Most investors misunderstand credit.
Henry Thornton didn’t — and his framework still explains every boom and bust we see today.
Credit begins with trust. Not legal enforcement, but something deeper: the expectation that commitments will be honored even when they don’t have to be. Without that, no financial system can function.
From there, Thornton makes a crucial distinction.
When merchants carry debt, it is not a weakness — it is the engine of commerce. Credit between producers expands trade, finances real activity, and increases output.
But when consumers take on debt, the logic changes.
The logic also changes in international trade.
He then identifies the real driver of credit cycles: psychology.
Periods of optimism expand credit beyond what underlying commerce can support — until confidence breaks. Then contraction happens faster than fundamentals justify. Boom and bust are not anomalies. They are structural.
And finally, the point most relevant today:
Paper wealth is not real wealth.
Rising asset prices driven by monetary expansion create the feeling of wealth — not the substance of it. A nation is not richer simply because balance sheets are larger.
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