How an Economy Grows and Why it Crashes

Chapter 3. THE MANY USES OF CREDIT

As we have just seen, Able decided to loan Baker and Charlie fish so that they could build nets. Business loans such as these are the best use of saved capital because they tend to expand production.

Of course, the act of lending money—or fish—to start a business is no guarantee that the venture will be successful. A borrower may not be able to fully execute on his initial plan.

That's what would have happened if Charlie and Baker failed to produce successful nets.

In other instances, a business may fail because the idea never held any promise to begin with. Suppose instead of asking for a loan to build a net, Baker and Charlie asked Able for a loan that would allow them to perfect a technique for mass fish hypnosis.

If the fish wouldn't fall for it, the loan would produce no benefit for the borrowers—Charlie and Baker—or the lender—Able.

The bottom line is that loans made to businesses that do not succeed waste society's store of savings and diminish productive capacity. As a result, the lender may then have trouble getting back his principal, let alone the interest.

But the business plans that work make up for the ones that don't!

It is important to understand ...