The Online Library of Liberty

A project of Liberty Fund, Inc.

• George B. De Huszar, Preface to the English-language Edition
• F. A. Hayek, Introduction
• 1: What Is Seen and What Is Not Seen 1
• 1. the Broken Window
• 2. the Demobilization
• 3. Taxes
• 4. Theaters and Fine Arts
• 5. Public Works
• 6. Middlemen
• 7. Restraint of Trade
• 8. Machines
• 9. Credit
• 10. Algeria
• 11. Thrift and Luxury
• 12. the Right to Employment and the Right to Profit
• 2: The Law 1
• 3: Property and Law 1
• 4: Justice and Fraternity 1
• 5: The State 1
• 6: Property and Plunder *
• First Letter 1
• Second Letter
• Third Letter
• Fourth Letter
• Fifth Letter
• Protest of M. Considérant and Reply of F. Bastiat. 14
• 7.: Protectionism and Communism
• 8.: Plunder and Law 1
• 9.: Academic Degrees and Socialism
• 10: Declaration of War Against the Professors of Political Economy 1
• 11: Speech On the Suppression of Industrial Combinations 1
• 12: To the Democrats
• 13: The Balance of Trade 1
• About the Publisher
• Additional Books By Frédéric Bastiat
• The Law
• Economic Harmonies
• Economic Sophisms

9. Credit

At all times, but especially in the last few years, people have dreamt of universalizing wealth by universalizing credit.

I am sure I do not exaggerate in saying that since the February Revolution* the Paris presses have spewed forth more than ten thousand brochures extolling this solution of the social problem.

This solution, alas, has as its foundation merely an optical illusion, in so far as an illusion can serve as a foundation for anything.

These people begin by confusing hard money with products; then they confuse paper money with hard money; and it is from these two confusions that they profess to derive a fact.

In this question it is absolutely necessary to forget money, coins, bank notes, and the other media by which products pass from hand to hand, in order to see only the products themselves, which constitute the real substance of a loan.

For when a farmer borrows fifty francs to buy a plow, it is not actually the fifty francs that is lent to him; it is the plow.

And when a merchant borrows twenty thousand francs to buy a house, it is not the twenty thousand francs he owes; it is the house.

Money makes its appearance only to facilitate the arrangement among several parties.

Peter may not be disposed to lend his plow, but James may be willing to lend his money. What does William do then? He borrows the money from James, and with this money he buys the plow from Peter.

But actually nobody borrows money for the sake of the money itself. We borrow money to get products.

Now, in no country is it possible to transfer from one hand to another more products than there are.

Whatever the sum of hard money and bills that circulates, the borrowers taken together cannot get more plows, houses, tools, provisions, or raw materials than the total number of lenders can furnish.

For let us keep well in mind that every borrower presupposes a lender, that every borrowing implies a loan.

This much being granted, what good can credit institutions do? They can make it easier for borrowers and lenders to find one another and reach an understanding. But what they cannot do is to increase instantaneously the total number of objects borrowed and lent.

However, the credit organizations would have to do just this in order for the end of the social reformers to be attained, since these gentlemen aspire to nothing less than to give plows, houses, tools, provisions, and raw materials to everyone who wants them.

And how do they imagine they will do this?

By giving to loans the guarantee of the state.

Let us go more deeply into the matter, for there is something here that is seen and something that is not seen. Let us try to see both.

Suppose that there is only one plow in the world and that two farmers want it.

Peter is the owner of the only plow available in France. John and James wish to borrow it. John, with his honesty, his property, and his good name, offers guarantees. One believes in him; he has credit. James does not inspire confidence or at any rate seems less reliable. Naturally, Peter lends his plow to John.

But now, under socialist inspiration, the state intervenes and says to Peter: “Lend your plow to James. We will guarantee you reimbursement, and this guarantee is worth more than John's, for he is the only one responsible for himself, and we, though it is true we have nothing, dispose of the wealth of all the taxpayers; if necessary, we will pay back the principal and the interest with their money.”

So Peter lends his plow to James; this is what is seen.

And the socialists congratulate themselves, saying, “See how our plan has succeeded. Thanks to the intervention of the state, poor James has a plow. He no longer has to spade by hand; he is on the way to making his fortune. It is a benefit for him and a profit for the nation as a whole.”

Oh no, gentlemen, it is not a profit for the nation, for here is what is not seen.

It is not seen that the plow goes to James because it did not go to John.

It is not seen that if James pushes a plow instead of spading, John will be reduced to spading instead of plowing.

Consequently, what one would like to think of as an additional loan is only the reallocation of a loan.

Furthermore, it is not seen that this reallocation involves two profound injustices: injustice to John, who, after having merited and won credit by his honesty and his energy, sees himself deprived; injustice to the taxpayers, obligated to pay a debt that does not concern them.

Will it be said that the government offers to John the same opportunities it does to James? But since there is only one plow available, two cannot be lent. The argument always comes back to the statement that, thanks to the intervention of the state, more will be borrowed than can be lent, for the plow represents here the total of available capital.

True, I have reduced the operation to its simplest terms; but test by the same touchstone the most complicated governmental credit institutions, and you will be convinced that they can have but one result: to reallocate credit, not to increase it. In a given country and at a given time, there is only a certain sum of available capital, and it is all placed somewhere. By guaranteeing insolvent debtors, the state can certainly increase the number of borrowers, raise the rate of interest (all at the expense of the taxpayer), but it cannot increase the number of lenders and the total value of the loans.

Do not impute to me, however, a conclusion from which I beg Heaven to preserve me. I say that the law should not artificially encourage borrowing; but I do not say that it should hinder it artificially. If in our hypothetical system or elsewhere there should be obstacles to the diffusion and application of credit, let the law remove them; nothing could be better or more just. But that, along with liberty, is all that social reformers worthy of the name should ask of the law.7

[*][Popular demonstrations against Prime Minister Guizot on February 22, 1848, resulted in his dismissal by King Louis Philippe. This prudent move, however, proved unavailing for the King, because the next day troops fired on a group of demonstrators, and the people of Paris responded with an armed revolt, which brought about the abdication of Louis Philippe and the establishment of the Second Republic.—Translator.]

[7.][See the end of the twelfth letter on Interest-free Credit, Vol, V, pages 282 ff. (of the French edition).—Editor.]