all experience a number of times in our lifetimes so most people understand better. When it comes to the long-term
debt cycle most people, including most economists, don’t recognize or acknowledge its existence because, to see a
number of them in order to understand the mechanics of how they work, one has to look at them operating in a
number of countries over many hundreds of years in order to get a good sample size. In Part 2 of this study we will
look at all of the most important cycles with reference to the timeless and universal mechanics of why money and
credit have worked and failed to work as mediums of exchange and storeholds of wealth. In this chapter, we will
look at how they archetypically work.
I will start with the basics of the long-term debt cycle from way back when and bring you up to the present, giving
you a classic template. To repeat, while I’m saying that this is a classic template I’m not saying that all cases
transpire exactly like this, though I am saying that almost all follow this pattern closely.
The Long-Term Debt Cycle
Let’s start with the basics.
1) It Begins with No or Low Debt and “Hard Money”
When societies first invented money they used all sorts of things, like grain and beads. But mostly they used things
that had intrinsic value, like gold, silver, and copper. Let’s call that “hard money.”
Gold and silver (and sometimes copper and other metals like nickel) were the preferred forms of money because 1)
they had intrinsic value and 2) they could easily be shaped and sized to be to portable so they could easily be
exchanged. Having intrinsic value (i.e., being useful in and of themselves) was important because no trust—or
credit—was required to carry out an exchange with them. Any transaction could be settled on the spot, even if the
buyer and seller were strangers or enemies. There is an old saying that “gold is the only financial asset that isn’t
someone else’s liability.” That is because it has widely accepted intrinsic value, unlike debt assets or other assets
that require an enforceable contract or a law to ensure the other side will deliver on its promise to deliver whatever
it promised to deliver (which when it’s just “paper” currency that can easily be printed isn’t much of a promise).
On the other hand, if during such a period of lack of trust and enforceability one receives gold coins from a buyer,
that doesn’t have a credit component to it—i.e., you could melt them down and still receive almost the same
amount of value because of its intrinsic value—so the transaction can happen without the same sort of risks and
lingering promises that need to be kept. When countries were at war and there was not trust in the intentions or
abilities to pay, they could still pay in gold. So gold (and to a lesser extent silver) could be used as both a safe
medium of exchange and a safe storehold of wealth.
2) Then Come Claims on “Hard Money” (aka, “Notes” or “Paper Money”)
Because carrying a lot of metal money around was risky and inconvenient, credible parties (which came to be
known as banks, though they initially included all sorts of institutions that people trusted, such as temples in
China) arose that would put the money in a safe place and issue paper claims on it. Soon people treated these paper
“claims on money” as if they were money themselves. After all, they were as good as money because they could
be redeemed for tangible money. This type of currency system is called a linked currency system because the value
of the currency is linked to the value of something, typically a “hard money” such as gold.
3) Then Comes Increased Debt
At first there is the same number of claims on the “hard money” as there is hard money in the bank. However, the
holders of the paper claims and the banks discover the wonders of credit and debt. They can lend these paper
claims to the bank in exchange for an interest payment so they get interest. The banks that borrow it from them
like it because they lend the money to others who pay a higher interest rate so the banks make a profit. And those
who borrow the money from the bank like it because it gives them buying power that they didn’t have. And the
whole society likes it because it leads asset prices and production to rise. Since everyone is happy with how things
are going they do a lot of it. More lending and borrowing happens over and over again many times, there is a
boom, and the quantity of the claims on the money (i.e., debt assets) rises relative to the amount of actual goods