How an Economy Grows and Why It Crashes

33
T H E   M A N Y   U S E S   O F   C R E D I T
Emergency Loans
As it turns out, Able’s 
rejection of Baker and 
Charlie’s “vacation” 
(consumption) 
loans was extremely 
fortunate. A week 
later, both are struck by a freak outbreak of the 
Pokalani Pox, which prevents them from fi shing for a week.
Now, when this emergency arises, Able is in a position to make 
a hardship consumer loan out of his accumulated savings 
so that Baker and Charlie can eat and 
live to work another day. Although 
he also understands that the risk 
of nonrepayment is high, he 
understands that the 
risk in not making 
the loan is higher. Unlike 
the consumption loan, Baker and 
Charlie can perish if the emergency loan is not made. If this 
were to happen, the island would lose productive capacity.
Able should deny the loan. Not only would such a transaction 
put his savings at unnecessary risk, but it would mean that 
the capital would be unavailable for more productive loans. 
And while he will earn their scorn, he will actually prevent 
future hardship. In actuality, loans to consumers that do not 
fundamentally improve productive capacity are a burden to 
both the lenders and the borrowers.  

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