08/09/2001 We Could Have Used a Mr. Hawtrey *

This week appeared a key inflection point in regard to deteriorating economic expectations for the U.S. and global economy. Despite today’s almost 220-point reversal, the Dow ended the week with a decline of 1%, while the S&P500 dropped 2%. The Transports and Morgan Stanley Cyclical indices declined 2%, with the Utilities sinking 3%. Defensive issues outperformed, with the Morgan Stanley Consumer index posting a marginal gain. The broader market suffered, as the small cap Russell 2000 and the S&P400 Mid-Cap indices declined better than 2%. The technology sector came under heavy selling pressure, with the NASDAQ100, Morgan Stanley High Tech, and NASDAQ Telecommunications indices all hit for 6%. The Semiconductors sank 7% and The Street.com Internet index 8%. Biotech stocks fared little better, with a 6% decline for the week. Financial stocks were mixed, with the S&P Banking index declining only 1%, as the AMEX Securities Broker/Dealer index was pummeled for 6%. With bullion up $6, the HUI gold index jumped 5% this week.

The credit market enjoyed a strong performance, with 2-year Treasury yields collapsing 19 basis points to 3.70%. The yield curve steepened, with 5-year Treasury yields declining 13 basis points to 4.52% and the key 10-year Treasury yield dropping 10 basis points to 5.05%. Long-bond yields dipped 8 basis points to 5.50%. Mortgage and agency securities rallied strongly as well, with yields dropping 14 and 12 basis points respectively. Dollar selling continues, with the euro trading to its highest level against the dollar since early May. The yen also posted strong gains this week, trading to its highest level in almost two months, as Asian currencies generally made up ground on the U.S. dollar.

According to Bloomberg earlier in the week, inflation-linked Treasury bonds have outperformed Treasuries so far this year, generating returns of 8.1% compared to 2.7% for the long-bond. From (www.marketnews.com) Gary Rosenberger’s excellent Reality Check Column: "US Insurers Say Commercial Premiums Up Sharply: Commercial insurance policy premiums are rising at the fastest rate in 14 years, and some brokers suspect poor investment returns may be partly responsible. Increases average around 10% and 15% this year, and there are anecdotal tales of far higher renewal rates for selected businesses, they add. Commercial premiums are vulnerable to an array of pressures, including cooling competition for market share, soaring jury awards, renewed medical inflation and a growing awareness that policies have been underpriced, particularly in disaster-prone regions, they say." Quoting the president of the Council of Insurance Brokers of Greater New York: "The pressure is on the insurance companies. Where they used to make double-digit gains on their investments, they now have to make it up in underwriting profits. They have to raise premiums in order to cover their investment losses…For 10 years the insuring public has experienced declining premiums and now they’re paying the price…In the past, double-digit returns on investment could forgive bad underwriting decisions."

The National Association of Realtors released second quarter data on Condo and Co-op sales this week. Unit sales were up almost 4% from second-quarter 2000, while median prices jumped almost 10%. Price gains were led by a 13% rise in the Northeast, 11% in the Midwest, and 9% in the South. Consistent with the detached housing market, the notable aspect of the data is the pervasiveness of the nationwide housing inflation. But, after all, it is very much a national real estate finance "Superstructure" behind the explosion of mortgage credit. During the past 10 quarters, national median Condo prices (mean prices unavailable) are up 21%, with a 25% increase in the Midwest, 21% in the South, 20% in the Northeast, and 12% in the West.

Inside Mortgage Finance estimates that a record $550 billion of 1 to 4 family mortgages were originated over the past three months. This is truly an astounding number, with 2001 almost certain to shatter previous mortgage lending records. From GMAC (through PRNewswire): "Residential Funding Corporation (GMAC-RFC) today announced it surpassed $12 billion in issuance of asset-backed (ABS) and mortgage-backed securities (MBS) in first half 2001. The company also reported June was its largest issuance month ever, with $4.75 billion in securitizations." GMAC’s issuance includes $4.4 billion of "jumbo" mortgages, $3 billion subprime, and $1.6 billion of "home equity and high loan-to-value." Since the failures of FirstPlus, Cityscape, Empire funding and others, GMAC has become one of the major lenders in the subprime mortgage arena. Interestingly, while GM’s second-quarter global automobile sales declined 7% from last year, GMAC revenues were up 10%. Sign of the times…

From Bloomberg: "Commercial mortgage lending by life insurers rose to the fastest pace in four years in the second quarter, as falling interest rates spurred refinancing and borrowing by property owners and buyers. Mortgage lending commitments from life insurance companies totaled $7.6 billion in the second quarter, up 41 percent from $5.4 billion a year earlier, the American Council of Life Insurers said in its quarterly survey. It was the fifth time the quarterly commitments topped $7 billion since the poll’s inception in 1965. The second-quarter’s volume was the highest since the last three months of 1997, and the number of loans made, 743, was the highest since 1979..."

In a development to follow closely going forward, it appears the explosive broad money supply growth experienced since last October is beginning to wane. Last week, broad money supply declined $10 billion, with institutional money fund assets dropping $12 billion. While it is too early to feel confident in a change in trend, M3 is basically unchanged over the past four weeks. Importantly, after expanding at a 60% annualized rate from October 30th to its high watermark of $1.023 trillion during the week of July 2nd, institutional money fund assets are basically unchanged over the past six weeks. Retail money fund asset growth has slowed markedly as well. During the past year, M3 has surged $817.6 billion, or 12%.

According to TrimTabs.com, investors pulled almost $15 billion from equity mutual funds during July, the first outflows since March. This, along with July’s weakened auto sales and anecdotal signs of an unimpressive month of home sales, is indicative of a change in consumer liquidity positions consistent with what we would expect from a tempering of the mortgage refi boom. Interestingly, however, refi activity has now bounced back strongly over the past four weeks and remains up 380% from last year’s level. And while it is tempting to use June’s reported drop in consumer debt as an indication of tempered consumer borrowing, I’m not yet ready to make that call. Non-seasonally adjusted, consumer borrowing was up slightly during the month, with "revolving" credit growing 11% year over year. We also know from second-quarter earnings reports that all the major monoline credit card lenders reported strong receivable growth. We also saw Citigroup’s North America card division receivables up 13% year over year, JPMorgan credit card receivable up 15% y-o-y, Bank America consumer loans up 10%, and Wells Fargo credit cards up 11%. Credit growth for the 10 largest Visa and MasterCard issuers was said to have grown at a 14% rate during the second quarter.

While tax rebate checks complicate the analysis, it is worth noting that July retail sales appear generally satisfactory. According to Bank of Tokyo data, same-store sales were up 3.4% year over year, compared to June’s 2.8%. Wal-Mart enjoyed sales "above plan," up 13.9% from last year to $16 billion (four week sales). On a same-store basis, Wal-Mart sales were up 6.9%. Target same-stores sales increased 5.7%. And indicative of the strong inflation now conspicuous throughout the health care industry, same store sales for the drug store group were up 9.5% for July, the strongest performance since April.

For those of us with a keen interest in economics this could not be a more fascinating (and for some of us fearful) environment. We live in truly extraordinary times, with the further curious dynamic that developments seem almost to move in slow motion. Perhaps it gives us analysts too much time to think, although there sure is good fodder for pontificating. Making things even more interesting, the current environment definitely offers something for everyone, with myriad of crosscurrents and inconsistencies providing support for various perspectives and theories. Indeed, one can look at the global technology sector, commodity prices, and manufacturing profits and build a decent case that we are in a deflationary environment. On the other hand, is it reasonable to speak of deflation in the U.S. when broad money supply is in the midst of an historic expansion, wages are rising strongly, almost certainly record mortgage lending continues to stoke home price inflation, healthcare and energy costs are surging, and for three years since the global deflationary scare back in 1998 general consumer prices have been rising steadily? If a poll were taken, how many households would state that their cost of living was in decline?

The bulls today could also build a rather convincing case for the continued resiliency of the U.S. economy. After all, we have experienced an historic technology bubble collapse without the U.S. economy yet experiencing even one quarter of negative GDP growth. Home sales are near a record pace, we are on track for one of the strongest years of auto sales, and consumers are generally content to keep borrowing and spending. One with a bullish persuasion would ask how this could not be interpreted as irrefutable evidence of sound underpinnings. Besides, we have continued reports of strong productivity gains, and doesn’t conventional economic doctrine tell us that this ensures rising corporate profits, unending government budget surpluses, and steady increases in general standards of living? Conventional analysis would also expect uninterrupted benefits from a highly "effective" contemporary financial system "efficiently" allocating our limited savings to productive investment.

Even within the "bear camp," there are rather stark differences in analytical perspective. Those viewing the world from the "Austrian" perspective certainly have sound justification for using the great analytical framework developed from the likes of Mises, Hayek, and Rothbard on the causes of the Great Depression. This line of analysis includes the critical issues of overinvestment and malinvestment, with a keen focus on capital goods investment. But while this analysis is obviously pertinent in analyzing the technology boom and bust, is it in itself adequate in gaining a comprehensive understanding of the greater U.S. Bubble? I could not think more highly of the great work of Mises and Hayek, and their analysis is invaluable in understanding the painful adjustments to an industrial based economy back in the 1930s. But as an objective analyst, I struggle with the idea of placing too great an emphasis on "over investment" and production themes as the critical factors in the recent U.S. boom. It seems to me today too much like trying to force a square peg into a round hole.

Considering the complex backdrop and apparent market perceptions of increasing U.S. and global economic vulnerability, I felt compelled this week to revisit Gottfried Haberler’s classic, Prosperity and Depression. Published in 1937, it provides an excellent exposition of various business cycle theories that were at the forefront during the heyday of this type of economic analysis throughout the Great Depression.

"Money and credit occupy such a central position in our economic system that it is almost certain that they play an important role in bringing about the business cycle, either as an impelling force or as a conditioning factor. During the upswing, the physical volume of production and of transactions grows while prices rise, or, in some rather exceptional cases, (footnote: "American boom of 1926-1929") remain constant… The purely monetary explanation of the business cycle has been most fully and most uncompromisingly set out by Mr. R.G. Hawtrey. For him the trade cycle is ‘a purely monetary phenomenon’ in the sense that changes in ‘the flow of money’ is the sole and sufficient cause of changes in economic activity, of the alternation of prosperity and depression, of good and bad trade… According to Mr. Hawtrey, the trade cycle is nothing but a replica, on a small scale, of an outright money inflation and deflation. Depression is induced by a fall in consumers’ outlay due to a shrinkage of the circulating medium…the prosperity phase of the cycle, on the other hand, is dominated by an inflationary process. If the flow of money could be stabilized, the fluctuation in economic activity would disappear. But stabilization of the flow of money is no easy task, because our modern money and credit system is inherently unstable. Any small deviation from the equilibrium in one direction or the other tends to be magnified."

"The upswing of the trade cycle is brought about by an expansion of credit and lasts so long as the credit expansion goes on or, at least, is not followed by a credit contraction. A credit expansion is brought about by the banks through the easing of conditions under which loans are granted to the customer…Prosperity comes to an end when credit expansion is discontinued. Since the process of expansion, after it has been allowed to gain a certain speed, can be stopped only by a jolt, there is always the danger that expansion will be not merely stopped but reversed, and will be followed by a process of contraction which is itself cumulative…

Mr. Hawtrey’s theory explains why there were not merely small oscillations around the equilibrium, but big swings of the pendulum in the one or the other direction. The reason is the cumulative, self-sustaining nature of the process of expansion and contraction. The equilibrium line is like a razor’s edge. The slightest deviation involves the risk of further movement away from equilibrium…the expansion could go on indefinitely, if there were no limits to the increase in the quantity of money."

Obviously, contemporary economic systems are incredibly complex, with myriad of non-monetary factors interacting with quite intricate and powerful monetary influences. What I propose is that sound monetary analysis today unequivocally provides the most valuable foundation for economic understanding. The "classical" economic viewpoint of money as merely a "veil" for the real economy could not leave analysis at a greater disadvantage currently. It is as well senseless to get lost in nebulous economic notions such as today’s fixation on "productivity" and the "efficient allocation of savings," when true and "tangible" insights can be garnered by the close examination and analysis of money, credit, and key monetary processes. According to Mr. Hawtrey, "credit holds the predominant position," and "banks create purchasing power in the process of creating credits." And, importantly to Mr. Hawtrey’s analysis, (and a definition I adamantly subscribe to) "inflation means too free creation of credit." "It is the instability of credit that is perpetually involving the world in credit expansions…"

Interestingly, Mr. Hawtrey’s analysis (his classic Currency and Credit was published in 1919) was generally superceded during the Great Depression by the seemingly more pertinent "overinvestment theories" of "Hayek, Machlup, Mises, Robbins, Ropke and Strigl" and then with the Keynesian revolution. All the same, I sense that Hawtrey’s perspective today actually provides much greater insight than investment and production theories, as it encourages us to focus on the critical points of credit creation, the resulting effects of the additional purchasing power, and the ramifications for a possible breakdown of key monetary processes. I will also admit to finding his work even more intriguing after watching the powerful U.S. credit system and the incredible resiliency of monetary forces over the past year. I could not be more convinced as to the dominant and precarious role continued to be played by extreme credit excess in sustaining the maladjusted, "service sector-based" U.S. Bubble economy.

"As has been mentioned, Mr. Hawtrey’s theory stands in contradiction to many other related theories in that it contends that a change in the rate of interest influences the economic system, not through a direct influence on investment in fixed capital, but through the provision of working capital and particularly stocks of goods… The banks, and especially the leaders of the banking system, the central banks, should not watch the reserve proportions so much as the flow of purchasing power. The demand for goods, the flow of money, is the important thing – not the outstanding aggregate of money units. The aim of banking policy should be to keep the consumer’s outlay constant, including outlays for new investment…" (Haberler, Prosperity and Depression)

"The existence of any large class of traders, whether it be bankers, underwriters, finance companies, or many others, with long-period assets and short-period debts, is always a source of trouble." (Hawtrey, Currency and Credit)

What sets Mr. Hawtrey’s analysis apart is his attention to "the causes and the nature of these cyclical movements" with specific focus on those in "strategic position" for instigating credit expansion. In his case, these were the merchants and dealers in commodities, capital assets, and securities (in concert with the bankers). It was these "traders" that were key to the inflationary and deflationary rhythm of the trade cycle: "there exists one class of business-men which is very sensitive even to small changes of the rate of interest." The key to this line of analysis is recognizing the players, instruments, mechanisms, and monetary processes for creating credit at the margin, and appreciating the direct and indirect influences of the increased spending power. Today, the demand for securities, the flow of liquidity, is the important thing.

It is my contention that, especially since 1998, extreme Federal Reserve accommodation has had its most direct influence on "traders" of financial assets, in particular the "leveraged speculating community." The resulting major inflationary manifestation was first largely isolated in the spectacular technology bubble, with wild speculative and spending excesses. Over time, credit-inflation induced general spending excesses and impacted household income and consumption, which manifested into enormous trade deficits. Endemic U.S. current account deficits were then a major factor in increasingly enormous and destabilizing global financial flows, in a self-feeding monetary disorder. The inevitable bursting of the technology bubble – in concert with the Fed’s well in advance advertised drastic rate cuts, then led to only more aggressive accumulation of leveraged positions in the U.S., particularly in mortgage and asset-backed securities, and mortgage agency debt. I contend that the Fed’s dramatic interest rate cuts incited massive foreign-sourced speculative flows into U.S. credit market instruments (recycling of inflationary U.S. trade deficits), as the U.S. became the focal point for global leveraged speculation. These aggressive rate cuts further fed the dollar Bubble.

"The general rise of prices will involve a proportional increase of borrowing to finance a given output of goods, over and above the increase necessitated by the increase in output. This increase of borrowing, meaning an increase in the volume of credit, will further stimulate trade. Where will the process end? In the case of the curtailment of credit the self-interest of the bankers and the distress of the merchants combined to restore the creation of credits…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 stock…thus the merchant and the banker share between them a larger rate of profit on a larger turnover... The greater the amount of credit created, the greater will be the amount of purchasing power and the better the market for the sales 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…(Hawtrey, Currency and Credit)

In Hawtrey’s day, the "dealers" were generally borrowing to finance inventories of goods. He saw such "dealer" credit growth as a key to creating the purchasing power that then fostered increased production, profits and wages. This analysis recognized the critical and direct link from credit expansion to income (while most others identified the flow from investment to income). "The consumers’ purchasing power is therefore largely supplied out of the credits which the traders borrow from the banks…the supply of purchasing power is thus regulated by the transactions which require to be financed. (Hawtrey, Currency and Credit)." Hawtrey, moreover, recognized that "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 credit operations means an increase in his business (Hawtrey, Currency and Credit)." Again, the contemporary comparison is with those taking leveraged speculative positions in financial assets and those providing the financing.

This line of analysis today has profound ramifications for the U.S. financial system and economy. It is my contention that credit creation emanating from the financing of momentous speculative holdings of U.S. financial assets has surreptitiously become the critical lifeline for the U.S. Bubble economy. First, there was the NASDAQ/technology inflation, and then upon the bursting of the tech bubble unrelenting financial system liquidity was made possible as wild credit excess engulfed the mortgage and consumer finance sector. Over time, this financial credit creation has involved the accumulation of $100s of billions (almost certainly trillions) of borrowings, that have driven extreme financial asset inflation, housing inflation, and, increasingly, an acceleration of income growth. These unstable monetary processes have also over time come to indelibly shape underlying economic structures. Importantly, this Credit Bubble has instilled a dangerous perception of limitless availability of finance, as well as perceptions of perpetual asset and wage inflation. Financial Credit excess, in particular, created the firepower for reckless spending throughout the Internet/telecom/tech sectors despite a dearth of true savings. It is furthermore the continued expansion of speculative financial borrowings that currently fosters the "terminal stage of excess" throughout consumer debt/mortgage finance. This is monetary disorder and fragility in its purest form.

As discussed in previous Bulletins, it is our view that this type of credit excess is particularly destabilizing and dangerous. For one, it fuels seductive asset inflation, with the related structural maladjustments and misallocation of resources to the real economy. Such processes feed heightened monetary disequilibrium, with self-reinforcing credit and speculative excess and only more problematic financial and economic distortions. We have argued repeatedly that the monetary disorder emanating from the 1998 system bailout led to a virtual breakdown in the market pricing mechanism. This may sound like hyperbole, but I strongly argue that since 1998 a dysfunctional U.S. financial sector has instigated processes overwhelmingly driving an endemic pursuit of speculative financial gains (tech and mortgage Bubbles!), at the great cost of neglecting the financing of true economic wealth creation capacity. Historians will not look favorably at Mr. Greenspan’s claims of an "efficient allocation of resources."

"We have traced the instability of credit to its source…we found that the initiative in production rests with the merchant and the promoter, the dealer in commodities, and the dealer in capital issues." (Hawtrey, Currency and Credit)

Over this long boom, we have watched as the pursuit of financial returns became paramount throughout the entire U.S. system, increasingly replacing the diligent pursuit of sound investment and true economic profits. The bulls can rationalize all they want, but the "bear case" can be stated rather succinctly: if a system borrows and speculates in excess, there’s going to be a problem. If overborrowing and speculation become endemic and allowed to progress over a long period, and the created purchasing power is spent recklessly, there is one big unavoidable problem and necessary adjustment process. The technology Bubble may have looked wonderful at the time to those studying company earnings momentum or salivating at the yields telecom companies were more than willing to agree to. But there was never a sliver of doubt in our minds as we watched enormous credit and speculative excess feed reckless spending (very little of it qualifies within our definition of "investment") that would certainly prove hopelessly uneconomic, hence problematic. Our focus was on the liabilities created, and the impossibility that expenditures would generate the future cash flows required to validate the debt levels and equity valuations.

There is similarly absolutely no question that the continuing massive creation of mortgage credit is generating spending power that is adding little if any true economic wealth creating capacity. Why would anyone not believe we are in the midst of a precarious Bubble with the creation of enormous additional liabilities not supported by any measurable increase in underlying economic assets? It truly is credit inflation in its most conspicuous and disconcerting form. Sure, the GSEs and the financial sector can create mountains of mortgage securities and inflate home prices, while stoking consumption. And the longer it continues, the more it may appear that rising wages will validate inflated home prices. We can furthermore stuff the new mortgage securities into the Social Security Trust Fund or use them to acquire more foreign goods. But let’s not kid ourselves. This is anything but investment - the prerequisite for providing the means of satisfying future economic wants and needs for our retirees or foreign creditors. This is unsound credit inflation, not investment, and it will come to a disappointing end.

But, for now, current monetary processes overwhelmingly encourage only more self-reinforcing creation (and speculative positioning) of mortgage and agency securities. In fact, a strong case can be made that the protracted period of monetary disorder has led to a complete breakdown of the U.S. financial system as a mechanism of effectively channeling resources to sound investment. It has, instead, developed overwhelmingly into a mechanism creating financial credit and funneling the resulting speculative flows (domestic and foreign) required to sustain a massive financial and economic Bubble. This the financial system does quite effectively. As a diligent analyst, carefully examining the scope of continuous credit excess as well as the dearth of additional underlying economic wealth supporting these liabilities, there is just no way to view this other than as an unfolding financial and economic disaster. It also appears so patently obvious that we have been expecting a reaction in the foreign exchange markets.

While there was certainly recognition, particularly by the "Austrians," regarding the acute structural damage imparted on the U.S. economy during the 1920’s Bubble, there has been little recognition for what I see as the other crucial aspect of large-scale financing of speculative security positions: systemic liquidity issues related to the accumulation of huge amounts of speculative financial credit. What are the ramifications for an economy and financial system when the key "strategic" credit creation mechanism has become financing speculative holdings of financial and other non-productive assets? And recognizing the momentous impact of this historic monetary expansion (technology and mortgage finance booms), what are the systemic consequences when this source of money and credit growth is disturbed? What if the monetary flows reverse? Yes, credit growth and resulting asset inflation are certainly self-sustaining, but we at the same time see them as unsustainable and acutely vulnerable to changing perceptions. Surging margin debt (and derivative related leverage) was a powerful source of monetary expansion, only to abruptly reverse with the bursting NASDAQ Bubble. The ramifications for the piercing of the mortgage finance Bubble are significantly more problematic.

The monetarists blame the Federal Reserve for not creating sufficient money to stem the post-1929 crash deflation. But if the monetary processes of the U.S. financial system had come to be dominated by extending credit to speculative asset markets, and the bubble had burst, why would this not necessitate a collapse in the debt from the previous monetary inflation? Importantly, credit expansion involves the creation of liabilities, and if the cash flows generated by the underlying assets prove insufficient to service the debts, there will be debt impairment and asset liquidations. There is furthermore the issue of forced sales of speculative marketable securities positions – and the resulting deleveraging/contraction of credit – come the bursting of the Bubble. Unfortunately, we today view a significant and unavoidable "deleveraging" as a prerequisite for a return to monetary stability. Looking at the 1980s Bubble in Japan, with speculative asset Bubble processes playing a key role in monetary expansion, why would one not expect the unavoidable collapse of the speculative bubbles in the equity, real estate, and other (golf club memberships!) asset markets to usher in a protracted period of monetary stagnation/deflation? Is it government ineptness, or more a case of it being exceedingly difficult to foster monetary expansion in post-asset Bubble economies? I would argue the latter.

Mr. Hawtrey was born near London in 1879 and worked in the British Treasury from 1904 to his retirement in 1944. His work had considerable influence both domestically and internationally. From the New Palgrave Dictionary of Economics: "At the Treasury Hawtrey had argued that there were two primary considerations for monetary policy: the stabilization of internal prices and the stabilization of the foreign exchanges. Given the UK’s status as a financial center he argued that exchange instability was particularly damaging and would make the covering of trade finance offered through London increasingly difficult. This predisposed him towards the Gold Standard as the de facto most practical means of achieving exchange stability."

"The actual variations in the value of the monetary unit are the result of the regulation of credit, which rests in the discretion of the bankers. The use of gold as an international currency tends to prevent credit conditions in any one country from deviating from those in the others in more than a certain limited degree…" (Hawtrey, Currency and Credit)

He was an ardent and uncompromising proponent of global monetary stability, and for that reason alone we have great appreciation for his contribution to economic understanding. Unfortunately, his valuable insights on the danger of uncontrolled credit expansion have for too long been forgotten or simply disregarded. Perhaps he displayed more passion and conviction in his views and was too outspoken for the crowd. We will not hold that against him. We Could Have Used a Mr. Hawtrey during this historic period of runaway credit excess, and U.S. led global monetary instability.

"Paper money which is not convertible into (gold) coin is a sham, a fraud. He who sells goods for paper money sells something for nothing; likewise he who sells them for credit payable only in paper money… This severe and uncompromising doctrine has owed its success rather to its practical utility than to its theoretical perfection. It has grown up out of the political contests which have raged from time to time about currency questions. Attacked and defended by a thousand politicians and pamphleteers, it has held the field as the only theory which provides an intelligible, self-consistent, workable system. The economists, at any rate for the past half century, have not paid such unreserved homage to it as the practical men …It is the only bulwark against inflationism, that insidious financial vice, which seems so attractive, but over-indulgence in which may enfeeble or wreck the system." (Hawtrey, Currency and Credit)