30 for all but four states, was 4.2 percent higher than states expected. Corporate income taxes were 11.6 percent higher than estimated, while personal income taxes were 5.7 percent higher. 'State fiscal conditions rebounded notably in fiscal 2005,' the report says. 'States were able to begin to restore funding to programs they were forced to cut during the downturn.' ...[S]tate revenue in fiscal 2005 rose about 7 percent..."

December 19 - Bloomberg (Laurence Arnold): "The biggest U.S. companies have underfunded their health-care benefits and other obligations to retirees by about $292 billion, almost double the gap between future liabilities and money already set aside for pensions, according to Standard & Poor's."

December 19 - Bloomberg (Victor Epstein): "Optimism among U.S. homebuilders unexpectedly fell in December, dropping to a 32-month low, as executives braced for a slowdown in the housing market after a five-year boom."

Speculator Watch:

December 20 - Bloomberg (Edward Evans): "Kohlberg Kravis Roberts & Co., the firm that engineered the biggest-ever leveraged buyout, is now racing to catch up with rivals in the fight for Asian assets. KKR opened a Hong Kong branch in September, seven months after co-founder Henry Kravis said...That he had no plans to establish an office in Asia. Buyout funds are targeting banks, insurers and computer-related companies in India and China..."

"Project Energy" Watch:

December 21 - Bloomberg (Bruce Blythe): "Oil and natural-gas producers...plan to increase exploration and production spending by 14 percent next year to a record $226.2 billion worldwide, Citigroup Inc. analyst Geoff Kieburtz said. The projected increase reflects efforts to capitalize on soaring oil and gas prices and to meet rising expenses for drilling rigs, well technology and other oilfield services..."

December 22 - Asia Business Times: "Saudi Arabia will build a US$26.7 billion Red Sea resort, port and financial centre, its developers said... The 55 sq km site, north of the tourist and commerce centre of Jeddah on the Red Sea, is due to be completed in two to three years, officials said. The complex is being developed by a consortium led by Emaar Properties, which is behind several mega-projects in the United Arab Emirates' tourism hub of Dubai... King Abdullah City, which is expected to boost tourism and trade in the conservative kingdom, is the latest multi-billion-dollar development in the booming Gulf Arab region."

December 21 - Bloomberg (Dania Saadi): "The economy of the United Arab Emirates will grow by 29 percent this year to $133.8 billion from a year earlier because of high oil prices and growth of non-oil industries, Khaleej Times reported, citing the International Monetary Fund."

December 22 - Bloomberg (Theophilos Argitis): "Vic Fedeli, the mayor of North Bay, wasn't pleased when Alberta health officials showed up in his depressed Northern Ontario mining community, rented a room in the Best Western and invited local doctors and nurses to interview for higher-paying jobs in their oil-rich home province. 'Barbarians at the gate,' he says. Much of Canada is having a similar reaction. With the increase in world energy prices, Alberta's growing capacity to attract professionals and investors and to shape Canada's economic agenda is stirring resentment elsewhere in the nation, sparking a fight that could do more to shake national unity than 40 years of separatist strife in French-speaking Quebec."

Mortgage Finance Bubble Watch:

December 21 - UBS research: "Late yesterday, bank regulators issued guidance on non traditional mortgage products, with particular emphasis on Option-ARM loans and the concern over negative amortization, and the use of such loans in the subprime space. Guidance addresses three key topics: 1) underwriting standards, and their consistency with prudent lending standards and the borrower's repayment capacity; 2) risk management and capital standards given the higher risk of the loans; and 3) borrower awareness regarding the risk of these products. Risk/Capital management key issue; overall guidance benign: As we anticipated, we view the guidance as largely benign. There is some guidance on more specific risk management and capital allocation topics, but do not anticipate many changes in lending practices as a result."

December 21 - Friedman, Billings and Ramsey & Co. research: "On 12/20/05, during market hours, federal financial regulatory agencies (collectively known as the FFIEC) issued proposed guidance on 'nontraditional' mortgage products, particularly Option ARMs that allow for negative amortization. We view the proposed guidance as relatively benign and unlikely to materially impact the business models of the traditional option ARM lenders..."

Freddie Mac expanded its total Book of Business by $22.06 billion during November to a record $1.658 Trillion, a 16.2% rate of growth. The company's Book of Business has expanded $74.86 billion, or 14% annualized, during the past four months - the strongest 4-month expansion since 2003. Year-to-date, the Book of Business has grown 11.1% annualized. Freddie's Retained Portfolio expanded at a 26% rate during November to $693 billion, with a four-month growth rate of 15% (y-t-d up 6.7% ann.).

Cantillon, Raguet, Hawtry & Persons:

We today face a torrent of disinformation, propaganda, imaginative "analysis" and a slew of wishful thinking when it comes to the true state of our financial and economic systems. At this manic stage of the Credit Bubble, we should expect nothing less. And I guess it is of no coincidence that we have a full-fledged monetary quack about to take the helm at the Federal Reserve. But, most fortunately, economic history offers us a wealth of pertinent insight to help keep us "grounded." I hope readers enjoy tidbits of wisdom from John Law's contemporary and profiteer from the collapse of Law's Bubble, the Irishman Richard Cantillon (1697-1734); a brilliant American merchant and statesman Condy Raguet (1784-1842); the English statesman, monetary economist and Keynes' contemporary Ralph G. Hawtrey (1879-1975), and little known but clearly exceptional American economist Charles E. Persons. I wish everyone a Merry Christmas and Happy Holidays!

"The proportion of the dearness which the increased quantity of money brings about in the State will depend on the turn which this money will impart to consumption and circulation. Through whatever hands the money which is introduced may pass it will naturally increase the consumption, but this consumption will be more or less great according to circumstances. It will be directed more or less to certain kinds of products or merchandise according to the idea of those who acquire the money. Market prices will rise more for certain things than for others however abundant the money may be."

"If more money continues to be drawn from the mines all prices will owing to this abundance rise to such a point that not only will the landowners raise their rents considerably when the leases expire and resume their old style of living, increasing proportionably the wages of their servants, but the mechanics and workmen will raise the prices of their articles so high that there will be a considerable profit from buying them from the foreigner who makes them much more cheaply. This will naturally induce several people to import many manufactured articles made in foreign countries, where they will be found very cheap; this will gradually ruin the mechanics and manufacturers of the state who will not be able to maintain themselves there by working at such low prices owing to the dearness of living."

Richard Cantillon, excerpt from "Essai sur la nature du commerce en general," 1730-1734

"The suspension of specie payments by all the banks in the United States, south of New England, in the year 1814, and of all, with a very few trifling exceptions, in the year 1837, has strongly impressed the public mind with the belief that there is something defective in the present banking system of this country; and it is not, perhaps, venturing too much to assert that there are now elements at work, which will ultimately overthrow the whole fabric, unless those who have the power to remedy the evil, shall introduce the reforms which can alone render a repetition of such a calamity impossible.

It must be evident to every observant mind, that a dislike to hear the truth, when opposed to one's interests or prejudices, is the principal cause of a large portion of the mischievous errors which so generally prevail. Men of education and capacity, who are best qualified to investigate and understand the important principles which belong to the science of public economy, are too apt to view them as of no account, or to despise them when they come in conflict with their purses, or with their political promotion; and hence that knowledge, which is the most entitled to regard, because most intimately connected with the prosperity of a country, is of all other the most neglected. I assert it, and in so doing, I think I do not overestimate its value, that political economy is the most important of the sciences; and if its practical branches were introduced as a study into all our colleges and principal schools, it would do more towards exempting the country from erroneous and destructive legislation, than any other study to which the attention of our youth could be directed.

Of these practical branches, the science of banking is one, but it is one, to the attainment of a knowledge of which there is no 'royal road' any more than there is to any other species of learning. He who wishes to understand it, must study and reflect, and this not with the feelings of a partisan, but in the true spirit of philosophy, unbiased by self-interest, or by any other consideration than a pure love of the truth...

That the interests of a country are best to be promoted by a stable currency, precisely as they are by a fixed standard of weights and measures, will hardly be disputed; and if it can be shown, that a defective, or mismanaged banking system, produces exactly the same results upon the pursuits of industry and property of individuals, as would the decrees of a despot, who should alter, at his pleasure, without any previous notice, as often as he thought it expedient, the weight of the pound, or the length of the yardstick, it is to be hoped that there is not a patriot in the land, who would hesitate to assist in the entire eradication of such a monstrous evil. That such is the effect of our present system, as it has been of late conducted, must be obvious to all who have closely examined its operations, and hence the necessity, before it is too late, of an application of the appropriate remedy."

Condy Raguet, excerpt from "A Treatise on Currency and Banking," 1839

"The probability of a contrary variation, an expansion of credits and a depreciation of the unit of value, is, however, at all times much greater. And this movement is even more unlimited in scope. Self-interest prompts both the enterprising trader ever to borrow more, and the enterprising banker ever to lend more, for to each the increase in his credit operations means an increase in his business. Suppose some of the merchants, in the hope of extending their business, give increased orders to the manufactures. The manufactures forthwith borrow more than usual from their bankers. They will urge on the business of manufacture, will pay more to their employees and will receive greater profits in proportion to their output. They and their employees will have more to spend; the retailers will dispose of more goods, and will take over more from the merchants; the merchants will give yet further orders... The manufactures, finding their productive capacity constrained, will quote higher prices... The general rise in prices will involve a proportional increase of borrowing to finance a given output of goods, over and above the increase necessitated by the increase of output. This increase of borrowing, meaning an increase in the volume of credit, will further stimulate trade. Where will this process end? In the case of curtailment of credit the self-interest of the bankers and the distress of the merchants combined to restore the creation of credits, though not to its pre-existing level. But in the case of the expansion of credits there is no such corrective influence at work. An indefinite expansion of credit seems to be in the immediate interest of merchants and bankers alike.

The continuous and progressive rise of prices makes it profitable to hold goods in stocks, and the rate of interest which the merchant who holds such goods is prepared to pay is correspondingly high. The merchant and the banker share between them a larger rate of profit on a larger turnover. The credit created for the purposes of production becomes purchasing power in the hands of the people engaged in production; the greater the amount of credit created, the greater will be the amount of purchasing power and the better the market for the sale of all kinds of goods. The better the market the greater the demand for credit. Thus an increase in the supply of credit itself stimulates the demand for credit, just as a restriction in the supply of credit leads to a decline in the demand for credit. Either the expansion or the contraction of credit may therefore proceed absolutely without limit, and the corresponding fall or rise in the value of the monetary unit would therefore also proceed without limit. In each case all standards of value will be completely lost."

Ralph George Hawtrey, excerpt from "Currency and Credit," 1919

"The thesis of this paper is that the existing depression was due essentially to the great wave of credit expansion in the past decade. There is a lamentable lack of comprehensive and accurate data concerning this process of debt creation. But highly suggestive information may be assembled regarding the growth of bank loans and investments; the increase in mortgage indebtedness, urban and rural; the increasing volume of securities outstanding; and the expansion of installment credit... [I]n the six years after 1922, loans and investments held by banks had increased over $18 billon. This is over 45 per cent...

The great field of credit expansion in the last decade lies in the realm of urban real estate mortgages... We have undoubtedly expanded the credit structure, spending today and postponing the accounting until tomorrow. We have been guilty of the sin of inflation. And there will be no condoning the sin nor reduction of the penalty because the inflation is of credit rather than a monetary one...

Thus the area covered by credit sales enlarges and the volume of credit expansion increases. As in monetary inflation the immediate results seem favorable. Credit expansion results in business activity, in full employment, in optimistic outlook and in a flood of gratulatory literature proclaiming us wiser than our predecessors... But the evidence is consistent and cumulative. The past decade has witnessed a great volume of credit inflation. Our period of prosperity in part was based on nothing more substantial than debt expansion.

Several financial devices of recent invention have contributed to this process of debt inflation... The Federal and Joint Stock Land Banks refinanced a growing proportion...of rural land mortgages into long term paper. This gave the borrowers security... Of similar tendency but more obvious in its recent developments is the newly originated and rapidly introduced device of urban real estate bonds. As a method of credit inflation this plan could hardly have been bettered... The volume successfully sold rolled up with the speed of the proverbial snowball traveling down a steep hill. The fruits of such sales gave us building activity and contributed to the flush times of the decade...

The fundamental question regarding installment sales is of this sort. The method per se is unexceptional. Granting that sound credit principles are applied such sales are safe. But it is highly probably that a considerable volume of the sales recently made were based on credit ratings only justifiable on the theory that flush times were to continue indefinitely... It so happened that this new credit method coincided in the time of its introduction with the origination of new consumption goods of the widest popular appeal... This process of debt inflation went on apace... Temporarily we have spent, enjoyed and stimulated business activity. When the process of expanding credit ceases and we return to a normal basis of spending each year no more than we earn that year, there must ensue a painful adjustment period...

When the accounts are footed we shall have learned new lessons respecting the evils of credit inflation. This dear bought wisdom we may place beside our knowledge of the evils of monetary inflation purchased at an equally dear price. And we may venture a pious hope that the joint lessons will induce growth of the wisdom to foresee, caution to move less rapidly and more surely in the path of progress...

The essential point here is that during the period of introduction of these new financial devices and while the newly opened reservoirs of credit are filing, we have a temporary increase in the nation's purchasing power. A combination of circumstances has rendered this expansion of large dimensions in the decade just closed...

The check to expansion is sharp and is intensified by the excesses inevitably associated with periods of over-rapid expansion. Such a course of events is clearly proven by the evidence as to credit expansion in the period 1920 to 1929. The depression into which the nation fell in the latter year was undoubtedly due in part at least to these developments in our complicated economic structure. Manifestly these events are too recent and our records too incomplete to attempt to measure their relative importance as compared with other factors of great weight. But there can be no doubt that their influence was large."

Charles E. Persons, excerpt from "Credit Expansion, 1920 to 1929, and its Lessons," November 1930, The Quarterly Journal of Economics. ("The writer makes grateful acknowledgement of generous assistance given him in his research for information by Miss Aryness Joy and Mr. F.R. Garfield of the Federal Reserve Board staff.")