**A Pyrrhic End To 130 Years Of Vicious Bad Money And Banking Crises**

A Pyrrhic End To 130 Years Of Vicious Bad Money And Banking Crises

_Authored by Brendan Brown via The Mises Institute,_ (https://mises.org/wire/pyrrhic-end-130-years-vicious-bad-money-and-banking-crises)

_**The original vicious circle starts with inflationary interventions in an up-to-then well-anchored monetary regime.**_

_Consequent asset inflation spawns a banking crisis. That leads to the installation of anticrisis safety structures (one illustration is a novel or enhanced lender of last resort). Alongside a possible monetary regime shift, these damage the money’s anchoring system. A great asset inflation emerges and leads on to an eruption of another banking crisis, devastating in comparison with the first._

_**An array of additional safety structures is put in place which makes the now-bad money worse than before.** After a long and variable lag, a long and violent monetary storm means the safety structures fail, a banking crisis again erupts but this time milder than the previous._

_Then a further tinkering with the safety structures causes money to deteriorate even more in quality. Another shift in monetary regime coincidentally does much additional damage. Consequently, in time, a new crisis erupts much worse than the last one._

_**The safety engineers do more work, causing yet more damage to the mechanisms essential to sound money.** But now the safety structures are so pervasive and strong across the banking industry that there is widespread belief that bank crisis eruptions will be smaller or, more likely, totally repressed._

_Subsequent events demonstrate those beliefs to be hollow. There is a new round of safety structure elaboration leading to further monetary deterioration. Regime officials declare the end of bank crises._

_The cumulative economic cost of this vaunted triumph over bank crisis is an advance of monopoly capitalism and monetary statism that throttles the essential dynamism of free market capitalism. **Malinvestment becomes cumulatively larger. Living standards in general suffer. The severely ailing money which subsists is beyond any cure except the most radical.**_

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**Let’s fit the above abstract series of vicious bad money–bank crisis cycles to the most recent 130-year history of US money.**

At the start there were the inflationary interventions by US administrations in the two penultimate decades of the international gold standard, overpowering for sustained periods the “checks and balances” of that regime.

Murray Rothbard highlights these interventions in his US monetary history book (https://mises.org/library/history-money-and-banking-united-states-colonial-era-world-war-ii) \- the first intervention under the “Billion Dollar Congress” of 1889–91 and the second from 1902–7 under Secretary Leslie Shaw who aimed to create a virtual central bank within the Treasury by deploying the huge cash balances of the federal government. The results were the Panic of 1893 and then the epic crash of 1907 followed by a recession.

**These financial system convulsions and the related economic slumps were decisive events behind the creation of the Federal Reserve in 1913.** Its advocates promised that an elastic currency, a state-run clearing house, and a monopoly of note issuance would mean the end of episodic banking crises.

The true source of these crises, however, were the preceding episodes of monetary inflation, and the scope for this crisis just got a lot worse. The international gold standard disintegrated at the outbreak of World War One. Demand for monetary gold in the belligerent European countries collapsed as governments there sequestered the yellow metal to pay for imports.

Beyond that wartime experience, the launch of the Fed destabilized the demand for monetary base. The novel provision of lenders of last-resort facilities and, more generally, discount window-access to member banks diluted the perceived special qualities of the monetary base (as means of payment and store of value) essential to its enjoying strong, broad, and stable demand despite its constituents bearing no interest. These “super money” qualities are crucial to monetary base’s role in the solid anchoring of money (https://www.amazon.co.uk/Guide-Good-Money-Illusions-Inflation/dp/3031060407).

**In the wake of the immediate postwar depression in 1920, during which no banking crisis erupted, opinion was prevalent that the institution of the Federal Reserve meant no more systemic bank runs and panics.** Correspondingly, individuals saw less reason to hold large amounts of cash or types of deposits that were backed by large amounts of cash, gold, or reserve deposits. Hence, though monetary base growth seemed low an…

https://www.zerohedge.com/markets/pyrrhic-end-130-years-vicious-bad-money-and-banking-crises