The Leverage Cycle - John Geanakoplos

Need example from Lombard Street (see Walter Bagehot, Lombard Street: A Description of the Money Market (1873)):

English trade is carried on upon borrowed capital to an extent of which few foreigners have an idea, and none of our ancestors could have conceived. In every district small traders have arisen, who 'discount their bills' largely, and with the capital so borrowed, harass and press upon, if they do not eradicate, the old capitalist.2 The new trader has obviously an immense advantage in the struggle of trade. If a merchant have 50,000l. all his own,—to gain 10 per cent. on it he must make 5,000l. a year, and must charge for his goods accordingly; but if another has only 10,000l., and borrows 40,000l. by discounts (no extreme instance in our modem trade), he has the same capital of 50,000l. to use, and can sell much cheaper. If the rate at which he borrows be 5 per cent., he will have to pay 2,000l. a year; and if, like the old trader, he make 5,000l. a year, he will still, after paying his interest, obtain 3,000l. a year, or 30 per cent., on his own 10,000l. As most merchants are content with much less than 30 per cent., he will be able, if he wishes, to forego some of that profit, lower the price of the commodity, and drive the old-fashioned trader—the man who trades on his own capital—out of the market. In modem English business, owing to the certainty of obtaining loans on discount of bills or otherwise at a moderate rate of interest, there is a steady bounty on trading with borrowed capital, and a constant discouragement to confine yourself solely or mainly to your own capital.1

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