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Criticism of fractional reserve banking

2011-02-15T09:42:27Z

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'''Criticisms of [[fractional reserve banking]]''' have been put forward from a variety of perspectives. Critics have included economists such as [[Irving Fisher]],<ref>''100% Money'', Irving Fisher</ref> and [[Milton Friedman]].<ref>Friedman, M., A Program for Monetary Stability, New York, Fordham University Press, 1960, pp. 65</ref><ref>[http://mises.org/daily/3108 The Social Imperative of Sound Money], Lew Rockwell: "I find it sickening that there are so few voices outside the [[Austrian School]] that will stand up to this policy (of [[fiat money]]/[[fractional reserve banking]]/[[central bank]]ing)".</ref> Within the economics profession, most criticisms are from the [[Austrian School]].<ref>[http://mises.org/media/4014 The Economics of Legal Tender Laws], [[Jorg Guido Hulsmann]] (includes detailed commentary on [[fractional reserve banking|FRB]])</ref><ref>[http://mises.org/store/Money-Bank-Credit-and-Economic-Cycles-P290C0.aspx Money, Bank Credit and Economic Cycles], Jesus Huerta de Soto, Mises Institute ISBN: 978-1-933550-39-8</ref><ref>[http://mises.org/store/Meltdown-P557.aspx ''Meltdown''], Tom Woods, Regnery Press ISBN: 9781596985872</ref><ref>[http://www.marketoracle.co.uk/Article25212.html The Faults of FRB], Thorsten Polleit</ref> There are also critics from outside the economics profession who advocate [[monetary reform]].<ref>[http://www.nakedcapitalism.com/2010/12/matt-stoller-end-this-fed.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+NakedCapitalism+%28naked+capitalism%29 End This Fed], Matt Stoller</ref><ref>For an example of the writings of these groups, see [http://www.bilderberg.org/monref.htm this] contribution from Bilderberg.org</ref><ref>[http://www.youtube.com/watch?v=VMngK0t5WkY Max Keiser]</ref>

==Terminology==

Critics of fractional reserve banking and the related fiat paper monetary system may refer to it by the term '''debt-based monetary system''',<ref>[http://mises.org/daily/4631 Is Our Money Based On Debt?], Robert Murphy</ref><ref name="speech">For an example of the public use of the term, see the [http://www.prosperityuk.com/prosperity/articles/earl.html speech] of the Earl of Caithness in the House of Lords on 5 March 1997</ref> or '''credit-based monetary system'''.<ref>For example of the public use of the term, see this speech given by [[Zhou Xiaochuan]], [http://www.bis.org/review/r090402c.pdf Reform the monetary system], 23 March 2009 (BIS), and this article, [http://www.nakedcapitalism.com/2009/02/steve-keen-roving-cavaliers-of-credit.html ''Roving Cavaliers of Credit''] by Steve Keen (with commentary by Yves Smith)</ref><ref>[http://globaleconomicanalysis.blogspot.com/2010/09/myths-about-whats-economically.html Myths], MISH</ref><ref>[http://globaleconomicanalysis.blogspot.com/2010/07/are-we-trending-towards-deflation-or-in.html Deflation], MISH</ref> They may also refer to money created in parallel with debt as '''debt money''', reflecting the fact that new money is currently created by people or businesses or governments further indebting themselves to banks.<ref name="death"/> Some consider this a perverse and dysfunctional way of introducing new money into the economy.<ref name="death"/>

The term, "debt-based monetary system," and related terms such as "debt money" are not used by conventional economists or academic mainstream economists. Mainstream economists often refer to "debt money" simply as [[Credit (finance)|credit]], and distinguish between types of money only ''after'' the money is created. Mainstream economists rarely if ever discuss the origins of modern money and generally do not actively discuss or comment on the fact that virtually all money is now created through individuals, or businesses, or governments going into debt to government-sponsored commercial banks.<ref>For an example of the mainstream use of the term "credit" instead of "debt-money" see [http://www.ft.com/cms/s/bdfa429e-17a2-11dd-b98a-0000779fd2ac,Authorised=false.html?_i_location=http%3A%2F%2Fwww.ft.com%2Fcms%2Fs%2F0%2Fbdfa429e-17a2-11dd-b98a-0000779fd2ac.html&_i_referer=http%3A%2F%2Fwww.ft.com%2Fhome%2Fasia this] example from the Financial Times, 1 May 2008</ref> The subject of debt-based money (as distinct from traditional monetary policy) is absent from most established mainstream academic economic publications.<ref>Paul Krugman, writing at Slate.com, says the Austrian theory of business cycles is "about as worthy of serious study as the phlogiston theory of fire". http://www.slate.com/id/9593</ref> Some commentators have speculated that this unusual "silence" around fractional reserve banking and central banking is due to the simple fact that many economists are on the payroll of the major commerical and/or central banks of the world and are unprincipled or, at worst, corrupt.<ref>[http://www.safehaven.com/article/15068/economists-opposing-fed-audit-are-on-fed-payroll Economists on Fed Payroll], MISH</ref><ref>[http://www.huffingtonpost.com/2009/09/07/priceless-how-the-federal_n_278805.html Priceless], Ryan Grim, Huffington Post</ref>

== Typical criticisms ==

Norm Franz states in his ''Money and Wealth in the New Millennium'':<ref>[http://www.amazon.com/Money-Wealth-Millennium-Norm-Franz/dp/0971086303 ''Money and Wealth in the New Millennium''], Norm Franz</ref>

{{quote|Gold is the money of kings, silver is the money of gentlemen, barter is the money of peasants – but debt is the money of slaves.}}

12th century Chinese scholar Hu Zhiyu stated:<ref>Ralph T. Foster, ''Fiat Paper Money, The History and Evolution of Our Currency'', page 19</ref>

{{quote|Paper money, the child, is dependent on precious metals, the mother. [Inconvertible paper notes are therefore] orphans who lost their mother in childbirth.}}

Robert H. Hemphill, credit manager of the Federal Reserve in Atlanta, stated in 1939:<ref>Preface to ''100% Money'', Irving Fisher</ref>

{{quote|If all the bank loans were paid, no one would have a bank deposit and there would not be a dollar of coin or currency in circulation. This is a staggering thought. Someone has to borrow every dollar we have in circulation, cash or credit. If the banks create ample synthetic money we are prosperous; if not, we starve. When one gets a complete grasp of the picture the tragic absurdity of our hopeless position is almost incredible, but there it is. It (the banking problem) is the most important subject intelligent persons can investigate and reflect upon. It is so important that our present civilization may collapse unless it becomes widely understood and the defects remedied very soon.}}

Ron Paul states in his book ''End the Fed'':<ref>[http://mises.org/daily/3687 ''End the Fed''], Ron Paul</ref>

{{quote|American presidents actually worked to implement and defend the gold standard, which put a brake on the ability of the largest banks to expand credit without limit. The gold standard worked like a regulator in this way. Ultimately, banks had to function like every other business. They could expand and make risky loans up to a point, but when faced with bankruptcy, they had nowhere they could turn. They would have to contract loans and deal with extreme financial pressures. Risk bearing is a wonderful mechanism for regulating human decision making. This created a culture of lending discipline.

In the jargon of the day, the system lacked "elasticity." That's another way of saying that banks couldn't expand money and credit as much as they wanted. They couldn't inflate without limit and count on a centralized institution to bail them out...

The banking industry has always had trouble with the idea of a free market that provides opportunities for both profits and losses. The first part, the industry likes. The second part is another issue. That is the reason for the constant drive in American history towards the centralization of money and banking, a trend that not only benefits the largest banks with the most to lose from a sound money system, but also the government, which is able to use an elastic system as an alternative form of revenue support. The coalition of government and big bankers provides the essential backbone of support for the centralization of money and credit...

Consider the Soviet case: to my knowledge, no business ever went under with the Soviet system but society in general grew ever poorer. Think of that Soviet system applied to the banking industry and you have the Fed.}}

In the foreward to ''Fiat Money Inflation in France'', Mr John McKay wrote the following:<ref>[http://mises.org/books/inflationinfrance.pdf ''Fiat Money Inflation in France''], Andrew Dickson White, 1912</ref>

{{quote|The story of "Fiat Money Inflation in France" is one of great interest to legislators, to economic students, and to all business and thinking men. It records the most gigantic attempt ever made in the history of the world by a government to create an inconvertible paper currency, and to maintain its circulation at various levels of value. It also records what is perhaps the greatest of all governmental efforts—with the possible exception of Diocletian's—to enact and enforce a legal limit of commodity prices. Every fetter that could hinder the will or thwart the wisdom of democracy had been shattered, and in consequence every device and expedient that untrammelled power and unrepressed optimism could conceive were brought to bear.

But the attempts failed. They left behind them a legacy of moral and material desolation and woe, from which one of the most intellectual and spirited races of Europe has suffered for a century and a quarter, and will continue to suffer until the end of time. There are limitations to the powers of governments and of peoples that inhere in the constitution of things, and that neither despotisms nor democracies can overcome.

Legislatures are as powerless to abrogate moral and economic laws as they are to abrogate physical laws. They cannot convert wrong into right nor divorce effect from cause, either by parliamentary majorities, or by unity of supporting public opinion. The penalties of such legislative folly will always be exacted by inexorable time. While these propositions may be regarded as mere commonplaces, and while they are acknowledged in a general way, they are in effect denied by many of the legislative experiments and the
tendencies of public opinion of the present day. The story, therefore, of the colossal folly of France in the closing part of the eighteenth century and its terrible fruits, is full of instruction for all men who think upon the problems of our own time.}}

C.J. Maloney wrote of the desperation of Henry VIII of England to counterfeit gold by engaging charlatan-alchemists:<ref>[http://www.lewrockwell.com/maloney/maloney28.1.html The Desperation of King Henry VIII], C.J. Maloney</ref>

{{quote|Despite his formidable education and great historic reputation, the disastrous interventions into the economy, the lifelong dishonesty with the currency in his care and, most of all, his laughable attempts to bring a sorcerer into his court to conjure gold, mark the great King Henry VIII as a fool. Yet there is no reason, be warned, for anyone to feel superior to the King; one only needs to pick up a newspaper to see that though alchemy may be a dead science, it has merely taken up new forms.

This has always been and always will be, for its immortality is powered by economic man’s most dangerous, fondest wish, the one that will drive us to endless imbecilities and repeated destruction – the ardent desire to believe that you can get something for nothing. His adherence to that belief made King Henry VIII a man of his times – and ours.}}

In his treatise, ''The Ethics of Money Production'', which was published by the Mises Institute in October 2008, Jörg Guido Hülsmann presents (at pages 238-239) the following description of the perverse rise of fiat money and fractional reserve banking:

{{quote|There is no tenable economic, legal, moral, or spiritual rationale that could be adduced in justification of paper money and fractional-reserve banking. The prevailing ways of money production, relying as they do on a panoply of legal privileges, are alien elements in the capitalist [i.e., true free market] economy. They provide illicit incomes, encourage irresponsibility and dependence, stimulate the artificial centralization of political and economic decision-making, and constantly create fundamental disequilibria that threaten the life and welfare of millions of people. In short, paper money and fractional-reserve banking go a long way toward accounting for the excesses for which the capitalist economy is widely chided.

We have argued that these monetary institutions have not come into existence out of any economic necessity. They have been created because they allow an alliance of politicians and bankers to enrich themselves at the expense of all other strata of society. This alliance emerged rather spontaneously in the seventeenth century; it developed in multifarious ways up to the present day, and in the course of its development it created the current monetary institutions.

…The driving force that propelled the development of central banks and paper money was the reckless determination of governments, both aristocratic and democratic, to increase their revenue, if necessary in violation of good faith and of all established rules of commerce.}}

Certain [[monetary reform]]ers claim that a fiat money/fractional-reserve based banking system is inherently destructive and inevitably generates [[inflation|debasement of the currency]], [[debt slavery|extreme inequality]] or [[Austrian Business Cycle Theory|periodic crises]].<ref>[http://www.marketoracle.co.uk/Article25212.html The Faults of FRB], Thorsten Polleit</ref><ref>[http://mises.org/daily/3687 ''End the Fed''], Ron Paul</ref><ref>[http://mises.org/store/Money-Bank-Credit-and-Economic-Cycles-P290C0.aspx Money, Bank Credit and Economic Cycles], Jesus Huerta de Soto, Mises Institute ISBN: 978-1-933550-39-8</ref><ref>[http://www.mises.org/Books/mysteryofbanking.pdf Murray Rothbard, ''The Mystery of Banking'']</ref><ref name="books.google.com">{{cite book |last= Brown |first= Ellen H. |title= Web of Debt |url= http://books.google.com/books?id=ILMGrEC524UC |accessdate= 2007-12-15 |year= 2007 |publisher= Engdahl Publishing|isbn= 0979560802 }}</ref><ref name="death"/><ref name="monetary.org">[http://www.monetary.org/lostscienceofmoney.html Stephen A. Zarlenga, ''The Lost Science of Money'' AMI (2002)]</ref><ref>[http://mises.org/story/3108 Sound Money], Lew Rockwell</ref><ref>[http://mises.org/story/1971 Our Money Madness], Lew Rockwell</ref><ref>[http://mises.org/rothbard/genuine.asp The Case for a Gold Dollar], Murray Rothbard</ref><ref name="twilight"/> Vladimir Z. Nuri has analyzed fractional reserve banking and considers it a form of economic parasitism.<ref>[http://econpapers.repec.org/paper/wpawuwpma/0203005.htm Fractional Reserve Banking as Economic Parasitism]</ref> This view is not accepted by mainstream economists.<ref>[http://www.capitalspectator.com/archives/2005/11/does_m3_matter.html Capital Spectator, "Does M3 Matter"], November 16, 2005.</ref>

Critics of fractional reserve banking frequently argue that since money creation requires ''loans'' from the banking system, people are required to go further into debt in order for any new money to be created. They theorize that this eventually causes [[Austrian Business Cycle Theory|credit cycle]]s (or [[Austrian Business Cycle Theory|business cycles]]) and necessarily debases the [[means of exchange]].<ref>[http://www.marketoracle.co.uk/Article25212.html The Faults of FRB], Thorsten Polleit</ref>

Many critics find it problematic that banks "create money out of nothing" and consider this akin to [[counterfeiting]] and/or [[embezzlement]].<ref>[http://www.dailypaul.com/node/119914 Ron Paul video - fractional reserve banking is fraudulent]</ref><ref>[http://mises.org/daily/3687 ''End the Fed''], Ron Paul</ref><ref>[http://www.marketoracle.co.uk/Article25212.html The Faults of FRB], Thorsten Polleit</ref>

Other critics link the alleged negative effects of fractional reserve banking with central banking and a government-enforced "paper" or [[fiat currency]], which they claim allows the practice of fractional reserve banking to continue without a "natural" limitation on the growth of the [[money supply]], thereby causing inherently unsustainable "[[bubble (economics)|bubbles]]" in asset and capital markets, which are vulnerable to Ponzi-like speculation by highly leveraged [[hedge funds]] and other bank agents.<ref>[http://mises.org/daily/3687 ''End the Fed''], Ron Paul</ref><ref>[http://mises.org/store/Money-Bank-Credit-and-Economic-Cycles-P290C0.aspx Money, Bank Credit and Economic Cycles], Jesus Huerta de Soto, Mises Institute ISBN: 978-1-933550-39-8</ref><ref name="books.google.com">{{cite book |last= Brown |first= Ellen H. |title= Web of Debt |url= http://books.google.com/books?id=ILMGrEC524UC |accessdate= 2007-12-15 |year= 2007 |publisher= Third Millennium Press |location= Baton Rouge, Louisiana |isbn= 0979560802 }}</ref><ref name="death"/><ref name="monetary.org">[http://www.monetary.org/lostscienceofmoney.html Stephen A. Zarlenga, ''The Lost Science of Money'' AMI (2002)]</ref><ref>[http://mises.org/story/3108 Sound Money], Lew Rockwell</ref><ref>[http://mises.org/story/1971 Our Money Madness], Lew Rockwell</ref><ref>[http://mises.org/rothbard/genuine.asp The Case for a Gold Dollar], Murray Rothbard</ref><ref name="twilight"/><ref>[http://www.marketoracle.co.uk/Article25212.html The Faults of FRB], Thorsten Polleit</ref>

Some critics (particularly those from the [[Austrian School]]) support a "full reserve" banking system and criticize [[fractional reserve banking]] as inherently fraudulent. [[Murray Rothbard]] held this view very strongly throughout his life.<ref>[http://mises.org/daily/3687 ''End the Fed''], Ron Paul</ref><ref>[http://www.marketoracle.co.uk/Article25212.html The Faults of FRB], Thorsten Polleit</ref> Others support free banking.<ref>[http://books.google.com/books?id=DFv6OzeBWpQC&pg=PP3&dq=steven+horwitz++banking&sig=VZasp_8pGVvpQsFKMI3W9yp4AlM#PPA231,M1 Microfoundations and Macroeconomics: An Austrian Perspective], Steven Horwitz, pp. 223-232.</ref>

==Basic debate==

Many Austrian economists and monetary reformers focus on the combined use of [[fiat currency]], [[fractional-reserve banking]] and [[central banking]] as a negative feature of modern monetary systems.<ref>[http://mises.org/media/4014 The Economics of Legal Tender Laws], [[Jorg Guido Hulsmann]]</ref><ref>[http://mises.org/store/Meltdown-P557.aspx ''Meltdown''], Tom Woods, Regnery Press ISBN: 9781596985872</ref> These commentators use the term "debt-based monetary system" to refer to an economic system where [[money]] is created primarily through fractional-reserve banking techniques, using the banking system.<ref>[http://mises.org/daily/4569 What Does Debt-Based Money Imply for Interest Payments?], Robert Murphy</ref><ref>[http://mises.org/daily/4631 Is Our Money Based On Debt?], Robert Murphy</ref><ref name="speech"/> This form of money is called "debt-based" because as a ''condition of its creation'' someone must go into debt in order for the money to be created and it must be paid back plus interest at some time in the future.

To some commentators, this implies that as the [[money supply]] and the economy grows, the general populace becomes increasingly indebted at the same time due to the idea that debt grows in parallel with money supply growth, and increasing interest payments (from either taxpayers or indebted consumers) are needed to pay bondholders as the money supply grows.<ref name="death">{{cite book |last= Rowbotham |first= Michael |title= The Grip of Death: A Study of Modern Money, Debt Slavery and Destructive Economics | year= 1998 |publisher= Jon Carpenter Publishing |isbn= 9781897766408 }}</ref><ref name="twilight">[http://www.marketoracle.co.uk/Article4489.html Antal E. Fekete, The Twilight of Irredeemable Debt]</ref><ref name="The Forgotten War">[http://news.goldseek.com/GoldSeek/1192819378.php America's Forgotten War Against the Central Banks], Mike Hewitt</ref>

One argument posits that since debt and the interest on the debt can only be paid in the same form of money, the total debt (principal plus interest) can never be paid in a debt-based monetary system unless more money is created through the same process. For example: if 100 credits are created and loaned into the economy at 10% per year, at the end of the year 110 credits will be needed to pay the loan and extinguish the debt. However, since the additional 10 credits does not yet exist, it too must be borrowed. To some, this implies that debt must grow exponentially in order for the monetary system to remain solvent.<ref name="death"/><ref name="twilight"/><ref>[http://globaleconomicanalysis.blogspot.com/2011/01/steve-keen-responds-to-world-economic.html Exponential Credit], MISH,</ref>

Others argue that there is in fact no mathematical necessity for the stock of money in a debt-based system to grow, as the "turnover" or "flow" or "velocity" of money can increase to allow for compounding interest payments.<ref>[http://mises.org/daily/4569 What Does Debt-Based Money Imply for Interest Payments?], Robert Murphy</ref><ref>[http://www.debtdeflation.com/blogs/2010/10/08/ami-talks-in-flv-format/ AMI Conference 2010], Steve Keen</ref><ref>[http://www.debtdeflation.com/blogs/2010/11/05/solving-the-paradox-of-monetary-profits-2/ Solving the Paradox of Monetary Profits], Steve Keen</ref> However this does imply that some consumers would increasingly have to consume and transact to expand the GDP sufficiently to allow the fixed stock of money to turnover sufficiently to pay for the interest compounding on top of the debt.<ref>[http://globaleconomicanalysis.blogspot.com/2011/01/steve-keen-credit-impulse.html The Credit Impulse], Steve Keen with commentary from MISH</ref><ref>[http://mises.org/daily/4569 What Does Debt-Based Money Imply for Interest Payments?], Robert Murphy</ref><ref>[http://www.debtdeflation.com/blogs/2010/10/08/ami-talks-in-flv-format/ AMI Conference 2010], Steve Keen</ref><ref>[http://www.debtdeflation.com/blogs/2010/11/05/solving-the-paradox-of-monetary-profits-2/ Solving the Paradox of Monetary Profits], Steve Keen</ref> This may mean that Ponzi-like dynamics bubble up in "pockets" of the economy with interest payments being allowed in a fixed money economy, but these debt-fuelled bubbles of higher spending or speculation would pop and die out relatively quickly.<ref>[http://mises.org/daily/4569 What Does Debt-Based Money Imply for Interest Payments?], Robert Murphy</ref><ref>[http://globaleconomicanalysis.blogspot.com/2011/01/steve-keen-credit-impulse.html The Credit Impulse], Steve Keen with commentary from MISH</ref>

==Basic nature of system==

The economic, environmental and social effects arising from money creation through fractional-reserve banking have been subject to much heated political debate for well over two centuries.<ref name="The Forgotten War"/><ref name="books.google.com"/><ref name="death"/><ref name="twilight"/><ref>[http://www.silverbearcafe.com/private/fracbank.html Antal E. Fekete, Fractional Reserve Banking Revisited]</ref><ref>[http://news.goldseek.com/GoldSeek/1297199137.php China Inflation and Gold], Darryl Robert Schoon</ref>

Critics claim that, in contrast to "debt money" (which is money created in parallel with the issuance of debt or [[Credit (finance)|credit]]), "true" fiat currency is issued by the [[Treasury]] of a [[central government]] debt-free, as no requirement for its eventual return is made as a condition of its creation.<ref name="monetary.org"/><ref name="The Forgotten War"/> Government-issued debt-free fiat currency (such as debt-free notes and coins) can circulate perpetually in the economy as "stable" or even [[sound money]] (if backed by [[gold]] or [[silver]]) and although not as stable as [[hard currency]], government-issued debt-free notes and coins (such as [[United States Note]]s and [[silver certificate]]s) do not have the same effects of debt-based money described below.<ref>[http://www.entrewave.com/freebooks/docs/a_pdfs/gnhm.pdf Honest Money]</ref> It should be noted however that fiat currency can be a source of [[hyperinflation]] if its production is not controlled, as the government has the potential to issue unlimited amounts of fiat currency - ''provided'' it is accepted as "money" by the [[private bank]]ing system.<ref>[http://mises.org/books/shorthistorypapermoney.pdf A Short History of Paper Money in the United States], William M. Gouge, Mises Institute</ref> Notes and coins in circulation (being defined as [[M0]]) now account for a tiny fraction of the total M3 [[money supply]] in all developed, debt-based [[capitalism|capitalist]] economies (and M0 is also generally less than 10% of the total [[M2 (economics)|M2]] money supply in most developed economies).<ref>[http://www.dollardaze.org/blog/?post_id=00216 Global Money Supply Ratios]</ref>

Similarly, gold, silver and other [[precious metals]] have in the past been used as money. Because of the difficulty in increasing the supply of precious metals quickly, some [[monetary reform]]ers believe a return to the [[gold standard]], or a similar system of "hard" or "real" asset-backed currency, is the only way to stabilize the growth of the money supply. These monetary reformers often refer to the gold standard and [[silver standard]] as "sound money" or "honest money".<ref>[http://mises.org/daily/4860 Money: Sound and Unsound], Mark Thornton commentary on Joseph Salerno's book</ref>

==Other economic and political criticisms==

In a 2003 statement to the U.S. House of Representatives, Ron Paul stated "if unchecked, the economic and political chaos that comes from currency destruction inevitably leads to tyranny".<ref name="house.gov">[http://www.house.gov/paul/congrec/congrec2003/cr090503.htm Paper Ron Paul, Paper Money and Tyranny, Speech in U.S. House of Representative, September 5, 2003]</ref>

Some economic thinkers (primarily members of the [[Austrian School]]) and political commentators believe that a debt-based monetary system amounts to a subtle form of monetary "[[fraud]]" in that it creates money "costlessly" through the use of [[fractional-reserve banking]] techniques.<ref>[http://www.mises.org/rothbard/moneyback.asp Taking Money Back, by Murray Rothbard]</ref>

[[Michael Rowbotham]] is an active proponent of [[monetary reform]], and argues that this system of [[money supply]] is perverse and inherently monopolistic and "anti-[[democratic]]", as it creates an inflationary [[exponential growth]] imperative in the economy which leads to over-centralization and [[Natural environment|environment]]ally damaging and unstable [[over-consumption]]. Critics such as Rowbotham argue that the indebted are forced to induce new [[consumers]] to spend their way into debt so existing loans can be repaid with new debt-created money. Failure to achieve this goal results in [[foreclosure]] for those businesses and [[insolvency]] in the banking system that leads to economic collapse due to the sudden contraction of the money supply.<ref name="death"/><ref name="Ponzi Nation">[http://www.iimagazine.com/article.aspx?articleID=1234345 Ponzi Nation]</ref>

Mark Anielski as well as some political thinkers such as Rowbotham and some economists (such as [[Hyman Minsky]], [[Steve Keen]] and [[Mike Shedlock]]) argue that this system of money supply has characteristics similar to a [[pyramid scheme]], where the newly indebted are compelled to induce others into debt to pay off their own debts.<ref>[http://globaleconomicanalysis.blogspot.com/2011/01/steve-keen-credit-impulse.html The Credit Impulse], Steve Keen with commentary from MISH</ref><ref>[http://www.lin.ca/resource/html/arpa02/PC1-FertileObfuscation.pdf ''Fertile Obfuscation: Making Money Whilst Eroding Living Capital''], 34th Annual Conference of the Canadian Economics Association, Mark Anielski</ref> It is therefore argued by a number of monetary reformers that fractional-reserve banking and the associated exponential growth of money in the economy "forces" the economy towards indebted [[consumerism]].<ref name="books.google.com"/>

Rowbotham argues that a major negative side-effect of the debt-based monetary system is its effect on [[agriculture]], claiming that [[residential development]] produces one of the greatest continuous injections of debt money into the economy. Therefore, significant super-normal profits can be generated by re-zoning agricultural land and replacing it with low-density [[House|housing]].<ref name="death"/>
If this is correct, this trend will lead to the destruction of fertile [[arable land]], as farmers cannot compete to retain fertile arable land from property developers at the periphery of major population centers, and as this land is then progressively re-zoned for speculative new residential development. Rowbotham also predicts that the global supply of fertile [[arable land]] will decline, leading to a broad decline in the quality and nutritional value of agricultural produce and, eventually, a dramatic increase in the prices of many "soft" commodities - which could then lead to actual food shortages for poorer segments of the world population.<ref>[http://www.lewrockwell.com/blog/lewrw/archives/76920.html The Corporate State and the Tapeworm Economy], Catherine Austin Fitts</ref><ref name="death"/><ref>[http://www.wsws.org/articles/2007/dec2007/food-d22.shtml Naomi Spencer, World Socialist Website, "Severe food shortages, price spikes threaten world population", 22 December 2007]</ref>

If for any reason the monetary system broke down, urban populations (nominally "rich" but poor in terms of direct access to [[food supply]]) could find basic foodstuffs either rationed or unavailable at any price, ultimately resulting in food security becoming a major public policy issue - particularly if combined with oil supply shortages or an oil price spike, as major population centers worldwide are almost entirely reliant on mass transportation of food from distant (or even foreign) locations to survive day-to-day.<ref name="death"/><ref>[http://www.wsws.org/articles/2007/dec2007/food-d22.shtml Severe food shortages, price spikes threaten world population]</ref><ref>[http://www.nytimes.com/2010/12/18/business/global/18yuan.html?hpw Inflation in China]</ref><ref>[http://www.lewrockwell.com/blog/lewrw/archives/76920.html The Corporate State and the Tapeworm Economy], Catherine Austin Fitts</ref>

===Effects on economic health===

According to Michael Rowbotham the expansion of money through debt creates [[Boom and bust|economic bubbles]]. This concentrates [[wealth]] in the hands of private banks as the populace is forced into [[debt]] simply to own a home and educate their children.<ref name="death"/> Debt expansion leads to price appreciation of assets through speculation as the financial market becomes riskier. Edward Chancellor compares this type of market to a monetary [[Ponzi scheme]].<ref>[http://www.iimagazine.com/article.aspx?articleID=1234345 Ponzi Nation,"Who is Hyman Minsky?", para 6]</ref>

The bust phase of this [[business cycle]] where "debt-based" money growth slows or contracts catches newly indebted businesses and consumers who are left out of the growth cycle.<ref name="death"/><ref name="Ponzi Nation"/>

===Effects on the environment===
There are also critics in the left-wing and [[environmentalist]] camps who contend fractional reserve banking (by creating a necessity for indefinite [[economic growth]]) leads to environmental destruction and a sudden, catastrophic depletion of natural resources as the unsustainable, exponential consumption of the world's scarce natural resources reaches its inevitable limits.<ref>David Korten, ''Agenda For A New Economy'', Berret-Koehler, 2009</ref><ref>[http://www.monbiot.com/archives/2004/10/06/no-longer-obeying-orders/ George Monbiot], about five sixths of the way down</ref>

===Inherent problems with the system===

Some monetary reformers predict that there will be an increased incidence of financial crises in the developed world, as economic and [[population growth]] inevitably slow and as the success of financial sector lobbying results in a reduction in redistributive [[tax]] policies which, combined with the debt-legacy of the [[welfare state]], allows an intense and unsustainable concentration of wealth and political power in the financial services sector.<ref name="death">{{cite book |last= Rowbotham |first= Michael |title= The Grip of Death: A Study of Modern Money, Debt Slavery and Destructive Economics | year= 1998 |publisher= Jon Carpenter Publishing |isbn= 9781897766408 }}</ref>

Some monetary reformers argue that perverse incentives in the financial services industry lead to a collusive relationship between governments and bankers which are economically and socially destablizing in the long run.<ref>[http://mises.org/media/4014 The Economics of Legal Tender Laws], Jorg Guido Hulsmann</ref>

Some monetary reformers argue that it is vital that the indebted "victims" who must sink deeper into debt for the system to survive do so voluntarily and willingly and are not made aware of the consequences of purchasing consumables with debt money.<ref name="death">{{cite book |last= Rowbotham |first= Michael |title= The Grip of Death: A Study of Modern Money, Debt Slavery and Destructive Economics | year= 1998 |publisher= Jon Carpenter Publishing |isbn= 9781897766408 }}</ref> Some politicians and others have highlighted the fact that mainstream media organizations appear to downplay or minimize the seriousness of deficit spending by government and debt-sourced spending of all kinds.<ref>[http://www.senate.gov/~budget/democratic/statements/2005/fs_reconciliationfloorstmt102005.pdf Speech by Senator Kent Conrad (D-ND) on October 20, 2005 regarding the "misleading" reporting of deficit spending by the mainstream media]</ref> The associated growth of derivatives during the upward phase of the debt money cycle was referred to as "[[innovation]]" in financial markets.<ref>[http://www.nytimes.com/2007/12/03/opinion/03krugman.html?em&ex=1196917200&en=ac60abcdbd977d07&ei=5087%0A Innovating Our Way to Financial Crisis, by Paul Krugman]</ref>

[[Bankruptcy]] laws differ to a small degree in different jurisdictions but in all developed economies unpaid debt results in legal penalties, property confiscation on behalf of the creditor and income [[sequestration]]. Although in [[Christian]], [[Jewish]] and [[Muslim]] religious practice there have been traditions of [[debt relief]] or laws against [[usury]], in no modern Western jurisdiction are any debts periodically forgiven or cancelled in recognition of the inherent impossibility of repaying debts in circumstances where the debt-based monetary cycle has inevitably resulted in too little new [[debt money]] being injected into the [[money supply]] to pay for the currently outstanding debts.<ref>[http://www.nakedcapitalism.com/2007/11/new-bankruptcy-law-backfires-by.html Bankruptcy law backfires]</ref>

On a national level, if the issuance of [[government bonds]] becomes unsustainable, sovereign [[bankruptcy]] can occur - and has occurred many times in history.<ref>[http://mises.org/daily/4869 Can the Fed Become Insolvent?], Robert Murphy</ref><ref>[http://elainemeinelsupkis.typepad.com/money_matters/2007/10/greenspaniel-an.html Greenspaniel and U.S. bankruptcy]</ref><ref>[http://www.prudentbear.com/index.php/thebearslairview?art_id=10493 Dee-Fault!], Martin Hutchinson, Prudent Bear</ref> [[Sovereign debt]] crises due to the inability of nations to pay interest on [[government bonds]] have occurred frequently and regularly in the [[third world]] and less frequently (every 30 years or so) in the first world as a result of high levels of unsustainable public debt - often because private debts are assumed by a corrupt government through large private bank bailouts.<ref>[http://www.dailymail.co.uk/debate/article-1331076/Ireland-bailout-Lets-frank-7bn-bunch-liars-crooks-bunglers.html Ireland Bailout], Alex Brummer</ref><ref>[http://www.marketoracle.co.uk/Article24543.html QE2 and the Great Economic Misdiagnosis], Jim Willie</ref> The [[Latin American debt crisis]] is an example of sovereign debt levels becoming unsustainable, resulting in a [[currency crisis]] and economic collapse, as [[interest rates]] rise precipitously due to the inability of the national government to attract financiers to purchase new [[government bonds]] to inject new [[debt money]] into the ailing economy.<ref>[http://www.marketoracle.co.uk/Article24543.html QE2 and the Great Economic Misdiagnosis], Jim Willie</ref>

At such times, it is the responsibility of the [[IMF]] to come in as a kind of supranational [[central bank]] to mediate between the national government and international financiers. The role of the [[IMF]] as [[central bank]] to the world has similar responsibilities and risks inherent in [[central bank]]ing which are described below in relation to the role of the [[Federal Reserve]]. If the [[IMF]] repeatedly intervenes to save financiers from loss when sovereign bankruptcy occurs, this has a tendency to induce [[moral hazard]] and can encourage the financing of reckless government spending and borrowing.<ref>[http://www.rgemonitor.com/41 IMF Reform and International Lender of Last Resort, RGE Monitor]</ref><ref>[http://info.interactivist.net/article.pl?sid=02/11/07/199213&mode=thread&tid=8 Banking Bunkum, by Henry C.K. Liu]</ref><ref>[http://www.marketoracle.co.uk/Article24543.html QE2 and the Great Economic Misdiagnosis], Jim Willie</ref>

A [[single currency]] regime such as the [[Euro]] can mask national liquidity or solvency crises, by ensuring that a national currency is not quickly exchangeable for another, thereby restricting the ability of national governments to depreciate their currencies and cutting off the possibility that the real value of [[government bond]] interest repayments could decline relative to other currencies.<ref>[http://www.dailymail.co.uk/news/article-1316442/Anglo-Irish-Bank-bail-Will-Irish-economic-meltdown-hit-UKs-fragile-recovery.html Irish Meltdown], UK Mail On-line,</ref><ref>[http://www.marketoracle.co.uk/Article24459.html Ireland Bailout Consequences for Britain, Portugal Next?], Nadeem Walayat</ref><ref>[http://www.marketoracle.co.uk/Article24543.html QE2 and the Great Economic Misdiagnosis], Jim Willie</ref><ref>[http://news.goldseek.com/RichardDaughty/1192374060.php The Mogambo Theory of Currency Relativity]</ref><ref>[http://www.youtube.com/watch?v=IvJEJEGzeU8&feature=player_embedded#! Putin ditches dollar], RTTV</ref> This may however increase the risk of bond default where indebted national governments cannot pay back the interest payments in the denominated common currency.<ref>[http://www.dailymail.co.uk/news/article-1316442/Anglo-Irish-Bank-bail-Will-Irish-economic-meltdown-hit-UKs-fragile-recovery.html Irish Meltdown], UK Mail On-line,</ref><ref>[http://blog.mises.org/15129/bagus-explains-the-ecb-and-the-euro/ The Tragedy of the Euro], Philipp Bagus</ref>

===Types of downturns===
{{main|Austrian Business Cycle Theory}}

There are two main kinds of debt money contraction that can cause a collapse in the value of inflated assets.

A "credit squeeze" occurs where new debt money is difficult to access without a high [[credit rating]]. At such times marginal borrowers, or those who have borrowed at the end of any debt-induced asset bubble, get "squeezed" out of further borrowing and a contraction in the growth of new debt money occurs, triggering a slow down in the growth of inflated assets. Those assets can then be "harvested" by the [[private bank]]s through widespread [[foreclosure]] or [[bankruptcy]] and re-sold to those with the money to buy the distressed assets.<ref name="marketoracle.co.uk">[http://www.marketoracle.co.uk/Article2882.html Market Fundamentalism, by Richard C. Cook]</ref>

A "credit crunch" occurs where new debt money is not available at any [[interest rate]] - even for those with previously acceptable credit ratings - due to widespread insolvency in the banking system. At such times, it is the banking system itself that is [[insolvent]] and other financial institutions (including overseas financiers) become reluctant to lend to the domestic banking system, resulting in the domestic banking system being unable to issue loans even to credit worthy borrowers.<ref>[http://www.scribd.com/doc/3906112/Credit-CrunchThe-New-Financial-Snack Credit Crunch, by Satyajit Das]</ref>

At any stage during the downward spiral of a "credit crunch", the [[central bank]] in a modern economy can try to save the system from complete economic [[meltdown]] by purchasing (either indefinitely or temporarily) the failed debts of the private banks.<ref>[http://www.youtube.com/watch?v=PTUY16CkS-k&feature=player_embedded#! Quantitative Easing Explained]</ref><ref>[http://www.marketoracle.co.uk/Article24489.html Does the Fed Create Money?] Michael Pento</ref><ref>[http://www.telegraph.co.uk/money/main.jhtml?view=DETAILS&grid=A1YourView&xml=/money/2007/12/19/ccom119.xml ECB's mind-numbing cash injection]</ref> This involves swapping depreciating "failed" assets with hard cash, thereby allowing the banks to maintain their net asset position and continue to give the impression of solvency to their auditors and depositors. However, doing so results in cash being transferred to the private banks in exchange for [[bad debt]], thereby violating the general economic precept to avoid [[moral hazard]] and effectively makes liquid the failed lending decisions of the [[private bank]]s.<ref>[http://www.rgemonitor.com/blog/roubini/228924/ Privitizing Profits and Socializing Losses, by Nouriel Roubini]</ref> In the U.S. banking system this is called "opening the Fed discount window", where the [[Federal Reserve]] temporarily purchases the failed investment portfolios of distressed private banks in exchange for cash. However, this rescue measure may only delay, rather than avoid, the realization of losses in the banking system, as the central bank cannot "force" new borrowing into the system to inject new debt money into the money supply. Somebody has to be a [[counterparty]] to borrow the debt money that is being offered. If all market participants realize a "[[bubble (economics)|bubble]]" has formed in assets markets, there will be few (or no) buyers for new debt money, as no one wants to borrow to buy inflated assets no one else will buy. Money markets can therefore remain illiquid even with intense [[central bank]] support.

Furthermore, banks can go bust even with intense central bank support, if the issue is not one of liquidity, but one of solvency.<ref>[http://www.ft.com/cms/s/0/233ae764-abef-11dc-82f0-0000779fd2ac.html Central Banks have No Plan]</ref><ref>[http://www.rgemonitor.com/blog/roubini/233120 Central Banks get desperate]</ref><ref>[http://www.youtube.com/watch?v=VMngK0t5WkY $20 Trillion in Bad Debt], Max Keiser</ref>

===Pushing on a string===
Some monetary economists describe the opening of the Fed discount window after the bursting of an asset bubble as "[[pushing on a string|pushing on a piece of string]]", as this measure does not solve the key problem – creating new credit (or debt money) to keep up the growth in the money supply and maintain the required level of liquidity in credit markets.<ref>[http://www.mises.org/story/2695 Don't Discount the Fed Discount Window]</ref><ref>[http://www.federalreserve.gov/Pubs/FEDS/2004/200401/200401pap.pdf Monetary Policy in Deflation: The Liquidity Trap in History and Practice]</ref> This is because unlimited central bank money and low interest rates ''allow'' credit creation, but do not ''force'' it into the system. In order for any new debt money to be created, somone has to borrow the excess reserves in order for the money to be injected into the system. If corporations and individuals are already heavily indebted (or insolvent after the bursting of another debt-induced bubble) there are no credit-worthy borrowers to lend to.

To encourage fresh borrowing, central banks generally combine these rescue measures with an interest rate cut to encourage more new borrowing to allow the existing (failed) debts to be [[liquidate]]d at or close to their original value. When [[Alan Greenspan]] repeatedly resorted to this tactic to revive illiquid [[money market]]s this became known in the market as the "[[Greenspan put]]", as the effect of these repeated reductions in interest rates was similar to a [[put option]] in the [[stockmarket]], insuring [[bank]]s' lending mistakes would be covered up by the Federal Reserve.<ref>[http://www.iie.com/publications/wp/02-1.pdf Moral Hazard and the "Greenspan Put"]</ref>

When interest rates cannot go any lower (the so-called "zero bound" monetary problem) and people still will not - or cannot - load themselves up with more debt, then the Keynesian solution is to run large public deficits and indebt future generations (who, they hypothesize, are more likely to be able to pay through increased future growth).<ref>[http://www.nytimes.com/2010/12/26/business/26view.html?_r=1&scp=1&sq=shiller&st=cse Stimulus Without More Debt], Robert Shiller</ref> Fabian socialists, and Keynesian economists such as Paul Krugman and Robert Shiller, argue that governments must take charge of the responsibility of spending more (and taking on more debt) on behalf of the public (who are too fearful to take on more debt themselves) in order to compensate for the immediate and urgent ''present'' insufficiency in total private consumption.<ref>[http://www.nytimes.com/2010/12/26/business/26view.html?_r=1&scp=1&sq=shiller&st=cse Stimulus Without More Debt], Robert Shiller</ref> Paul Krugman is a prominent advocate of the policy of spending trillions of government money to help stimulate the economy, if spending billions does not work.<ref>[http://www.nytimes.com/2010/06/21/opinion/21krugman.html?dbk Budget Deficits], Paul Krugman</ref><ref>[http://globaleconomicanalysis.blogspot.com/2010/10/krugman-and-inevitable-i-told-you-so.html Krugman], MISH</ref><ref>[http://krugman-in-wonderland.blogspot.com/2010/11/inflation-prisoner.html The Inflation Prisoner], William Anderson</ref> For economists such as Paul Krugman, if the "more and more government spending" solution does not work initially, it is a sign that not enough government money has been spent.<ref>[http://www.nytimes.com/2010/12/20/opinion/20krugman.html?hp When Zombies Win], Paul Krugman, NY Times</ref><ref>[http://globaleconomicanalysis.blogspot.com/2010/10/krugman-and-inevitable-i-told-you-so.html Krugman], MISH</ref> It is his view that the "deflationary" Japanese recession from 1991/2 could have been cured by the Japanese government going into even more debt than the current net debt to GDP ratio of 110%.<ref>[http://www.nytimes.com/2010/06/21/opinion/21krugman.html?dbk Budget Deficits], Paul Krugman</ref><ref>[http://www.economist.com/node/15867844 Japan's debt-ridden economy], The Economist</ref>

Although there is active debate as to whether this policy (indebting future generations by the government spending debt-sourced money on projects the private sector would not touch) can actually help the economy long term,<ref>[http://www.prudentbear.com/index.php/featuredcommentaryview?art_id=10485 Krugman Is Eating America Alive], Neeraj Chaudhary, Prudent Bear</ref><ref>[http://www.marketoracle.co.uk/Article25163.html Keynesian models], Robert Murphy</ref><ref>[http://krugman-in-wonderland.blogspot.com/2010/11/inflation-prisoner.html The Inflation Prisoner], William Anderson</ref><ref>[http://www.lewrockwell.com/north/north925.html Yes, Virginia, There Really Is a Free Lunch], Gary North</ref> there is no argument that this would undoubtedly help the present group of private bankers, as increased income from the interest payments on new government bond issuance offsets the decline in private sector debt and allows private bankers to survive when otherwise they may face collapse due to the fatal impairment of their balance sheets through private debt write-offs after an unsustainable debt-fuelled bubble bursts.<ref>[http://georgewashington2.blogspot.com/2010/08/quantitative-easing-wont-help-economy.html QE won't help the economy]</ref><ref>[http://moneymorning.com/2010/11/19/federal-reserves-quantitative-easing-strategy-save-the-us-economy/ QE won't save the economy]</ref>

As government debt is effectively an asset on the books of the banks, increasing Treasury bond issuance necessarily increases the profitability and net asset position of the debt-issuing banks - at least until government insolvency renders the value of those bonds worthless.<ref>[http://www.marketoracle.co.uk/Article25313.html Asset Speculation and Capital Destruction], Jim Willie</ref><ref>[http://www.prudentbear.com/index.php/featuredcommentaryview?art_id=10485 Krugman Is Eating America Alive], Neeraj Chaudhary, Prudent Bear</ref>

===Inequities in system===
To summarize the standard government strategy to help the banks out of the "tailspin" of an insolvency crisis when the banks have taken effective control over the national government:

In the worse-case scenario, where banks cannot find many credit-wrothy private businesses to borrow to even if the government continually swaps failed assets with cash, then the government itself then spends money into the economy directly without individuals needing to borrow and spend, and thereby tries to "inflate" its way out of economic crisis by causing asset prices to rise and bank balance sheets to appear solvent. It can do this by printing money and simply spending the additional currency on random (or pre-planned) projects. This is now called "quantitative easing".<ref>[http://www.marketoracle.co.uk/Article25964.html QE is Nothing New], Mike Hewitt</ref>

Aside from the [[moral hazard]] issue, the key risk with [[quantitative easing]] is that the [[central bank]] exposes the financial system to disruptive inflation, as the growth in the [[money supply]] spirals out of control due to the need to save the [[bank]]s from themselves. This eventually tends to precipitate a currency and/or government bond crisis, as the debt-based currency becomes completely dysfunctional when either the currency becomes worthless or when debtors - including government debtors - cannot even pay interest on the debt money.<ref>[http://www.marketoracle.co.uk/Article25964.html QE is Nothing New], Mike Hewitt</ref><ref>[http://www.marketoracle.co.uk/Article25313.html Asset Speculation and Capital Destruction], Jim Willie</ref><ref>[http://www.swlearning.com/economics/hall/hall-lieb2e-upd/ppt_lecture/exchange_rate_macro_policy.ppt Exchange Rates and Macroeconomic Policy]</ref><ref>[http://www.sciencedirect.com/science?_ob=ArticleURL&_udi=B6VGT-41WBFRG-1&_user=10&_rdoc=1&_fmt=&_orig=search&_sort=d&view=c&_acct=C000050221&_version=1&_urlVersion=0&_userid=10&md5=4e89075114dcdb58b503172ff1801bd2 Central Bank Intervention]</ref><ref>[http://www.federalreserve.gov/newsevents/speech/mishkin20071026a.htm Financial Instability and the Federal Reserve as a Liquidity Provider, by Frederic S. Mishkin]</ref>

For these reasons, a collapse in confidence in the [[solvency]] of the domestic banking system (and the central government) is one of the most complex and difficult policy issues any central government can face.<ref>[http://blogs.telegraph.co.uk/finance/ambroseevans-pritchard/100008812/irelands-debt-servitude/ Ireland's Debt Servitude], Ambrose Evans-Pritchard, UK Telegraph</ref>

In such crises of confidence, if central bank continues to try to save the current players in the banking sector by continually printing money and inflating its way out of the crisis, at some point hyperinflation suddenly appears, and has appeared many times in history.<ref>[http://mises.org/daily/4869 Can the Fed Become Insolvent?], Robert Murphy</ref><ref>[http://blog.mises.org/14626/quantitative-easing-explained/ Quantitative Easing Explained], YouTube video</ref> Some comentators have commented that the media and the Fed have to constantly come up with new terms (such as "quantitative easing") to hide the fact that they are simply repeating the same failed policy of monetary inflation that corrupt sovereigns have deployed at the end of failed regimes many times over the millenia.<ref>[http://www.marketoracle.co.uk/Article25679.html Many Euphemismis for Money Creation], Thorsten Polleit</ref>

This is also now referred to by some [[monetary reform]]ers and [[economist]]s as "[[socialism for the rich and capitalism for the poor]]", as many indebted [[consumers]] will still lose their [[house]]s and be declared [[bankrupt]] regardless whether or not the central bank intervenes to save marginal lenders who have been made [[insolvent]] through their mis-timing of the [[credit cycle]].<ref>[http://www.rgemonitor.com/blog/roubini/228924/ Privatizing Profits and Socializing Losses, by Nouriel Roubini]</ref><ref>[http://www.beearly.com/pdfFiles/Satyajit%20Das.pdf Regulatory Debauchery by Satyajit Das]</ref> Future generations of innocent taxpayers may ultimately finance any [[bail out]] of reckless lenders, as the money used to fund any [[bail out]] will be funds diverted from the general revenue of the central government.<ref>[http://www.ft.com/cms/s/0/f4cf8426-654d-11dc-bf89-0000779fd2ac.html A run on the bank]</ref>

Some bankers and financial commentators still refer to [[Walter Bagehot]]'s 1873 commentary on monetary crises, ''Lombard Street'', in an attempt to gain insights into the way in which central bankers should revive illiquid banking systems.<ref>[http://blogs.ft.com/economistsforum/2010/04/a-history-lesson-from-lombard-street-for-wall-street-in-2010/ History Lesson from Lombard Street], Roger Farmer, Ft.com</ref> However this old text may be outdated in circumstances where the community's debt limits have been reached and where the banking crisis arises from insolvency rather than illiquidity.<ref>[http://www.marketoracle.co.uk/Article24543.html QE2 and the Great Economic Misdiagnosis], Jim Willie</ref>

A prime example of the fatal effects of combining aging demographics with reckless bank lending in a purely fiat debt-based monetary system can be found in the case of the [[Japanese asset price bubble]].<ref>[http://www.economist.com/displaystory.cfm?story_id=10286992 The Japanese and American Bubbles: Been There, Done Some of That]</ref>

===The Keynesian Endpoint===

Some more extreme monetary reformers and [[conspiracy theorists]] anticipate the declaration of [[martial law]] and the imposition of [[fascist]]-style restrictions on [[civil rights]] and [[freedom of speech]] by the political [[The Establishment|Establishment]] to physically protect it from [[anarchy]] or military [[coup]] when the [[bubble (economics)|bubble]] of debt completely bursts, either through a precipitous currency crisis or debt-created [[Depression (economics)|depression]].<ref>[http://www.lewrockwell.com/lewrockwell-show/2010/12/14/179-the-espionage-act-and-the-death-of-american-freedoms/ Death of American Freedoms], Naomi Wolf, LRC interview, Dec 14, 2010</ref><ref>[http://www.house.gov/paul/congrec/congrec2007/cr120507h.htm New security legislation threats freedoms]</ref> Some conspiracy theorists also anticipate price controls, then rationing of basic essentials, as the coalescence of a corrupt banker-government coalition solidifies to eliminate potential dissent and ensure the forced elimination - by any means necessary - of any actual or potential competing [[currencies]] that could threaten the viability or legitimacy of the [[monopoly]] currency, which could include the compulsory confiscation of all privately-owned [[gold]] (gold being the ultimate reserve currency, still used by central banks as a universally accepted medium of exchange for the settlement of international debts).<ref>[http://blog.mises.org/14795/the-gold-clause-cases-and-constitutional-necessity/ Gold Clause Cases]</ref><ref>[http://news.goldseek.com/GoldSeek/1196605589.php America's Trade Debts Lead to a Likely Gold Confiscation]</ref><ref>[http://www.libertydollar.org/ld/legal/raid.htm FBI Raids Liberty Dollar]</ref><ref>[http://www.lewrockwell.com/rothbard/solution.html The Solution]</ref><ref>[http://prudentinvestor.blogspot.com/2007/09/us-mint-suspends-gold-coin-sales-due-to.html US Mint Suspends Gold Coin Sales]</ref><ref>[http://www.swissamerica.com/article.php?art=06-2004/200406140537f.txt Why a Gold Standard Now?]</ref><ref>[http://www.lewrockwell.com/blog/lewrw/archives/73468.html Bank of America an arm of US government policy]</ref>

There have been many [[financial crisis|monetary crises]] throughout history<ref>[http://www.lewrockwell.com/bonner/bonner454.html Revolution in Egypt and Black Swans], Bill Bonner</ref><ref>[http://news.goldseek.com/GoldSeek/1297199137.php China Inflation and Gold], Darryl Robert Schoon</ref><ref>[http://mises.org/store/Early-Speculative-Bubbles-P578.aspx Early Speculative Bubbles and Increases in the Money Supply], Doug French, Mises Institute ISBN: 978-1-933550-44-2</ref><ref>[http://dailyreckoning.com/a-word-of-advice-to-financial-authorities/ Advice to Financial Authorities], Bill Bonner</ref> and prior to widespread anarchy or [[revolution]], in the late stages of a [[financial bubble]], there are a number of warning signs of impending [[chaos]] caused by a complete breakdown of trust in the debt-based [[monetary system]].<ref>[http://mises.org/store/Product.aspx?ProductId=435 Fiat Money Inflation in France], Andrew Dickson White, Mises Institute</ref><ref>[http://www.marketoracle.co.uk/Article25313.html Asset Speculation and Capital Destruction], Jim Willie</ref> Just prior to the complete collapse of the [[pyramid scheme]] of public and private debt, the economic system tends to feed on itself, and in the past, where debt-created [[Depression (economics)|depression]]s or periods of [[hyperinflation]] have occurred in [[Europe]],<ref>[http://www.lewrockwell.com/bonner/bonner454.html Revolution in Egypt and Black Swans], Bill Bonner</ref> the [[U.S.]] and [[China]], there has been a sustained spike in predatory economic behavior, as the heavily indebted central government and producers are forced to find more extreme (previously considered unethical) methods to extract any remaining wealth from increasingly desperate and impoverished [[consumers]], who are either unwilling or unable to go into further debt without forceful coercion.<ref>[http://www.lewrockwell.com/bonner/bonner454.html Revolution in Egypt and Black Swans], Bill Bonner</ref><ref name="http">{{cite book |last= Widdig |first= Bernd |title= Culture and Inflation in Weimar Germany |url= http://books.google.com/books/ucpress?id=kvKAATycUzIC |accessdate= 2007-12-16 |year= 2001 |publisher= University of California
Press |isbn= 0520222903 }}</ref><ref>[http://mises.org/daily/3569 John Law and the Invention of Modern Finance], Doug French (Mises.org)</ref><ref>[http://mises.org/daily/1690 The Saga of John Law and Richard Cantillon], Sean Corrigan (Mises.org)</ref> [[Long-term]] investment and sustained [[capital investment]] are almost impossible in this environment because the "measuring stick" of [[return on investment]] (the real value of [[money]]) is so uncertain at times of debt-induced [[credit crunch]], depression or hyperinflation.<ref>[http://www.marketoracle.co.uk/Article25313.html Asset Speculation and Capital Destruction], Jim Willie</ref>

As potential new [[borrower]]s and international financiers are scared away from participating in the [[pyramid scheme]] of debt and borrowing further, the [[monetary system]] seizes up, starved of the fresh injections of [[debt money]] it needs for its survival, thereby precipitating economic [[anarchy]],<ref>[http://www.lewrockwell.com/bonner/bonner454.html Revolution in Egypt and Black Swans], Bill Bonner</ref> widespread [[lawlessness]]<ref>[http://www.lewrockwell.com/bonner/bonner454.html Revolution in Egypt and Black Swans], Bill Bonner</ref> and [[insolvency]] of the monetary and banking system.<ref>[http://www.oftwominds.com/blognov07/empire-debt1.html Empire of Debt]</ref><ref>[http://www.goldensextant.com/SavingtheSystem.html Fiat's Reprieve, by Robert K. Landis]</ref><ref>[http://www.marketoracle.co.uk/Article25313.html Asset Speculation and Capital Destruction], Jim Willie</ref><ref>[http://www.lewrockwell.com/bonner/bonner454.html Revolution in Egypt and Black Swans], Bill Bonner</ref> Some have described the moment when governments cannot borrow any more from banks to keep up the growth in debt money as the "Keynesian Endpoint" - which is the point in time when the ''in extremis ''"emergency" measures by the government to kick-start the economy by increasing total gross debt have no lasting positive effect on GDP.<ref>[http://en.wikipedia.org/wiki/Keynesian_endpoint Keynesian Endpoint], Wikipedia definition</ref> Antal E. Fekete identifies this "crisis" point as the point when the marginal increase in total gross debt has no positive marginal effect on GDP.<ref>[http://www.professorfekete.com/articles/AEFGotterdammerung.pdf Gotterdammerung], Antal E. Fekete</ref> According to Professor Fekete, once the marginal productivity of debt turns negative, a disastrous depression is inevitable.<ref>[http://www.professorfekete.com/articles/AEFGotterdammerung.pdf Gotterdammerung], Antal E. Fekete</ref>

This final denouement is triggered when [[borrower]]s cannot be found to buy depreciating heavily indebted assets, and international financiers reduce lending as they experience losses on pre-existing loans either through asset or currency [[depreciation]]. Some analysts predict that the [[monetary system]] will seize up due to a [[deflationary]] depression or a sustained period of [[stagflation]]ary hyperinflation resulting in a "final and total catastrophe of our fiat monetary system."<ref>[http://www.goldensextant.com/SavingtheSystem.html Fiat's Reprieve, by Robert K. Landis]</ref><ref>[http://www.marketoracle.co.uk/Article25313.html Asset Speculation and Capital Destruction], Jim Willie</ref>

This has often occurred after a failed [[aggressive war]], as international financiers realize the heavily indebted [[government]] they funded will not gain the [[resources]] it planned to seize as a result of the waging of [[aggressive war]]. When this pay-off does not materialize, the government is left with the [[debt]] of war without the ability to offset this [[government debt]] through the imposition of [[reparations]] on the defeated [[nation]] and the acquisition of the defeated state's [[resources]]. This occurred to [[Germany]] after the [[First World War]] and [[Japan]] after the [[Second World War]].

Whatever the trigger, the key warning sign of any impending monetary crisis and economic [[anarchy]] is a sudden [[currency crisis]], or a sudden spike in domestic interest rates, or a sudden [[credit crunch]].<ref>[http://www.goldensextant.com/SavingtheSystem.html Fiat's Reprieve, by Robert K. Landis]</ref> Early warning signs that the [[private banks]] themselves are aware of an impending breakdown in the [[solvency]] of the [[financial system]] would be: a spike in the prices for [[oil]] (which is an internationally accepted, inherently limited, store of value, and therefore can act as a modern form of [[hard currency]], oil sometimes being referred to as "black gold"), [[gold]], [[silver]] and other stable, non-perishable, inherently limited [[natural resources]] essential for non-discretionary industrial production;<ref>[http://www.marketoracle.co.uk/Article25313.html Asset Speculation and Capital Destruction], Jim Willie</ref> a spike in the [[futures contract]]s for vital agricultural [[commodities]]<ref>January 27, 2011 – ''Financial Times'' (Javier Blas and Chris Giles): “Governments across the developing world are stockpiling food staples in an attempt to contain panic buying, inflation and social unrest. But the hoarding is driving agricultural commodity prices even higher. The cost of wheat, the world’s most important staple, reached a fresh two-and-a-half-year high on Thursday, after countries from Algeria to Saudi Arabia announced extraordinary purchases. High food prices have been a contributing factor to the recent wave of social unrest across North Africa and the Middle East. In Algeria earlier this month, young rioters chanted ‘Bring us sugar!’ The cost of the sweetener in the wholesale market is at its highest in 30 years. Earlier this week, Algeria bought 800,000 tonnes of wheat – much more than usual – and Saudi Arabia announced plans to double the size of its wheat stockpile. Bangladesh and Indonesia joined the rush on Thursday, placing extraordinary on rice orders.”</ref> such as [[sugar]],<ref>[http://www.bloomberg.com/news/2010-12-15/portugal-tries-to-prevent-sugar-hoarding-amid-shortage-ft-says.html 2010 Portugal Sugar Crisis]</ref> [[coffee]], [[wheat]], [[soybean]]s and [[rice]], as investors realize the debt-based monetary system has squeezed supplies of [[arable land]]; a sudden flight of money ''to'' [[Treasury bills]] and/or a sudden spike in the [[interest rate]] differential between short-term [[Treasury bills]] and asset-backed corporate paper (or a sudden spike in the [[LIBOR]] rate in [[London]])<ref>[http://www.goldensextant.com/SavingtheSystem.html Fiat's Reprieve, by Robert K. Landis]</ref><ref>[http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2007/12/03/cnrates103.xml&CMP=ILC-mostviewedbox Pleas for rate cut as interbank loans dive]</ref> - and then, in the very late stages of a credit crisis, a sudden and disorderly flight of money ''away from'' government bonds and a "shock" or "panic" collapse in government bond prices, as banks perceive that some governments will ultimately find it ''impossible'' to pay interest on their debt from coercively acquired taxes.<ref>[http://www.telegraph.co.uk/finance/economics/8190059/Global-bond-rout-deepens-on-US-fiscal-worries.html Global bond rout], Ambrose Evans-Pritchard, UK Telegraph</ref><ref>[http://www.prudentbear.com/index.php/thebearslairview?art_id=10480 When Will The U.S. Become Greece?], Michael Hutchinson</ref>

Shortly thereafter, some [[monetary reform]]ers predict that there would be desperate, but ultimately futile [[central bank]] intervention, a [[currency crisis]], a panic run on a number of marginal, [[insolvent]] [[banks]] and [[hedge funds]] as desperate wealthy investors try to get [[cash]] out before the [[pyramid scheme]] collapses to invest in inherently limited, non-perishable, in-demand commodities such as [[oil]] and [[gold]]<ref>[http://www.marketoracle.co.uk/Article25313.html Asset Speculation and Capital Destruction], Jim Willie</ref> (and undeveloped agricultural and industrial [[land]] in areas of the world with strong [[economic growth]]), followed by a [[recession]] or [[depression]] in the broader heavily indebted economy as the [[money supply]] contracts.<ref>[http://www.goldensextant.com/SavingtheSystem.html Fiat's Reprieve, by Robert K. Landis]</ref><ref>[http://www.marketoracle.co.uk/Article25313.html Asset Speculation and Capital Destruction], Jim Willie</ref><ref>[http://www.newyorkfed.org/research/staff_reports/sr291.pdf Hedge Funds, Financial Intermediation and Systemic Risk]</ref>

In 2010 Ireland and Greece experienced simiilar financial crises along the lines described above and many financial commentators and politicians expect more countries to go through the same debt crisis.<ref>[http://globaleconomicanalysis.blogspot.com/2010/12/video-fire-bombs-stones-fly-in-greek.html Greek protests]</ref><ref>[http://www.youtube.com/watch?v=2gm9q8uabTs "Who the Hell do you think you people are?"], Nigel Farage, UKIP leader</ref><ref>[http://www.marketoracle.co.uk/Article25313.html Asset Speculation and Capital Destruction], Jim Willie</ref> In 2011, Tunisia experienced a financial and political crisis that was almost identical to those already experienced on the poorer European periphery, except that in this case the pre-existing political establishment quickly fled the country in fear for their safety - with some allegations that the wife of the deposed leader, Leila Trabelsi, ordered the country's central bank to transfer 1.5 tonnes of [[gold]] to Zine El Abidine Ben Ali and his family.<ref>[http://www.marketoracle.co.uk/Article25636.html We are all Tunisians], Yvonne Ridley</ref><ref>[http://www.heraldsun.com.au/news/breaking-news/tunisia-missing-15-tonnes-of-gold/story-e6frf7jx-1225992107457 Tunisia missing 1.5 tonnes of gold], Herald Sun</ref> The Egyptian uprising resulted in Hosni Mubarek fleeing after desperate attempts were made by him and his associates to preserve his family's wealth and power.<ref>[http://news.yahoo.com/s/ap/20110212/ap_on_re_mi_ea/ml_egypt_mubarak_s_final_hours Mubarak's final hours], Associated Press</ref> Several newspapers have reported that, once again, appropriating gold reserves was a major priority for the fallen leader.<ref>[http://www.smh.com.au/world/mubaraks-lastminute-rush-to-hide-his-billions-20110213-1as1c.html Mubarak's Rush to Hide Billions], SMH</ref> Following the overthrow of the ruling elites in Tunisia and Egypt, other North African countries have experienced similar uprisings - all attributable to higher food prices, according to some noted commentators, who have accused Fed Chairman Ben Bernanke of literally having "blood on his hands" due to the encouragement of food price inflation via sustained inflationary loose-monetary policies.<ref>[http://globaleconomicanalysis.blogspot.com/2011/01/blood-on-bernankes-hands-riots-in-egypt.html Blood on Bernanke's Hands], MISH</ref> The central banker has denied that his inflationary loose-monetary policies have contributed to food inflation.<ref>[http://www.telegraph.co.uk/finance/newsbysector/retailandconsumer/8302111/Fed-chief-Ben-Bernanke-denies-US-policy-behind-record-global-food-prices.html Ben Bernanke Denies US Policy Behind Food Price Inflation], UK Telegraph, 3 February 2011</ref> Implicit in Mr Bernanke's argument is the assumption that the central bank can create "good" inflation in some markets and avoid "bad" inflation in others. This alleged central bank power to direct good inflation and abate bad inflation is derided by a number of commentators.<ref>[http://globaleconomicanalysis.blogspot.com/2011/01/blood-on-bernankes-hands-riots-in-egypt.html Blood on Bernanke's Hands], MISH</ref>

Noted British ''Telegraph'' commentator Ambrose Evans-Pritchard has called these the first Malthusian "Food Revolutions" of the modern era, as agflation causes political instability on the periphery of major economies worldwide - particularly those countries that have already denuded their agricultural base and have to import grain and other foods to survive.<ref>[http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/8291470/Egypt-and-Tunisia-usher-in-the-new-era-of-global-food-revolutions.html A New Era of Food Revolutions], Ambrose Evans-Pritchard</ref>

It is also reported that very complex, delicate negotiations are taking place between debtor and creditor nations to swap government bonds with gold at prices far in excess of the declared "market price" of gold.<ref>[http://www.marketoracle.co.uk/Article25878.html China Buys European Gold], Jim Willie</ref> These so-called "off-market" deals are a sign the Keynesian Endpoint has arrived.<ref>[http://www.marketoracle.co.uk/Article25878.html China Buys European Gold], Jim Willie</ref>

===Potential solutions===
The simplest and cleanest solution for any debt fueled crisis is to default. Many commentators have observed that in 2010 [[Iceland]] recovered much faster than other countries such as [[Ireland]].<ref>[http://www.smh.com.au/business/iceland-bounces-back-as-pain-leads-to-gain-20101208-18pvm.html Iceland Bounces Back]</ref><ref>[http://www.vanityfair.com/business/features/2011/03/michael-lewis-ireland-201103?printable=true When Irish Eyes Are Crying], Michael Lewis</ref> Iceland did not try to save its private banks but instead permitted them to default on bond payments. Ireland guaranteed private bank debt and in doing so subjected the taxpayers of that country to decades of payments for debts that were not incurred on their behalf or for their benefit. In his extensive analysis of the aftermath of the banking panic in Ireland, Michael Lewis wrote of his puzzlement that the Irish government thought it was beyond the bounds of acceptable discussion to consider default on privately issued Irish bank bonds, when Iceland successfully and easily defaulted and nationalized their banking system.<ref>[http://www.vanityfair.com/business/features/2011/03/michael-lewis-ireland-201103?printable=true When Irish Eyes Are Crying], Michael Lewis</ref>

In the absence of outright default, time is the only real remedy for monetary crises (allowing re-inflation of the markets through the gradual injection of new [[debt money]] into the system through new borrowings). However, time is something panicked financiers and investors are least likely to want to give up when the threat is never getting their [[money]] out of the imploding investment [[bubble]]. In extreme cases [[bank]]s could set up "independent" corporate investment vehicles to buy the assets associated with the [[bad debt]],<ref>[http://www.dealbreaker.com/2007/10/citigroup_looks_to_lend_money.php Citigroup looks to lend money]</ref> thereby allowing [[borrower]]s to liquidate their investments and allow time for the markets to re-inflate. Alternatively, these "sour" loans, that have gone bad through too much debt overwhelming the markets, could be dumped or "hidden" on the central bank's balance sheet, and swapped for more secure government debt (financed through compulsorily acquired taxes, which are immune from the risk of private bankruptcy). However the holding costs involved in these measures would be extremely high and would not guarantee that the losses could be averted if no new gullible investors could be found to offload these distressed assets.<ref>[http://www.youtube.com/watch?v=n8w6Nx2rfiE A Wikileaks for the Fed?]</ref> More fundamentally, these short-term "parachutes" used after bubbles burst do not save ordinary borrowers from [[foreclosure]] and [[bankruptcy]], nor do they address the pernicious long-term dysfunctional aspects of [[fractional reserve banking]] described above. These problems are temporarily averted, only to be dealt with yet again by the next generation of indebted governments and peoples.<ref>[http://www.informationclearinghouse.info/article18431.htm The Era of Global Financial Instability, by Mike Whitney]</ref><ref>[http://www.youtube.com/watch?v=n8w6Nx2rfiE A Wikileaks for the Fed?]</ref>

Given these repeated financial crises arising from the debt-based monetary system, many [[monetary reform]]ers predict that there will inevitably be widespread default or hyperinflation or depression. After this "catastrophe"<ref>[http://www.goldensextant.com/SavingtheSystem.html Saving the Sytem], Robert K. Landis</ref> a spontaneous market-induced return to the [[gold standard]] is anticipated to be the most likely result.<ref>[http://www.youtube.com/watch?v=VMngK0t5WkY Mike Maloney interview with Max Keiser], The Keiser Report</ref><ref>[http://www.goldensextant.com/SavingtheSystem.html Saving the Sytem], Robert K. Landis</ref> Other possible solutions following the inevitable catastrophe include a return to legally enforced full-reserve banking combined with the issuance government-issued debt-free [[fiat currency]], or [[free banking]] and the issuance of private coinage and private money. If these solutions are not initiated soon, it can be expected that a complete financial "meltdown" will ensue at some stage, as fewer young people in developed economies can be found who are willing to go into debt in sufficient magnitude to pay off the debts that have already been accumulated.<ref>[http://www.lewrockwell.com/bonner/bonner454.html Revolution in Egypt adn Black Swans], Bill Bonner</ref><ref>[http://www.goldensextant.com/SavingtheSystem.html Saving the System], Robert K. Landis</ref> As extreme inequality increases, [[foreclosure]]s mount and financial crises repeatedly erupt, many believe a political crisis will eventually result in calls for fundamental [[monetary reform]].<ref>[http://www.youtube.com/watch?v=VMngK0t5WkY Mike Maloney interview with Max Keiser], The Keiser Report</ref><ref>[http://www.goldensextant.com/SavingtheSystem.html Saving the Sytem], Robert K. Landis</ref>

These on-going, worsening, [[debt]]-created crises in the economy and society (and the unsustainable damage to the [[environment]] caused by debt-created [[overconsumption]]) could turn monetary and economic policies either to the extreme left or to the extreme right, as there are a number of competing solutions to the debt-based monetary "problem".

===Proposals for monetary reform===
====Libertarians, Austrians and commodity money====

[[Libertarians]] and [[Austrian School]] advocates envision a society of [[free markets]], [[free banking]], [[small government]]<ref>[http://www.prudentbear.com/index.php/thebearslairview?art_id=10473 Models of Capitalism], Michael Hutchinson</ref> and the abolition of [[legal tender laws]], allowing money backed by a free market [[gold standard]] or [[silver standard]] to come back in circulation,<ref>[http://www.marketoracle.co.uk/Article25212.html The Faults of FRB], Thorsten Polleit</ref> along with the abolition of all monopolistic governmental central economic planning and monopolistic central banking.<ref>[http://www.lewrockwell.com/blog/lewrw/archives/73833.html End the Fed], Freedom Watch</ref><ref>[http://mises.org/daily/4860 Money: Sound and Unsound], Mark Thornton commentary on Joseph Salerno's book</ref><ref>[http://www.prudentbear.com/index.php/thebearslairview?art_id=10471 Gold Standard Renaissance?]</ref><ref>[http://www.marketoracle.co.uk/Article24632.html The Gold Standard Never Dies], [[Lew Rockwell]]</ref><ref>[http://www.prudentbear.com/index.php/thebearslairview?art_id=10471 Gold Standard], Michael Hutchinson</ref><ref>[http://mises.org/store/Money-Bank-Credit-and-Economic-Cycles-P290C0.aspx Money, Bank Credit and Economic Cycles], Jesus Huerta de Soto, Mises Institute ISBN: 978-1-933550-39-8</ref><ref>[http://radio.goldseek.com/griffin04.10.10.php Goldseek interview] with [[G. Edward Griffin]]</ref><ref>See also these [[Murray Rothbard]] articles: [http://www.mises.org/money.asp What Has Government Done to Our Money?], [http://www.mises.org/story/1829 The Case for the 100% Gold Dollar]; [http://www.lewrockwell.com/rothbard/cartelization.pdf The Fed as Cartel], [http://www.lewrockwell.com/rothbard/rothbard191.html Private Coinage], [http://www.lewrockwell.com/rothbard/rothbard190.html Repudiate the National Debt]; [http://www.lewrockwell.com/rothbard/rothbard181.html Taking Money Back], [http://www.lewrockwell.com/rothbard/rothbard163.html Anatomy of the Bank Run], [http://www.lewrockwell.com/rothbard/rothbard128.html Money and the Individual]</ref> Some Libertarians would also support experimentation with [[full-reserve banking]],<ref>[http://mises.org/daily/4860 Money: Sound and Unsound], Mark Thornton commentary on Joseph Salerno's book</ref><ref>[http://mises.org/store/Money-Bank-Credit-and-Economic-Cycles-P290C0.aspx Money, Bank Credit and Economic Cycles], Jesus Huerta de Soto, Mises Institute ISBN: 978-1-933550-39-8</ref><ref>[http://www.mises.org/Books/mysteryofbanking.pdf Murray Rothbard, ''The Mystery of Banking'']</ref> recognizing that when fractional-reserve banking is combined with the gold standard a deflationary bias (and the systematic transfer of real wealth to the banking system) is normally inevitable. Those Libertarians who support full reserve banking would strongly support more flexible and forgiving bankruptcy laws in a fractional reserve banking environment, recognizing that no [[social stigma|stigma]] should be attached to bankruptcy given the anti-Libertarian "unjust acquisition" of real wealth implicit in both fractional reserve banking and [[taxation]].<ref>[http://mises.org/daily/4860 Money: Sound and Unsound], Mark Thornton commentary on Joseph Salerno's book</ref><ref name="Repudiating the National Debt">[http://mises.org/article.aspx?Id=1423 Repudiating the National Debt], Murray Rothbard</ref><ref>[http://www.mises.org/Books/mysteryofbanking.pdf Murray Rothbard, ''The Mystery of Banking'']</ref><ref>[http://gonzalolira.blogspot.com/2010/12/want-to-ruin-your-own-country-assume.html Want to Ruin Your Country?]</ref>

Regarding the current accumulation of [[government bonds]] and private debt, some Libertarians believe that the creation of the [[Federal Reserve System|Federal Reserve]] under the [[Federal Reserve Act]] of 1913 was [[Criticism of the Federal Reserve|unconstitutional]] and some Libertarians consider that at least some of this accumulated debt should be canceled or forgiven prior to a return to the gold standard in recognition of its fundamental illegitimacy.<ref name="Repudiating the National Debt"/> Arguably this would be supported by the "just acquisition" [[jurisprudence]] of legal philosopher [[Robert Nozick]] and Libertarian advocate [[Murray Rothbard]].<ref name="Repudiating the National Debt"/>

In late 2010, financial commentator Max Keiser started the [[Buy Silver Crash JP Morgan Campaign 2010]] in an attempt to expose the flaws underlying the [[fractional reserve banking]] system.

====Reform within fiat currency systems====
[[Stephen Zarlenga]] of the American Monetary Institute and [[Ellen Hodgson Brown]] call for the nationalization of the private banking system once the full losses on the banks' portfolios are recognized.<ref>[http://www.webofdebt.com/articles/new_theory.php Time for a New Theory of Money]</ref><ref>[http://globaleconomicanalysis.blogspot.com/2011/01/steve-keen-responds-to-world-economic.html Exponential Growth], MISH</ref><ref>[http://www.webofdebt.com/articles/force_nationalization.php Foreclosuregate could force bank nationalization]</ref><ref>[http://webofdebt.wordpress.com/2010/12/22/austerity-fails-in-euroland-time-for-some-%e2%80%9cdeficit-easing%e2%80%9d/ Austerity Fails in Europe], Ellen Hodgson Brown</ref> Brown also supports "QE2" - which she describes as a necessary and desirable funding of government spending via money printing rather than by the indirect means of issuing of interest-bearing government bonds, which simply allows private bankers to profit from costless money creation.<ref>[http://www.marketoracle.co.uk/Article24443.html QE2 and the Looming Threat of a Crippling Debt Service]</ref><ref>[http://www.marketoracle.co.uk/Article24719.html QE2 and Hyperinflation], Ellen Hodgson Brown</ref> In late 2010, [[Ellen Hodgson Brown]] and Austrian School commentator [[Gary North]] engaged in an intense debate over the direction of [[monetary reform]], with gold-standard supporter [[Gary North]] accusing Brown of going down a path that inevitably leads to the economics of fascism.<ref>[http://www.lewrockwell.com/north/north908.html Criticism of Ellen Hodgson Brown]</ref><ref>[http://www.lewrockwell.com/north/north912.html Ellen Betrays], Gary North</ref>

[[Michael Rowbotham]] also seeks the cancellation of "unjust" debts (such as [[third world debt]]), but would also support the re-introduction of strongly redistributive tax policies involving higher financial transaction taxes (such as a [[Tobin tax]]), [[land tax]]es and [[inheritance tax]]es, and, crucially and most importantly, a [[social security]] [[safety net]] involving a guaranteed minimum [[social credit|debt-free income]] (sourced from government-issued debt-free money independent of any central bank) for all citizens in the debt-based economy. Under this proposal, every adult citizen would be given a livable debt-free income transferred electronically into their [[bank account]], simply by virtue of their [[citizen]]ship. They could then use this debt-free money to pay off their [[mortgage]]s or to live, debt-free, without being compelled to work as a [[wage slavery|wage slave]] in the market economy if they chose not to. The government would finance these payments simply by ordering the private banks to accept their electronic instructions as legal tender. It would therefore not result in the expansion of [[government debt]].

Instead of [[money]] being created "indirectly" and "furtively" at the point of [[loan]] creation by the private banking system, with periodic [[bailouts]] to [[socialism for the rich and capitalism for the poor|already-rich bankers]], it would be created directly and openly by the democratically elected government and issued to its [[citizen]]ry by way of instruction to the private banking system.

Rowbotham and Ellen Hodgson Brown both argue in their books that this would ''not'' be [[inflation]]ary (or at least would not be as inflationary or as dysfunctional as the present system).<ref>[http://www.webofdebt.com/articles/hyperinflation.php Weimar Hyperinflation], Ellen Hodgson Brown</ref> This would also reduce [[overconsumption]] and the associated [[Natural environment|environment]]al damage associated with debt-based [[consumerism]]. It would also give individuals the free time to engage once again in non-marketable [[religious]], [[artistic]] and [[recreation]]al activities if they chose to do so.<ref name="death"/>

Ex-U.S. Treasury Department analyst Richard C. Cook also supports the issuance of debt-free money and zero-interest credit by the central government and has provided a detailed blueprint of monetary reform recommendations to transition to a debt-free money supply.<ref name="marketoracle.co.uk"/>

Many monetary reformers who call on the government to take back the money creation from debt-sourced banks also call for full reserve banking to remove the bank's alleged "embezzlement" and "counterfeiting" abilities.<ref name="marketoracle.co.uk"/><ref>[http://www.monetary.org/ AMI website, calling on full-reserve banking]</ref>

It is to be expected that these policies would be violently opposed by the [[private bank]]ing "[[elite]]", as it would render impotent their control over the [[money supply]], dissipating this crucial decision-making power away from its current power base. It would also be likely to reduce [[economic growth]], dramatically increase the cost of [[labor]] and, potentially, simply increase monetary and price inflation as individuals used the additional income to bid up the cost of health care, education, housing, food and other real assets.<ref>[http://www.marketoracle.co.uk/Article25175.html Kucinich's End the Fed campaign fatally flawed], MISH</ref> <ref>[http://webofdebt.wordpress.com/questions-and-answers/response-to-mogambo-guru/ Response to the Magambo Guru], by Ellen Hodgson Brown</ref> However, this proposal would undoubtedly address the problem of [[inequality]] inherent in a debt-based monetary system and reduce the devastating impact of personal [[bankruptcy]] and allow individual citizens to quickly recover from financial hardship. It would also ensure that this [[social security]] measure (and government spending in general) would not have to be paid for by future generations from future streams of [[income tax]].

===Left-leaning ideas===
Many left-leaning [[social democrats]] would also support the taxing of the banking system and the enforcement of strongly redistributive income and [[land tax]]es to ensure the financially dispossessed are "replenished" with income. They would also support a [[social security]] [[safety net]] involving the provision of unemployment benefits and government-supplied free medical care, education and other essential services and [[public goods]]. It is to be expected however that, without the issuance of debt-free [[fiat currency]], this system would result in the persistent, exponential, accumulation of [[government debt]], financed by the [[private banking]] system by the issuance of [[government bonds]]. If not properly managed, this could result in a progressively higher tax burden and may result in higher [[interest rates]] in the long term, as financiers require higher [[interest rates]] to lend to the increasingly indebted central government. Without the issuance of [[debt-free money]] these policies can be self-defeating, with the net result simply being that a larger stream of guaranteed income goes to the [[private bank]]ing system via the issuance of interest-bearing [[government bonds]] (which are purchased by the [[private banks]] "out of nothing" through [[fractional reserve banking]] techniques). This [[government debt]] must then be financed in perpetuity by compulsorily acquired [[tax]]es from future generations.

It could be argued that the early success of extreme right-wing [[fascism]] in [[Nazi Germany]] and [[Italy]] in the period after [[World War I]] was a response to the economic chaos created by the debt-based monetary system in early 20th century [[Europe]]. Some of the economic policies introduced by [[Hitler]] and [[Mussolini]] were in direct response to the economic collapse and social [[anarchy]] caused by soaring government and personal debt levels in both countries in the post-[[Versailles Treaty]] era, and (indirectly) arose from the writings of [[Silvio Gesell]] and others on the nature of the problems associated with a debt-based [[monetary system]]. Although many [[historian]]s justifiably criticize many of the non-economic policies of the [[fascist]] governments of [[Germany]] and [[Italy]] during this period, it cannot seriously be disputed that the [[economics of fascism]] provided a degree of [[prosperity]] to the populace, and that the economic policies that were implemented during this period by these [[fascist]] governments succeeded in their stated objective of restoring economic and social order during the pre-[[World War II]] era.<ref>[http://www.webofdebt.com/articles/bankrupt-germany.php How a Bankrupt Germany Solved its Economic Problems], Ellen Hodgson Brown</ref>

Similarly it could be argued that [[socialism]] and [[communism]] were movements inspired by the inequalities caused by the intense (and in [[Karl Marx]]'s view unsustainable) concentrations of monetary wealth, power and influence inherent in the practice of [[fractional reserve banking]] in a [[laissez-faire]], [[free market]] [[capitalist]] environment (particularly when [[fractional reserve banking]] is combined with a [[gold standard]] or other [[hard currency]] [[monetary system]]).<ref>[http://www.nakedcapitalism.com/2009/02/steve-keen-roving-cavaliers-of-credit.html ''Roving Cavaliers of Credit'', Steve Keen, with commentary from Yves Smith at Naked Capitalism]</ref>

The [[communist]]/[[socialist]] solution to the problem of [[fractional reserve banking]] is simple: complete removal (and if necessary, violent non-democratic removal) of the allegedly "parasitic" political and financial capitalist class, wholesale repudiation of [[government debt]] resulting in complete debt [[default]]; forced [[expropriation]] of [[land]] and wealth from the [[upper classes]] to the dispossessed and needy [[working classes]]; [[nationalization]] of the [[private banks]] (which has required armed [[coup]]s by the [[military]] in some past [[revolution]]s); and the return of the banking function from a dominant, speculative to a subordinate, administrative institution, where the banking system is reduced to a subservient arm of the centralized [[Leviathan]]. In this system, government-owned banks are directed by government policy; often provide different kinds of loans to different industry sectors at different interest rates depending on the perceived "needs" of the economy and the community; normally have a significant proportion of [[non-performing loan]]s due to weak or non-existent [[bankruptcy]] laws; and periodically "forgive" failed debts in recognition of the impossibility of some businesses in paying this debt money back.

It is to be expected that the [[profitability]] of the government-owned banking system would be more stable - but dramatically lower - than that in a debt-based [[capitalist]] economy. It is also to be expected that a significantly higher misallocation of resources could occur in this system, where lending decisions are "infected" by political considerations and are not made on the basis of expected [[return on investment]]. The risk of [[corruption]] in the banking system is also expected to be higher where there is no separation between the political and monetary systems in an economy. Market-oriented [[monetary reform]]ers and [[neo-classical]] economists therefore do not support [[nationalization]] of the [[private banking]] system.

It should be noted that partial [[nationalization]] of the [[private bank]]ing system would only be temporary, as any remaining [[private banks]] could still engage in unlimited [[fractional reserve banking]] and facilitate the eventual acquisition and control of any strategic assets in a partially socialized economic system. It is to be expected that in the absence of complete [[nationalization]] of the banking system, the [[private bank]]ing system would eventually dominate the financial system in any nominally [[socialist]] society.

===Status under current systems===
Whatever their political leanings, nearly all [[monetary reform]]ers agree that the current financial and economic system imposed on the populace by most governments, involving the perpetuation of government-protected [[private bank]]s (organizations legally permitted to engage in unlimited and inherently speculative [[fractional reserve banking]] activities, with recourse to monopoly [[central bank]]s - and in some cases corrupt governments<ref>[http://blogs.telegraph.co.uk/finance/ambroseevans-pritchard/100008812/irelands-debt-servitude/ Ireland's Debt Servitude], Ambrose Evans-Pritchard, UK Telegraph</ref> - to provide [[bail out]]s of [[fiat money]]), "deregulated" labor markets (which have the effect of increasing the marketization and commodification of human activity), strictly enforced [[bankruptcy]] laws (which permit the periodic transfer of assets from failed [[bankrupt]] investors to the [[private banks]] and their associates) and [[personal income tax]] (which, combined with periodic economic collapses, dispossesses the majority of the populace from their accumulated [[income]] and [[wealth]] and transfers this wealth to the owners of [[government bonds]]) amounts to an inherently unstable, unjust and dysfunctional [[economic system]] resulting in [[environment]]ally damaging [[over-consumption]], the systematic and irredeemable destruction of fertile [[arable land]] and the government-sponsored (and ultimately unsustainable) oppression of the indebted, impoverished and economically enslaved majority.<ref>[http://mises.org/daily/4893 ''The Ethics of Money Production''], Jorg Guido Hulsmann</ref>

==See also==
* [[Austrian Business Cycle Theory]]
* [[Central bank]]
* [[Monetary reform]]
* [[Murray Rothbard]]
* [[Ron Paul]]

==References==
{{reflist|2}}

==External links==
*[http://libertariannation.org/b/money.htm Libertarian Nation Foundation - Money and Banking]
*[http://econpapers.repec.org/paper/wpawuwpma/0203005.htm Fractional Reserve Banking as Economic Parasitism]
*[http://www.prosperityuk.com/prosperity/links/links.html Monetary Reform websites]
*[http://www.jamesrobertson.com/books.htm#creating James Robertson: Creating New Money: A Monetary Reform for the Information Age]
*[http://www.relfe.com/plus_5_.html I want the Earth Plus 5%]
*[http://video.google.com/videoplay?docid=-9050474362583451279 Money As Debt (videoplay animation)]
*[http://libertariannation.org/b/money.htm Money and Banking]
*[http://globaleconomicanalysis.blogspot.com/ MISH]
*[http://maxkeiser.com/ Max Keiser]
*[http://www.webofdebt.com/ Web of Debt]
*[http://www.prudentbear.com/ PrudentBear.com]
*[http://www.marketoracle.co.uk/ Market Oracle]
*[http://www.rgemonitor.com/index.php RGE Monitor]
*[http://www.financialarmageddon.com/ Financial Armageddon]
*[http://thedollarmeltdown.com/book.html The Dollar Meltdown]

{{DEFAULTSORT:Criticism Of Fractional-Reserve Banking}}
[[Category:Argumentation]]
[[Category:Money]]

Great Recession

2010-12-17T15:09:29Z

192.100.130.229: Expanded quote.

{{RightTOC}}

The [[economic crisis]], that began in 2007, has been named the '''Great Recession''' due to its impact on the American and worldwide economy.<ref name="Zuckerman_recession">Zuckerman, Mortimer. [http://online.wsj.com/article/SB10001424052748703837004575013592466508822.html "Mortimer Zuckerman: The Great Recession Continues - WSJ.com"], ''The Wall Street Journal'', referenced 2010-07-23.</ref><ref name="Evans-Pritchard_recession">Evans-Pritchard, Ambrose. [http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/7871421/With-the-US-trapped-in-depression-this-really-is-starting-to-feel-like-1932.html "With the US trapped in depression, this really is starting to feel like 1932"]. ''The Daily Telegraph'' (London). Referenced 2010-07-27.</ref><ref name="Samuelson_recession">Robert J. Samuelson. [http://www.washingtonpost.com/wp-dyn/content/article/2010/07/11/AR2010071103038.html "The Great Recession's stranglehold"], ''The Washington Post'', July 12, 2010. Referenced 2010-07-27.</ref><ref name="Isidore_recession">Chris Isidore. [http://money.cnn.com/2009/03/25/news/economy/depression_comparisons/ "The Great Recession"], ''CNNMoney.com'', First Published: March 25, 2009. Referenced 2010-07-27.</ref>

==Prelude to the crisis==
Banks increasingly had the incentive to make long-term amortizing loans secured by long-term assets because the threat of bank runs has been taken away by increases in [[Federal Deposit Insurance Corporation|FDIC]] deposit insurance. Deposit insurance started at $2,500 in the [[Great Depression]] and has increased in fits and starts to $250,000 in 2009. With the increase in deposit insurance there is no need to maintain liquidity. So instead of making short-term, self-liquidating business lines of credit, bankers opted for making real-estate loans.

Numbers from the FDIC reflect this shift over the past decade. At the end of the third quarter of 1999, the assets of the nation's banks totaled $5.5 trillion. As of September 30 2009, bank assets had grown to $13.2 trillion. Commercial and industrial loans outstanding only grew from $947 billion a decade ago to $1.27 trillion by September 30, 2009. Meanwhile, loans secured by real estate increased from $1.43 trillion in the fall of 1999 to $4.5 trillion in 2009. And investment in securities doubled, rising from $1.03 trillion to $2.4 trillion.<ref name="French_loans">Doug French. [http://mises.org/daily/3925 "Productive Debt versus Unproductive Debt"], Mises Daily, December 08, 2009. Referenced 2010-07-28.</ref>

Finance was once just a small portion of the US economy, but by 2007 it had mushroomed into being over a quarter of the S&P 500, after being only 5 percent of the index back in 1980 — and this doesn't count the financial affiliates of companies like GE. Finance is the largest sector of the US economy, so college graduates believe the road to riches lies with pushing paper, creating complex financial securities, and jockeying risk-management models.

These products served to grow Wall Street exponentially. All stocks in the S&P in 1957 had a market value of $220 billion. By the end of 2008, that index had a value of $9 trillion, but the real action was in derivatives, which totaled $518 trillion that year, "or about ten times the Gross Global Product." Credit Default Swaps owners jumped on this opportunity to profit and the CDS market grew to $62 trillion at its peak, while the entire market for home mortgages was only $12 trillion. Sold as an insurance to hedge against credit risk, the CDS market morphed into speculation.<ref name="French_finance_industry">Doug French. [http://mises.org/daily/4592 "Turning Bread into Stones"], Mises Daily, July 26, 2010. Referenced 2010-07-28.</ref>

The Washington Post has called the 2000s "[[Lost Decade (Japan)|The lost decade]]". "The U.S. economy has expanded at a healthy clip for most of the last 70 years, but by a wide range of measures, it stagnated in the first decade of the new millennium. Job growth was essentially zero, as modest job creation from 2003 to 2007 wasn't enough to make up for two recessions in the decade. Rises in the nation's economic output, as measured by gross domestic product, was weak. And household net worth, when adjusted for inflation, fell as stock prices stagnated, home prices declined in the second half of the decade and consumer debt skyrocketed."<ref name="WashPost_decade">The Washington Post. [http://www.washingtonpost.com/wp-dyn/content/graphic/2010/01/01/GR2010010101478.html "The lost decade for the economy"], a graphic by Neil Irwin, Cristina Rivero and Todd Lindeman. Referenced 2010-07-30.</ref>

===Predicting the crisis===
<blockquote>''"While I am not going to say that there is no possibility of house pricing declining... the notion of a bubble bursting and the whole price level coming down seems to me as far as a nationwide type of phenomenon really quite unlikely."'' 
Federal Reserve Chairman [[Alan Greenspan]], 2003.<ref name="Greenspan_bubble">Alan Greenspan. [http://www.access.gpo.gov/congress/senate/pdf/108hrg/86497.pdf "Global Aging: Opportunity or Threat for the U.S. Economy?"] (pdf), Hearing before the [http://aging.senate.gov/ Special Committee on Aging], United States Senate, One Hundred Eighth Congress, First Session, Washington, DC, February 27, 2003, p.10. Referenced 2010-07-24.</ref></blockquote>

A common view from the very beginning of the credit crisis, shared from the upper echelons of the global financial and policy hierarchy and in academia to the general public, was that, ‘no one saw this coming’. However, several economical analysts - especially from the [[Austrian School of Economics]] - warned specifically about a housing-led recession, going against the general mood and official assessment, and well before most observers turned critical from late 2007.<ref name="Bezemer_coming">Bezemer, Dirk J. [http://som.eldoc.ub.rug.nl/FILES/reports/2009/09002/09002_Bezemer.pdf "No One Saw This Coming": Understanding Financial Crisis Through Accounting Models] (pdf), ''Groningen University'', 16. June 2009. Referenced 2010-07-30.</ref><ref name="Mises_Bailout">Mises.org. [http://mises.org/daily/3128 "The Bailout Reader"], ''Mises Daily''', September 2008, section "Who Predicted This?". Referenced 2010-11-11.</ref><ref name="Murphy_Recession">Robert P. Murphy. [http://mises.org/daily/2728 "The Worst Recession in 25 years?"], ''Mises Daily'', October 01, 2007. Referenced 2010-11-11.</ref>

==Bubble economy==

===Housing bubble===
Psychology clearly plays a role in stimulating a bubble, but only monetary [[inflation]] enables it. It is difficult not to succumb to the temptation of astronomic profits in a short period of time. Resistance is even more difficult if the means to engage in the bubble are easily available at the nearest bank.

Former Fed chairman [[Alan Greenspan]] would suggest that "irrational exuberance" has the power to escalate asset prices. He could certainly claim exuberance, but there is nothing irrational in investing in higher-yield projects instead of watching your idle savings lose their purchasing power because of inflation.

With extremely low nominal interest rates and negative real interest rates (inflation is estimated at over 10% for 2007 and 2008), the rational behavior was to borrow and invest wherever it is possible. A booming real-estate market seemed to be the obvious choice most of the time. Under these conditions, everyone becomes a brilliant businessman. Entrepreneurial errors seem seldom while credit is abundant.

In the case of the housing sector, people failed to understand that demand for real estate is only sustainable if the ultimate reason for purchasing a property is to actually reside in it. Only [[saving]]s can allow for sustainable economic growth. Through inflation, credit flows excessively and distorts the production structure, allocating resources to projects that should have never existed in the first place and paving the way for the ensuing recession, that is, the adjustment of all the [[malinvestment]]s. Entrepreneurs can and will make mistakes even in the absence of inflation. But it is only through undue monetary expansion that the distortion occurs on a massive scale throughout the economy.

Production and saving cannot keep up with the pace of credit expansion, because production takes time and labor. The creation of additional money out of thin air does not add to the available amount of goods and services in the economy. If more credit is extended to construction companies, it does not mean there will be enough steel, cement, etc. — certainly not at prices that make the developments profitable. As soon as each company starts bidding for the same resource, it will tend to increase in [[price]], rendering some projects unviable. Resources are scarce. Printing more money can never alter this fact.<ref name="Ulrich_housing_bubble">Fernando Ulrich. [http://mises.org/daily/3956 "Rise and Fall in Dubai: An Austrian Perspective"], Mises Daily, December 16, 2009. Referenced 2010-07-28.</ref>

===Government intervention in the housing market===
Government policies intended to promote home ownership, even by people otherwise not able to afford it, date back to the 1930s if not before. Today, many government agencies and government-sponsored companies guarantee or subsidize mortgage loans, either directly or by providing a secondary market. Examples include the [[Federal Home Loan Banks]], the [[Federal Housing Administration]] (FHA), the [[Government National Mortgage Association]] (GNMA, "Ginnie Mae"), and the Department of Agriculture's [[Rural Housing Service]] and [[USDA Rural Development|Rural Development Guaranteed Loan Program]]. Some programs aim to make housing more affordable for particular groups, including military veterans, police officers, teachers, and Native Americans.

Some programs have forged strong links with politicians. The [[Fannie Mae|Federal National Mortgage Association]] (Fannie Mae) and [[Federal Home Loan Mortgage Corporation]] (Freddie Mac), both government sponsored, have been particularly notorious, enjoying cozy relations with members of Congress and an implicit (later explicit) government guarantee of their bonds.

Several much-discussed laws and regulations, including the [[Community Reinvestment Act]] of 1977 and its sequels, pressured financial institutions to make mortgage loans to normally unqualified borrowers, and even to make them in parts of cities where a prudent person would hesitate to walk. Lenders have also been pressured to grant relief to troubled mortgage debtors.

It is not obvious that homeownership is unequivocally desirable. Owning a house puts friction in the way of the owner's moving to a place where he could have a better job. The owner carries the burdens of maintenance, landscaping, and finding plumbers and other repairmen when emergencies arise. These burdens might be left in the first place to managers of rental properties, who would take advantage of professionalism, risk-spreading, and economies of scale. Yet government has gone to remarkable lengths in obeisance to "the American dream."

Tax laws have long privileged owner occupancy over renting. Homeowners may deduct mortgage-interest payments and real-estate taxes in figuring their federal income taxes, and they enjoy favorable tax treatment of gains on the sale of their houses. Federal tax law permits state and local government agencies to offer below-market-rate financing to homebuyers. Owners enjoy tax-free nonmonetary income (implicit rental income) from occupancy of their homes, whereas landlords pay tax on their rental income and pass it and the property tax along to their tenants.

Such policies have effects. Cheap credit during the years of the boom compounded the long-term effects of government action. As one would predict, cheap credit encouraged borrowing, building construction, and bullish speculation in houses. Even financially unqualified homebuyers took advantage of dubiously attractive subprime mortgages, mortgages whose initial teaser rates could later be raised, loans requiring no payment of principal during the early years, and even negative-amortization loans.

Some borrowers and mortgage brokers connived to conceal applicants' inability to meet even the loosened financial standards. Borrowers and lenders were seduced by expectations that the collateral — houses — would keep rising in price indefinitely. Low interest rates spurred savers and institutions to look for better yields even on new or exotic and riskier kinds of investment. Financiers reached for these yields, resorting to complicated and poorly understood financial derivatives and making defective assessments and unclear explanations of risks.<ref name="Yeager_bubble_background">Leland B. Yeager. [http://mises.org/daily/4531 "Pandemic: The Contagious Crisis"], Mises Daily, July 08, 2010. Referenced 2010-07-28.</ref>

===Financial markets===
An advanced economy is a tissue of intricate interdependencies whose unraveling damages finance, production, employment, and consumption. Contagion particularly bedevils financial intermediation, which is the business of banks and other financial firms and the stock market. Lending institutions borrow, normally at shorter-term and lower rates of interest, to relend at higher rates. Banks, for example, owe short-term debt to their depositors and use the funds for medium- and long-term loans and securities.

Financial intermediation tailors types, maturities, and risk/reward characteristics of financial instruments to meet the desires both of ultimate savers and of borrowers and stock-issuing firms. In an advanced economy, this intermediation is essential to channel savings efficiently into factories, farms, machinery, and other capital goods, so promoting economic growth.

By its very nature, intermediation requires firms performing it to operate heavily with borrowed funds. Their excess of assets over liabilities — their capital in this accounting sense (net worth) — amounts to only a very small percentage of either. Even ordinary businesses use borrowed funds to some extent; but financial firms practice this [[Leverage (finance)|leverage]], so called, to a more extreme degree. Their capital, a small percentage of their balance sheets, is vulnerable to being wiped out.

'''[[Securitization]]''' means bundling loans into packages that provide the backing for bonds issued by the bundlers. Ideally, these "[[Collateralized debt obligation|collateralized debt obligations]]" enable their buyers to enjoy the convenience of not making individual mortgage loans and also, normally, the relative safety of diversification. The bundlers receive their shares of these benefits from an interest-rate spread between what they earn on the loans and what they pay on their own obligations.

The process can be carried to further stages as the first-level bonds are cut into "tranches" according to the estimated riskiness of their backing. The different tranches can then serve as backing for a further level of bonds, and even further levels. The results are called CDO2s (collateralized debt obligations squared). Many of them received the highest ratings by the three government-privileged bond-rating companies, S&P, Moody's, and Fitch, so becoming approved holdings even for conservative investors such as pension funds, and building confidence among other investors also.

Yet these ratings, especially of unfamiliar debt instruments, proved overoptimistic. At the beginning of the chain, some of the underlying mortgage borrowers may not have been creditworthy — and in recent years, many of them certainly were not. While the process may achieve the apparent safety of diversification, it also makes risk assessment more difficult and obscures how participants along the chain share the risk of default on the underlying mortgages. Unforeseen defaults can spread and magnify damage along the whole ingenious chain.<ref name="Yeager_bubble_background" />

'''[[Credit-default swaps]]''' can be described as an insurance that investors buy to compensate for a loss if a particular debtor defaults on its obligation (a loan, mortgage, government debt, etc). The investor pays the CDS spread (the "insurance premium") and if the debtor defaults on its debt, the investor receives the insured sum. The CDS spreads indicate the confidence in the underlying bond.

Investors can buy CDSs even if they do not own any debt from the company that they refer to. These are the infamous naked credit-default swaps (already banned in Germany, there are plans to extend this ban to the rest of the EU). From a free-market point of view, betting on defaults of financial institutions is as legitimate as betting against a certain soccer team in the World Cup.<ref name="Bagus_CDS">Philipp Bagus. [http://mises.org/daily/4502 "The Social Function of Credit-Default Swaps"], Mises Daily, June 29, 2010. Referenced 2010-07-28.</ref>

Generally, the option of insurance means more certainty and that people will be more eager to lend money. However, if many are buying a specific "insurance", it will increase the spreads,and indicate distrust of the market. The institution in question may find it hard to borrow more money (this in fact happened to the [[2008–2010 Icelandic financial crisis|banks from Iceland]], and led to higher interest rate payments for the [[2010 European sovereign debt crisis#Greek government funding crisis|Greek government]]). Speculators can in this way warn the public that a company - or a government - won't be able to pay its debts. They may also bring about the collapse of unstable companies sooner.<ref name="Mera_CDS">Xavier Méra. [http://blog.mises.org/13177/second-thoughts-on-sovereign-credit-default-swaps/ "Second Thoughts on Sovereign Credit-Default Swaps"], Mises Economics Blog, July 6, 2010. Referenced 2010-07-28.</ref><ref name="Bagus_CDS" /> The default-swap issuer can also go broke - and with greater likelihood than a regular "insurer", because of the relative complexity and novelty of the transactions. For an example see the insurer [[American International Group|AIG]], which had to be rescued by the government.<ref name="Yeager_bubble_background" /> (As Treasury Secretary [[Timothy Geithner]] said: "Despite regulators in 20 different states being responsible for the primary regulation and supervision of AIG’s U.S. insurance subsidiaries, despite AIG’s foreign insurance activities being regulated by more than 130 foreign governments, and despite AIG’s holding company being subject to supervision by the Office of Thrift Supervision (OTS), no one was adequately aware of what was really going on at AIG."<ref name="Geithner_AIG">Secretary Timothy F. Geithner. [http://oversight.house.gov/images/stories/Hearings/Committee_on_Oversight/TESTIMONY-Geithner.pdf "Written Testimony"] (pdf) for the House Committee on Oversight and Government Reform, January 27, 2010. Referenced 2010-07-28.</ref>)

The whole tissue of economic interrelations rests on '''trust'''. Confidence can be justified, excessive, or abnormally weak. Confidence can rise or fall in waves of herding: understandably, people without enough information to make judgments on their own regard others' behavior as guided by information that they possess. A boom reinforces confidence. People are inclined to fall for dishonest schemes. A bust saps confidence. People and institutions, including banks, become more cautious in doing business with one another.

The stock market, swinging widely, both registers and magnifies the state of confidence or fear. Loss of stock and house values makes consumers hesitant to spend money, depriving businesses of sales in a further fall of dominos.

'''[[Moral hazard]]''' is a danger: past rescues breed expectations of more in the future. So soothed, firms run greater risks than would otherwise be prudent (just as fire insurance soothes homeowners to be less obsessively cautious than they would be without it). Against a long background of bank and hedge-fund rescues, the rescue of [[Bear Stearns]] in March 2008 further bolstered expectations. These were disappointed when [[Lehman Brothers]] was allowed to fail in mid-September. The crisis deepened, arousing hopes that the authorities had learned a lesson and would not allow a similar major collapse. The economy faces a [[Catch-22 (logic)|catch-22]]: damned by immediate damage if a rescue goes unattempted, and damned by the longer-run moral hazard if a rescue ''is'' undertaken.

Moral hazard presents a major short-run versus long-run contrast. Rescue of a troubled bank may seem the best thing to do immediately, but it reinforces expectations of further rescues, inviting repeated trouble later.<ref name="Yeager_bubble_background" />

===Regime uncertainty===
The December 2009 regular survey on Small Business Economic Trends by the [[National Federation of Independent Businesses|NFIB]] showed that capital expenditures and near-term plans for new capital investments remained stuck at 35-year lows. The same survey revealed that only 7% of small businesses saw the next few months as a good time to expand. Only 8% of small businesses reported job openings, as compared to 14%-24% in 2008, depending on month, and 19%-26% in 2007. The weak economy was the most prevalent reason given for why the next few months are "not a good time" to expand, but "political climate" was the next most frequently cited reason, well ahead of borrowing costs and financing availability. The authors stated: "the other major concern is the level of uncertainty being created by government, the usually source of uncertainty for the economy. The 'turbulence' created when Congress is in session is often debilitating, this year being one of the worst. . . . There is not much to look forward to here."<ref name="NFIB_Small_business">William C. Dunkelberg, Holly Wade. [http://www.nfib.com/Portals/0/PDF/sbet/SBET200912.pdf "NFIB Small Business Economic Trends"] (pdf), December 2009. Referenced 2010-08-15.</ref>

Business investment in the third quarter of 2009 was down 20% from the low levels a year earlier. Job openings were at the lowest level since the government began measuring the concept in 2000. The pace of new job creation by expanding businesses was slower than at any time in the past two decades and, though older data are not as reliable, likely slower than at any time in the past half-century. While layoffs and new claims for unemployment benefits have declined in recent months, job prospects for unemployed workers have continued to deteriorate. The exit rate from unemployment was lower now than any time on record, dating back to 1967.

According to the Michigan Survey of Consumers, 37% of households planned to postpone purchases because of uncertainty about jobs and income, a figure that has not budged since the second quarter of 2009, and one that remained higher than any previous year back to 1960.<ref name="Becker_Uncertainty">Gary S. Becker, Steven J. Davis and Kevin M. Murphy. [http://online.wsj.com/article/SB10001424052748703278604574624711732528426.html "Uncertainty and the Slow Recovery"], ''The Wall Street Journal'', January 4, 2010. Referenced 2010-08-15.</ref> In 2009, companies were holding more cash — and a greater percentage of assets in cash — than at any time in the past 40 years.<ref name="McGinty_cash">Tom McGinty and Cari Tuna. [http://online.wsj.com/article/SB125712303877521763.html "Jittery Companies Stash Cash"], ''The Wall Street Journal'', November 3, 2009. Referenced 2010-08-15.</ref><ref name="Higgs_cash">Robert Higgs. [http://www.independent.org/blog/index.php?p=3890 "More Evidence of Current Regime Uncertainty?"], ''The Beacon'', blog of the The Independent Institute, Nov 7, 2009. Referenced 2010-08-15.</ref>

The chairman of China’s [[sovereign wealth fund]] said in late 2008 that China had no plans for further investments in Western financial institutions. "Right now we do not have the courage to invest in financial institutions because we do not know what problems they may have." Mr. Lou said that the sheer pace of new initiatives and new rules issued by Western regulatory agencies was disconcerting and made it even harder for him to choose worthwhile investments. "If it is changing every week, how can you expect me to have confidence?" he asked.<ref name="Bradsher_China">Keith Bradsher. [http://www.nytimes.com/2008/12/04/business/worldbusiness/04yuan.html?_r=2&adxnnl=1&adxnnlx=1228594043-/gsxRDJZWxAxLLCcUhx8oQ "China Shuns Investments in West’s Finance Sector"], ''The New York Times'', published: December 3, 2008. Referenced 2010-08-15.</ref><ref name="Higgs_China">Robert Higgs. [http://www.independent.org/blog/index.php?p=635 "Regime Uncertainty in 1937 and 2008"], ''The Beacon'', blog of the The Independent Institute, Dec 6, 2008. Referenced 2010-08-15.</ref>

The chairman of the [[Business Roundtable]], an association of top corporate executives that has been [[Barack Obama|President Obama's]] closest ally in the business community, accused the president and Democratic lawmakers in June, 2010, of creating an "increasingly hostile environment for investment and job creation." ... "By reaching into virtually every sector of economic life, government is injecting uncertainty into the marketplace and making it harder to raise capital and create new businesses."<ref name="Montgomery_stifle_growth">Lori Montgomery. [http://www.washingtonpost.com/wp-dyn/content/article/2010/06/22/AR2010062205279.html "Business leaders say Obama's economic policies stifle growth"], ''Washington Post'', June 23, 2010. Referenced 2010-08-15.</ref>
{{Main|Regime uncertainty}}

==Burst of the bubble==
Some consider the [[Bankruptcy of Lehman Brothers|bankruptcy of Lehman Brothers]] to cause the financial panic of late 2008.<ref name="Jones_Lehman">Sam Jones. [http://ftalphaville.ft.com/blog/2009/03/12/53515/why-letting-lehman-go-did-crush-the-financial-markets/ "Why letting Lehman go did crush the financial markets"], ''Financial Times'' on Mar 12 2009. Referenced 2010-07-30.</ref> According to others, the main risk indicators only took off after Treasury Secretary Henry Paulson and Fed Chairman Ben Bernanke's [[Troubled Asset Relief Program|TARP]] speeches to Congress on Sept. 23 and 24.<ref name="Cochrane_TARP">John H. Cochrane and Luigi Zingales. [http://online.wsj.com/article/SB10001424052970203440104574403144004792338.html "Lehman and the Financial Crisis"], ''The Wall Street Journal'', September 15, 2009. Referenced 2010-07-30.</ref><ref name="Taylor_responses">John B. Taylor. [http://www.stanford.edu/~johntayl/FCPR.pdf "The Financial Crisis and the Policy Responses: An Empirical Analysis of What Went Wrong"] (pdf), November 2008, referenced 2010-07-30.</ref>

Still others point out, that the previous bailouts (esp. Bear Stearns in March 2008) produced in the markets an expectation, that the government will bail out large financial institutions and its decision to let Lehman Brothers to fall has surprised and shocked them.<ref name="Suster_Lehman">Matěj Šuster. [http://www.libinst.cz/komentare.php?id=574 "Pád Lehman Brothers a finanční panika"] ("Fall of Lehman Brothers and financial panic", in ''[[Czech language|Czech]]''), ''[http://libinst.cz/stranka_en.php?id=2 Liberalni Institut]'', 2009-09-20. Referenced 2010-07-30.</ref> (It has been noted, however, that there is a significant relationship between lobbying and bailout money, as well as a greater chance of getting bailouts depending on a bank’s ties with either the Federal Reserve or key members of Congress.<ref name="Mitchell_corruption">Daniel J. Mitchell. [http://www.cato-at-liberty.org/2009/12/22/university-of-michigan-study-confirms-link-between-financial-bailout-and-corruption/ "University of Michigan Study Confirms Link between Financial Bailout and Corruption"], ''Cato Institute'', December 22, 2009. Referenced 2010-07-31.</ref>)

===Unemployment===
Total employment peaked in 2007 at 137.6 million persons on nonfarm payrolls, fell slightly in 2008, and then dropped precipitously in 2009 to 132.0 persons, for a two-year loss of 5.6 million jobs. In 2009, total employment was approximately equal to its magnitude in 2001, even though the labor force had grown substantially in the interim.

The loss of employment has occurred entirely in the private sector: employment fell from 115.4 million persons in 2007 to 109.5 million persons in 2009, a decline that took private employment back to its level at the end of the 1990s. As private employment has collapsed since 2007, however, the government payroll has actually grown slightly from 22.2 million persons in 2007 to 22.5 million persons in 2009, which puts this class of employment roughly 1.7 million persons above its magnitude in 2000.<ref name="Higgs_unemployment">Robert Higgs. [http://www.independent.org/blog/index.php?p=4728 "Pity the Poor Private-Sector Workers"], ''The Independent Institute'', Jan 9, 2010. Referenced 2010-07-31.</ref>

The government employees also enjoyed increased compensation. The growth in six-figure salaries has pushed the average federal worker’s pay to $71,206, compared with $40,331 in the private sector.<ref name="Higgs_federal">Robert Higgs. [http://www.independent.org/blog/index.php?p=4383 "The Federal Bureaucracy-Plutocracy"], ''The Independent Institute'', Dec 12, 2009. Referenced 2010-07-31.</ref><ref name="Cauchon_Feds">Dennis Cauchon. [http://www.usatoday.com/news/washington/2009-12-10-federal-pay-salaries_N.htm "For feds, more get 6-figure salaries"], ''USA TODAY'', 2009-12-10. Referenced 2010-07-31.</ref>

This situation bears a resemblance to the employment situation during the [[Great Depression]], when private nonfarm hours worked fell steeply from 1929 to 1932 and did not get back to the 1929 level until 1941, notwithstanding (or perhaps because of) the millions of persons added to government payrolls during the New Deal period. In both cases, the possibility that government employment crowds out private employment, rather than stimulating it, cannot be dismissed out of hand.

The 2000s may prove to have been America’s second "lost decade" (the 1930s having been the first), an interval of little or no net economic gain, owing to destructive government policies that produced only unsustainable booms followed by inevitable busts, along with such huge, frequent, and unsettling changes in government policies that private planning, especially for long-term investment, has become too risky for private investors to bear — a situation called [[Uncertainty#Regime uncertainty|regime uncertainty]].<ref name="Higgs_unemployment" />

==After the fall==
Since the summer of 2008, the U.S. Treasury and the Fed initiated a new wave of spending, lending, and subsidizing programs ostensibly aimed at stemming the recession that began early in that year and deepened quickly in its last quarter and in the first quarter of 2009. Among the most notable of these programs have been attempts to prop up the real estate market and the residential construction industry, where the Fed’s easy-money policies in the first half of the present decade induced lenders to make millions of mortgage loans to home buyers who would not have qualified for such loans if traditional underwriting standards had been applied.

Rather than terminating the government policies that had encouraged the foolish behavior of real estate buyers, sellers, and lenders, the government has undertaken to continue and even to compound the selfsame policies that in large part caused our present economic troubles. For example, Fannie and Freddie, now effectively government owned and operated firms, continue to extend loans as if promising borrowers were superabundant.

Moreover, the [[Federal Housing Administration]], a government agency created in 1934 to insure conventional mortgage loans, has greatly expanded the volume of its business, and according to a [http://www.nytimes.com/2009/11/20/business/20limits.html?_r=1 report] in the New York Times, the FHA "is underwriting loans at quadruple the rate of three years ago even as its reserves to cover defaults are dwindling." The Mortgage Bankers Association affirmed on November 19, 2009 that "more than one in six F.H.A. borrowers was behind on payments." The FHA has backed 37 percent of all residential mortage loans made in 2009. Reporter Patrice Hill observes that "these loans are exposing taxpayers to the same kinds of soaring default rates and losses that brought down Fannie Mae and Freddie Mac as well as destroyed many banks and the private market for mortgage loans."<ref name="Higgs_housing">Robert Higgs. [http://www.independent.org/blog/?p=4069 "Government Responds to Economic Woes by Making More Bad Mortgage Loans"], ''The Independent Institute'', Nov 22, 2009. Referenced 2010-07-30.</ref>

Households across a majority of large U.S. cities received more foreclosure warnings in the first six months of 2010 than in the first half of 2009. In all, 154 out of 206 metropolitan areas with at least 200,000 residents posted an annual increase in foreclosure activity between January and June. The threat of foreclosures is spreading well beyond the top tier of metropolitan areas located in California, Florida, Nevada and Arizona, which have borne the brunt of the fallout from the housing crisis. "The face of foreclosure is driven much more now by unemployment than in the past," said the speaker of a foreclosure listing firm. The number of households facing foreclosure in the first half of the year climbed 8 percent versus the same period last year, but dropped 5 percent from the last six months of 2009.<ref name="Veiga_foreclosures">AP Real Estate Writer Alex Veiga. [http://news.yahoo.com/s/ap/20100729/ap_on_bi_ge/us_foreclosure_rates "Foreclosure activity up across most US metro areas"], ''Yahoo News'' / ''Associated Press'', Jul 29, 2010. Referenced 2010-07-31.</ref>

===Impact on Investment===
In 2006, gross private domestic [[investment]] reached its most recent peak, at $2.33 trillion (in constant 2005 dollars), or 17.4 percent of GDP. After remaining almost at this level in 2007, this measure of investment fell substantially during each of the next two years, reaching $1.59 trillion, or 11.3 percent of GDP, in 2009.

The greater part of gross investment consists of what the statisticians call the capital consumption allowance, an estimate of the amount of money that must be spent simply to offset wear and tear and obsolescence of the existing capital stock. In a country such as the United States, with an enormous fixed capital stock built up over the centuries, a great amount of funds must be allocated simply to maintain that stock. In recent years, the private capital consumption allowance has ranged from $1.29 trillion in 2005 to $1.46 trillion (in constant 2005 dollars) in 2009. Thus, even in the boom year 2006, about 60 percent of gross private domestic investment was required merely to maintain the economy’s productive capacity, leaving just 40 percent, or $889 billion in net private domestic investment, to augment that capacity.

From that level, net private domestic investment plunged during each of the following three years, taking the greatest dive between 2008 and 2009, when it fell to only $54 billion (in constant 2005 dollars), having declined altogether by 94 percent from its 2006 peak! Only 3.5 percent of all private investment spending in 2009 went toward building up the capital stock. Thus, net private investment did not simply fall during the recession; it virtually disappeared. Without substantial net private investment, brisk economic growth is unthinkable beyond the very short run.<ref name="Higgs_Divergence">Robert Higgs. [http://www.independent.org/blog/index.php?p=7882 "The Great Divergence: Private Investment and Government Power in the Present Crisis"], ''The Independent Institute'', on Sep 18, 2010. Data taken or derived from the National Economic Accounts prepared by the Commerce Department’s ''Bureau of Economic Analysis'' (Tables 1.1.5, 1.1.6, and 5.2.6 - see a [http://www.bea.gov/national/nipaweb/SelectTable.asp?Selected=N list of tables] for information. Referenced 2010-09-20.</ref>

==End of the crisis?==
In September, 2010, the [[National Bureau of Economic Research]] concluded, that the recession has ended in June 2009. It defines a recession as following:
<blockquote>"A recession is a period of falling economic activity spread across the economy, lasting more than a few months, normally visible in real [[GDP]], real income, employment, industrial production, and wholesale-retail sales. The trough marks the end of the declining phase and the start of the rising phase of the business cycle."</blockquote>

According to the Bureau, the recession lasted 18 months, which makes it the longest of any recession since World War II. Previously the longest postwar recessions were those of 1973-75 and 1981-82, both of which lasted 16 months.

The committee did not conclude that economic conditions since that month have been favorable or that the economy has returned to operating at normal capacity. Rather, the committee determined only that the recession ended and a recovery began in that month.<ref name="NBER_recovery">National Bureau of Economic Research. [http://www.nber.org/cycles/sept2010.html "Business Cycle Dating Committee, National Bureau of Economic Research"], referenced 2010-12-06.</ref>

[[Frank Shostak]] holds, that the NBER's definition does not provide an explanation of what a recession is all about. The main reason why the NBER's definition is confined to describing manifestations rather than the underlying causes of a recession is because mainstream thinkers do not hold that such causes can be known. They are of the view that the sources of recessions are various random shocks emanating from various factors such as a sudden change in people's psychology or various unexpected political and other events. In short, these causes are of an unexpected nature.

In a [[Free market|free unhampered environment]] it is conceivable that the economy would be subject to various shocks, but it is difficult to envisage a phenomenon of recurrent [[Business cycle|boom-bust cycles]].

Shostak points out, that movements in GDP mirror past money pumping. And since a loose monetary policy will start an exchange of 'nothing for something', a rebound in the GDP rate of growth is actually likely to reflect a weakening in the wealth-formation process, which is bad news for the economy. A fall in the growth momentum of [[money supply]] is likely to undermine the rate of growth of GDP in the months ahead. This will be seen by most experts as bad economic news. On the contrary, Shostak suggests that the expected downturn is actually going to be good news for the wealth generating process.<ref name="Shostak_NBER">Frank Shostak. [http://mises.org/daily/4741 "How Useful Is the NBER's Dating of Business Cycles?"], ''Mises Daily'', September 26, 2010. Referenced 2010-12-06.</ref>

==References==
{{Reflist}}

==External links==
* The [[Wikipedia:Late-2000s recession|Late-2000s recession]] on Wikipedia
* [http://video.google.com/videoplay?docid=-2757699799528285056 Real Estate Roller Coaster] (video), history of home values, 1890-2006
* [http://mises.org/daily/4059 Illusions of the Age of Keynes] by Doug French, January 2010
* [http://www.independent.org/blog/index.php?p=5142 Anatomy of the Current Recession] by Robert Higgs, February 2010
* [http://mises.org/daily/4787 Bank Failures in Slow Motion] by Doug French, October 2010
* [http://mises.org/books/walkaway_french.pdf Walk Away: The Rise and Fall of the Home-Ownership Myth] (pdf) by Douglas E. French, 2010

{{DEFAULTSORT:Great Recession, The}}
[[Category:History]]
[[Category:Issues]]

Panama

2010-12-07T16:09:55Z

192.100.130.229: /* External links */ Resource about Panama added.

{{Stub}}

{{Infobox
|Box title = Country summary
|Row 1 title = Capital
|Row 1 info = Panama City
|Row 2 title = Borders
|Row 2 info = [[Colombia]] 225 km, [[Costa Rica]] 330 km
|Row 3 title = Government type
|Row 3 info = constitutional democracy
|Row 4 title = Population
|Row 4 info = 3,360,474 (July 2010 est.)<ref name="CIA_PA">CIA - The World Facebook. [https://www.cia.gov/library/publications/the-world-factbook/geos/countrytemplate_pm.html "Panama"], from The World Facebook. Referenced 2010-09-30.</ref>
|Row 5 title = Population growth
|Row 5 info = 1.503% (2010 est.)<ref name="CIA_PA" />
|Row 6 title = Life expectancy
|Row 6 info = 77.25 years<ref name="CIA_PA" />
|Row 7 title = Unemployment
|Row 7 info = 7% (2009 est.)<ref name="CIA_PA" />
|Row 8 title = [[Wikipedia:Index of Economic Freedom|Index of Economic Freedom]]
|Row 8 info = 60<ref name="Heritage_PA">Heritage Foundation. [http://www.heritage.org/Index/Country/Panama "Panama"], Economic Freedom Score. A lower ranking is better; but please be careful when comparing between different countries or years. Referenced 2010-09-30.</ref>
|Row 9 title = [[Wikipedia:Corruption Perceptions Index|Corruption Perceptions Index]]
|Row 9 info = 84<ref name="Transparency_PA">Transparency International. [http://www.transparency.org/policy_research/surveys_indices/cpi/2009/cpi_2009_table "Panama"], Corruption Perceptions Index 2009. A lower ranking is better; but please note that the numbers cannot be compared between countries or years due to different methodology. Referenced 2010-09-30.</ref>
|Row 10 title = [[Wikipedia:Doing Business Report|Doing Business ranking]]
|Row 10 info = 77<ref name="Business_PA">Doing Business. [http://www.doingbusiness.org/economyrankings/ "Panama"], Doing Business 2010 (part of The World Bank Group). A lower ranking is better; but please be careful when comparing between different countries or years. Referenced 2010-09-30.</ref>
}}

Explored and settled by the Spanish in the 16th century, '''Panama''' broke with Spain in 1821 and joined a union of Colombia, Ecuador, and Venezuela - named the Republic of Gran Colombia. When the latter dissolved in 1830, Panama remained part of Colombia. With US backing, Panama seceded from Colombia in 1903 and promptly signed a treaty with the US allowing for the construction of a canal and US sovereignty over a strip of land on either side of the structure (the Panama Canal Zone). The Panama Canal was built by the US Army Corps of Engineers between 1904 and 1914. In 1977, an agreement was signed for the complete transfer of the Canal from the US to Panama by the end of the century. Certain portions of the Zone and increasing responsibility over the Canal were turned over in the subsequent decades. With US help, dictator Manuel NORIEGA was deposed in 1989. The entire Panama Canal, the area supporting the Canal, and remaining US military bases were transferred to Panama by the end of 1999. In October 2006, Panamanians approved an ambitious plan (estimated to cost $5.3 billion) to expand the Canal. The project, which began in 2007 and could double the Canal's capacity, is expected to be completed in 2014-15.<ref name="CIA_PA" />

==Economical characteristics==
* '''Currency''': Balboa, U.S.Dollar (ISO code: PAB, USD)
* This country does not seem to have a central bank.
* Central bank '''[[Wikipedia:Discount rate|discount rate]]''': <ref name="CIA_PA" />
* Commercial banks '''lending rate''': 8.16% (31 December 2008)<ref name="CIA_PA" />
* '''Stock of money''' ([[Money supply#M1|M1]]): $3.764 billion (31 December 2008)<ref name="CIA_PA" />
* '''Quasi money''' (with M1 makes [[Money supply#M2|M2]]): $15.84 billion (31 December 2008)<ref name="CIA_PA" />

===Statistics===
{| border="1" cellspacing="0" cellpadding="5" style="text-align:center"
| Statistic / Year
! 1999
! 2000
! 2001
! 2002
! 2003
! 2004
! 2005
! 2006
! 2007
! 2008
|-
! [[GDP]] (million USD)<ref name="WorldBank_GDP_PA">World Bank. [http://open.worldbank.org/countries/pa/indicators%5BNY.GDP.MKTP.CD%5D?date=1999:2009 "Panama: GDP"], from World Bank [http://data.worldbank.org/ Data]. Referenced 2010-09-30.</ref>
| 11 456
| 11 621
| 11 808
| 12 272
| 12 933
| 14 179
| 15 465
| 17 137
| 19 485
| 23 088
|-
! Govt. debt (% of GDP)<ref name="WorldBank_Debt_PA">World Bank. [http://open.worldbank.org/countries/pa/indicators%5BGC.DOD.TOTL.GD.ZS%5D?date=1999:2009 "Panama: government debt"], from World Bank [http://data.worldbank.org/ Data]. Referenced 2010-09-30.</ref>
|
|
|
|
|
|
|
|
|
|
|-
! Govt. revenue (% of GDP)<ref name="WorldBank_Revenue_PA">World Bank. [http://open.worldbank.org/countries/pa/indicators%5BGC.REV.XGRT.GD.ZS%5D?date=1999:2009 "Panama: government revenue"], from World Bank [http://data.worldbank.org/ Data]. Referenced 2010-09-30.</ref>
| 23.230
| 23.125
| 25.555
|
|
|
|
|
|
|
|-
! Govt. expenses (% of GDP)<ref name="WorldBank_Expenses_PA">World Bank. [http://open.worldbank.org/countries/pa/indicators%5BGC.XPN.TOTL.GD.ZS%5D?date=1999:2009 "Panama: government expenses"], from World Bank [http://data.worldbank.org/ Data]. Referenced 2010-09-30.</ref>
| 21.320
| 22.096
| 23.172
|
|
|
|
|
|
|
|-
! Debt to revenue (years)
|
|
|
|
|
|
|
|
|
|
|}

==References==
Note: statistical data was rounded. Different sources may use different methodologies for their estimates. Debt to revenue is calculated by dividing the two variables from their original ('unrounded') values. It represents how long it would a government take to repay its entire debt if it used its whole revenue for this purpose.
{{Reflist}}

==External links==
* [[Wikipedia:Panama|Panama]] on Wikipedia
* [http://www.enterprisesurveys.org/documents/EnterpriseSurveys/Reports/PANAMA.pdf Country profile] (pdf) from the Enterprise Studies page (part of the The World Bank Group)
* [http://countrystudies.us/panama/ Studies] from the Library of Congress (1986-1998)
* BBC [http://news.bbc.co.uk/1/hi/world/americas/country_profiles/1229332.stm country profile]
* [http://mises.org/daily/4493 The Treaty That Wall Street Wrote] by Murray N. Rothbard, from ''Inquiry'' (1977); reprinted in ''Wall Street, Banks, and American Foreign Policy'' (1995)
[[Category:Countries]]

Greenland

2010-12-02T08:35:08Z

192.100.130.229: Resource added on Greenland's economy.

{{Stub}}

{{Infobox
|Box title = Country summary
|Row 1 title = Capital
|Row 1 info = Nuuk (Godthab)
|Row 2 title = Borders
|Row 2 info = (N/A)
|Row 3 title = Government type
|Row 3 info = parliamentary democracy within a constitutional monarchy
|Row 4 title = Population
|Row 4 info = 57,600 (July 2010 est.)<ref name="CIA_GL">CIA - The World Facebook. [https://www.cia.gov/library/publications/the-world-factbook/geos/countrytemplate_gl.html "Greenland"], from The World Facebook. Referenced 2010-09-28.</ref>
|Row 5 title = Population growth %
|Row 5 info = 0.062% (2010 est.)<ref name="CIA_GL" />
|Row 6 title = Life expectancy
|Row 6 info = 70.07 years<ref name="CIA_GL" />
|Row 7 title = Unemployment
|Row 7 info = 6.8% (2007 est.)<ref name="CIA_GL" />
}}

'''Greenland''', the world's largest island, is about 81% ice capped. Vikings reached the island in the 10th century from Iceland; Danish colonization began in the 18th century, and Greenland was made an integral part of Denmark in 1953. It joined the European Community (now the EU) with Denmark in 1973 but withdrew in 1985 over a dispute centered on stringent fishing quotas. Greenland was granted self-government in 1979 by the Danish parliament; the law went into effect the following year. Greenland voted in favor of increased self-rule in November 2008 and acquired greater responsibility for internal affairs in June 2009. [[Denmark]], however, continues to exercise control of Greenland's foreign affairs, security, and financial policy in consultation with Greenland's Home Rule Government.<ref name="CIA_GL" />

==Economical characteristics==
* '''Currency''': Danish krone (ISO code: DKK)
* This country does not seem to have a central bank.

===Statistics===
{| border="1" cellspacing="0" cellpadding="5" style="text-align:center"
| Statistic / Year
! 1999
! 2000
! 2001
! 2002
! 2003
! 2004
! 2005
! 2006
! 2007
! 2008
|-
! [[GDP]] (million USD)<ref name="WorldBank_GDP_GL">World Bank. [http://open.worldbank.org/countries/gl/indicators%5BNY.GDP.MKTP.CD%5D?date=1999:2009 "Greenland: GDP"], from World Bank [http://data.worldbank.org/ Data]. Referenced 2010-09-28.</ref>
| 1 132
| 1 068
| 1 086
| 1 169
| 1 426
| 1 645
| 1 703
| 1 919
| 2 197
|
|-
! Govt. debt (% of GDP)<ref name="WorldBank_Debt_GL">World Bank. [http://open.worldbank.org/countries/gl/indicators%5BGC.DOD.TOTL.GD.ZS%5D?date=1999:2009 "Greenland: government debt"], from World Bank [http://data.worldbank.org/ Data]. Referenced 2010-09-28.</ref>
|
|
|
|
|
|
|
|
|
|
|-
! Govt. revenue (% of GDP)<ref name="WorldBank_Revenue_GL">World Bank. [http://open.worldbank.org/countries/gl/indicators%5BGC.REV.XGRT.GD.ZS%5D?date=1999:2009 "Greenland: government revenue"], from World Bank [http://data.worldbank.org/ Data]. Referenced 2010-09-28.</ref>
|
|
|
|
|
|
|
|
|
|
|-
! Govt. expenses (% of GDP)<ref name="WorldBank_Expenses_GL">World Bank. [http://open.worldbank.org/countries/gl/indicators%5BGC.XPN.TOTL.GD.ZS%5D?date=1999:2009 "Greenland: government expenses"], from World Bank [http://data.worldbank.org/ Data]. Referenced 2010-09-28.</ref>
|
|
|
|
|
|
|
|
|
|
|-
! Debt to revenue (years)
|
|
|
|
|
|
|
|
|
|
|}

==References==
Note: statistical data was rounded. Different sources may use different methodologies for their estimates. Debt to revenue is calculated by dividing the two variables from their original ('unrounded') values. It represents how long it would a government take to repay its entire debt if it used its whole revenue for this purpose.
{{Reflist}}

==External links==
* [[Wikipedia:Greenland|Greenland]] on Wikipedia
* BBC [http://news.bbc.co.uk/1/hi/world/europe/country_profiles/1023393.stm country profile]
* [http://blogs.telegraph.co.uk/news/alexsingleton/100065718/why-is-greenland-so-rich-these-days-it-said-goodbye-to-the-eu/ Why is Greenland so rich these days? It said goodbye to the EU] by Alex Singleton, November 2010
[[Category:Countries]]

Silver

2010-09-17T12:22:04Z

192.100.130.229: /* Gold and silver in history */

{{Stub}}

'''Silver''' is a metallic chemical element with the chemical symbol '''Ag''' (Latin: ''argentum'') and atomic number 47. It is a precious metal, and it is used to make ornaments, jewelry, high-value tableware, utensils (hence the term silverware), and currency coins. Today, silver metal is also used in electrical contacts and conductors, in mirrors and in catalysis of chemical reactions. Its compounds are used in photographic film and silver compounds are used as disinfectants and microbiocides. It has been known since earliest human history. Silver objects dated as old as 3400 B.C. have been found in Egypt.

==Production==
It was estimated, that by 2001 a total of 1,260,000 tonnes of silver have been mined throughout all human history, 69 percent in the 20th century.<ref name="USGS_profile">W.C. Butterman and H.E. Hilliard. [http://pubs.usgs.gov/of/2004/1251/2004-1251.pdf "Mineral Commodity Profiles Silver"], Open-File Report 2004-1251. See also [http://www.gold-eagle.com/editorials_05/zurbuchen011506.html The World's Cumulative Gold and Silver Production] for other production estimates. Referenced 2010-05-15.</ref>

Silver can occur as a free metal, but much less often than [[gold]] or copper. Most of the rich ores have been mined by now, today its content in mined ores ranges from about a few thousandths of an ounce per ton of ore to 100 ounces per ton. Silver is most commonly produced as a by-product of mining for other metals.

The largest producers of silver in the world are Mexico, Peru, the United States, Canada, Poland, Chile, and Australia. In the United States, silver is produced at about 76 mines in 16 states. The largest state producers are Nevada, Idaho, and Arizona. These three states account for about two-thirds of all the silver mined in the United States.<ref name="Chemistry_Silver">Chemistry Explained. [http://www.chemistryexplained.com/Ru-Sp/Silver.html Silver] (as chemical) and [http://www.chemistryexplained.com/elements/P-T/Silver.html Silver] (as element). Referenced 2010-01-10.</ref>

==Properties==
Silver is a soft, white metal with a shiny surface. It is very ductile and malleable. It conducts heat and electricity better than any other metal. It also reflects light very well.<ref name="Webelements_Silver">Webelements. [http://www.webelements.com/silver/ "Silver"], referenced 2010-01-10.</ref>

Silver is a very inactive metal. It does not react with oxygen in the air under normal circumstances, but it reacts slowly with sulfur compounds in the air. The product of this reaction is silver sulfide, a black tarnish that develops over time on silverware and other silver-plated objects. Silver does not react readily with water, acids, or many other compounds. It does not burn except as silver powder.<ref name="Chemistry_Silver" />

To identify silver, one can start excluding similar metals by using a magnet, gold and silver are not magnetic. <ref name="Van_Silver">[http://van.physics.illinois.edu/qa/listing.php?id=378 "Is gold magnetic?"], The Van, University of Illinois Physics Department, referenced 2010-01-17.</ref> Another method is to either drop a coin on the floor or to strike it with a pencil. The resulting sound should be of a higher frequency similar to a bell, and will resonate for longer than is perhaps expected. If a dull sound is heard then the coin is likely only to be a base metal coated in silver plating; this requires experience and offers no guarantee. Testing the conductivity (e.g. by placing a part of an item into ice and observe it quickly going cold) is also a hint, but does not reveal plated items. More reliable methods require a chemical reaction, that creates the black sulfide tarnish (by lighting a match against the silver object; or using a special brand of mustard with sulfur). Using commercial testing kits or nitric acid is more reliable, but destructive in nature, use with care.<ref name="Identifying_silver">See [http://www.helium.com/items/1473868-how-to-test-for-pure-silver "How to test for pure silver"] by Tim Harry; [http://www.mschon.com/isitsilver.html "Is it Silver?"] by Sheryl Gross Shatz; or [http://quazen.com/shopping/jewelry/how-to-identify-pure-silver/ "How to Identify Pure Silver] by Roberrific. Referenced 2010-01-17.</ref>

==Applications==
One way silver is used is in alloys with gold. Gold is highly desired for coins and jewelry. But it is much too soft to use in its pure form. Adding silver to gold, however, makes an alloy that is much stronger and longer lasting. Most "gold" objects today are actually alloys, often alloys of silver and gold. Silver compounds are used to make photographic film.

Another important use of silver is in electrical and electronic equipment. It is the most desirable metal due to its high conductivity, but in most cases are used metals like copper or aluminum because they are less expensive. Silver is used where cost is secondary, like in aircraft, satellites and spacecraft. It is also used in specialized batteries, including silver-zinc and silver-cadmium batteries. It can be used for mirrors and reflectors.

Silver is also used in dental amalgams, which are non-toxic and do not break down or react with other materials very readily.<ref name="Chemistry_Silver" /> Silver has antibacterial and antifungal effects without harm to higher animals. It has numerous medicinal applications, especially in wounds and burns treatment. It was historically used to prevent the spoiling of water (Pioneers of the American West would place silver coins in their casks) and other liquids. Today, water tanks on ships and airplanes are often "silvered".
<ref name="Antibacterial_Silver">Salt Lake Metals. [http://www.saltlakemetals.com/Silver_Antibacterial.htm "The Antibacterial Effects of Silver and it's compounds"], referenced 2010-01-10.</ref>

Important uses and their introduction:<ref name="USGS_profile" />
* Silver and silver salts have been central to the development of photography since its origins in the 1820s.
* Silver-mercury dental amalgams have been used for tooth restorations since the late 1830s.
* Mirrors of polished silver were used by the Egyptians in the third millennium B.C., and “silvering” of mirrors with lead, tin, or mercury was practiced in Europe before and during the Renaissance. The large-scale production of silvered glass mirrors through the chemical reduction of silver nitrate dates from [[Wikipedia:Justus von Liebig|Justus von Liebig]]’s 1835 invention of the process.
* A patent for a process for the electroplating of silver was granted in 1840; it was the first patent for the electroplating of any metal.
* Although [[Wikipedia:Alessandro Volta|Alessandro Volta]] had used silver and zinc as the electrodes of his “electric pile,” or battery, at the beginning of the 19th century, it was not until military requirements in the 1940s created a demand for high-energy-density batteries that the first two types of practical silver batteries were developed.
* Silver sleeve bearings were developed in the 1940s for use in high-performance military aircraft engines.
* Silver catalysts for the large-scale production of formaldehyde and the oxidation of ethylene are developments of the second half of the 20th century.
* Although silver was known to be an excellent conductor of electricity in the 19th century, its widespread use in switch and relay contacts and in conductors arose gradually during the 20th century.

==Gold and silver in history==
The relation in value of gold to silver in Asia generally in [[Wikipedia:Achaemenid Empire|Persian times]] was 13 to 1 as evidenced by [[Wikipedia:Herodotus|Herodotus]] (other sources speculate on 13⅓ to 1, at the time were used silver bars weighing 169 [[Wikipedia:Grain (unit)|grains]], ten of which passed for one gold bar of 130 grains).<ref name="Percy_coins">Gardner, Percy. [http://www.archive.org/details/typesgreekcoins00gardgoog "The types of Greek coins; an archaeological essay (1883)"], publisher: Cambridge [Eng.] University Press, 1883, p.3-4. Digitized book at the ''Internet Archive''. Referenced 2010-08-06.</ref>

In England, the Exchequer of [[Wikipedia:Henry I of England|Henry I]] usually accepted silver in discharge of debts in gold at a ratio of nine to one. In the thirteenth century a ratio of ten to one had become normal. In 1255 the ratio was a little less than ten to one.<ref name="Oresme_De_Moneta">[[Nicholas Oresme]]. [http://mises.org/books/oresme.pdf The De Moneta of Nicholas Oresme and English Mint Documents] (pdf), Introduction, page xxix (p.31 of the pdf). Referenced 2010-08-02.</ref>

In the second quarter of the fourteenth century has the value of silver against gold risen. In Florence had the ratio been fixed at 13.62, while in France was the ratio at 12.6. The result on Florence was immediate, and silver disappeared from circulation. In 1345, says the historian [[Wikipedia:Giovanni Villani|Villani]], there was a great scarcity. A recoinage was attempted several times, but silver had so far disappeared in the Italian peninsula, or gold had so far increased, that the commercial ratio during the fifteenth century remained persistently low — 9.25 both in Milan and Florence.<ref name="Groseclose">Elgin Groseclose. [http://mises.org/books/money.pdf Money and Man] (pdf), A Survey of Monetary Experience, p. 147-148. First ed. published in 1934. Referenced 2010-08-02.</ref>

Europe was impacted by the inflow of precious metals from the [[Wikipedia:New World|New World]], but it was not a dramatic [[Wikipedia:Price revolution|price revolution]]. The money stock (gold and silver) increased depending on various estimates by 50 to 500% from the year 1500 over a period of 150 years (an average growth rate of the money supply somewhere between 0.3 and 3.3 percent per annum).<ref name="Hulsmann_New_World">Jörg Guido Hülsmann. [http://www.mises.org/books/moneyproduction.pdf "The Ethics of Money Production"] (pdf), online version, Chapter 4. Utilitarian Considerations on the Production of Money, p.73-74, referenced 2010-03-04.</ref> Where many complained about rising prices, some have recognized (often ascribed to [[Wikipedia:Jean Bodin|J. Bodin]] in 1568, but first recognized by Azpilcueta Navarro from the [[Wikipedia:School of Salamanca|School of Salamanca]] in 1556<ref name="Hutchinson_Navarro">Marjorie Grice-Hutchinson. [http://mises.org/books/salamanca_grice-hutchinson.pdf "The School of Salamanca"] (pdf), p.52, referenced 2010-03-11.</ref>), that the goods have not risen in value, but silver has fallen; from 1500 to 1700 it was estimated to be 1/20 of its former value.<ref name="Gaettens_Law_France">Richard Gaettens. ''Geschichte der Inflationen Von Altertum bis zum Gegenwart'' (German: History of Inflations from Old Ages to the Present), ''John Law und die französischen Finanzprobleme nach dem Tode Ludwigs XIV.'' (John Law and the French financial troubles after the death of Louis XIV.) p. 100-126. ISBN: ISBN 3-87045-211-0. Referenced 2010-02-27.</ref>

The prices of gold and silver changed from 1701 to 1710 from about 1:15,27, to 1:14,93 in 1740-50. In Germany has the Reichstag in Regensburg (1737-38) set the ratio to 1:15,1.<ref name="Gaettens_Seven_War">Richard Gaettens. ''Geschichte der Inflationen Von Altertum bis zum Gegenwart'' (German: History of Inflations from Old Ages to the Present), ''Die Finanzierung des Siebenjährigen Krieges durch Friedrich den Grossen'' (The financing of the Seven Years' War by Frederick the Great) p. 147-172. ISBN: ISBN 3-87045-211-0. Referenced 2010-07-12.</ref>

==References==
{{Reflist}}

==External links==
* [[Wikipedia:Silver|Silver]] on Wikipedia
* [http://www.mindat.org/min-3664.html Silver] from the Mineralogy Database
* [http://www.webmineral.com/data/Silver.shtml Silver Mineral Data]
* [http://www.kitco.com/charts/historicalsilver.html Historical Silver Data and Charts] from 1833 to the present
[[Category:Historical]]

Inflations

2010-09-17T11:42:39Z

192.100.130.229: /* The Swedish crisis under Charles XII. */ Typo.

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This page lists various historical [[inflation]]s, many were known in the cause of [[History of Money and Banking|human history]]. Well documented is it in [[Money and banking in Ancient Rome|Ancient Rome]], more examples are below.

==The schinderling inflation in Austria==
The fall of the Roman Empire brought an economic decline in Europe's Middle Ages. Luckily, it was spared for the most part from major inflations.

The coinage in Western Europe was inspired by the [[Money and banking in Ancient Rome|Romans]] and later reformed by [[Wikipedia:Charlemagne|Charlemagne]] to a silver standard. The [[Wikipedia:Pfennig|Pfennig]] remained a key coin, the privilege was given to many cities and high nobles, so by the 13th century many local pfennigs circulated in Austria and surrounding countries. Many local lords recalled the coins every year, exchanging them for new coins, keeping a part of them; some did so even more often. [[Wikipedia:Rudolf IV, Duke of Austria|Duke Rudolf IV]] made an end to this practice and instituted a tax instead. But the purity and value of the pfennigs kept sinking.

After the death of [[Wikipedia:Albert II of Germany|Albert II]], a conflict inflamed between the brothers [[Wikipedia:Frederick III, Holy Roman Emperor|Frederick IV]] and [[Wikipedia:Albert VI, Archduke of Austria|Albert VI]] over the inheritance. Frederick, who was very capable with finances did not have the means to finance the war, which has broken out in 1457. He started to massively devalue the currency and gave the privilege to others; binding them to maintain the same quality as of his own coins. Albert followed suit, and the practice has spread further. Besides the white pfennigs appeared "black pfennigs", then grey pfennigs, and all the bad coins came soon to be called ''hebrenko'' or ''schinderlings''. Finally, they turned into copper coins.

The continuing inflation of the pfennig (1 pound was 8 schillings and 240 pfennigs) could be seen in its exchange rate against the Hungarian gulden, a solid gold coin based on the [[Wikipedia:Ducat|ducat]]. At the beginning of 1458 was the rate 1 gulden = 7 schillings 12 pfennig (222 pfennigs). In April 1460 was 1 gulden exchanged for 15 pounds 2 schillings 26 pfennig (3686 pfennig - over 15 times the rate!). The price was going up daily by 20 to 30 pfennigs. By 1460 was the situation so bad, that people complained to the emperor, "that he may order a better coin to be made, for all wars, robberies and fires did not impoverish the land as the bad coins did". Frederick blamed others and promised a new coin to be made, but it failed completely and the prices continued to rise. Eventually was the minting of the bad coins stopped.

This devaluation carried many signs of a modern inflation. People refused the money, and no goods were to be had, unless one happened to have the good old money or the Bohemian [[Wikipedia:Prague groschen|groschen]]. The chronicles describe the great suffering in the lands of [[Wikipedia:Archduchy of Austria|Austria]] and neighboring [[Wikipedia:Bavaria|Bavaria]], and there are reports of deaths of individuals as entire families, and the destruction of countless livelihoods. The return to normal was possible with a return to good currency.<ref name="Gaettens_Austria">Richard Gaettens. ''Geschichte der Inflationen Von Altertum bis zum Gegenwart'' (German: History of Inflations from Old Ages to the Present), ''Die Zeit der Schilderlinge'' (The Time of the Schilderlings) p. 40-51. ISBN: ISBN 3-87045-211-0. Referenced 2010-01-29.</ref>

==Vellon inflation in Spain==
After the [[Wikipedia:Reconquista|unification]] of Spain, king Charles the 1st (emperor [[Wikipedia:Charles V, Holy Roman Emperor|Charles V]]) reigned over all the lands of the Habsburg line, Germany, Netherlands and large parts of Italy. The discovery of the [[Wikipedia:New World|New World]] made Spain a colonial empire upon which the sun would never set. Though it enjoyed growth from trade, it kept little of the treasures of silver and gold, that streamed through it into Europe.

Though he was the most powerful ruler in Europe, Charles the Fifth had huge problems with his finances. The constant wars meant huge expenses, the incomes from his lands were varied and insufficient. The taxes, tariffs and various donatives were much larger than the incomes from silver and gold imports, still it was not enough. The interest rates were 10-20% high (at times up to 30%), incomes had to be often pawned or sold off. It is estimated, that at his abdication had his government a debt of 20 Million ducats, the interest ate most of the incomes.

When [[Wikipedia:Philip II of Spain|Philip II]] took over, he was advised to renounce the debts of his father, but chose not to as it would mean effective bankruptcy. The introduction of new special tariffs, selling of monopolies on salt and noble titles and offices brought some temporary relief. He also confiscated several shipments of gold and silver, which caused many bankruptcies. By 1564 was the debt 23 Million ducats, in 1574 already 35 Millions. Since the interest consumed all incomes, in 1575 were all payments stopped and the public debt should be revised by a commission, the interest lowered. Since so many of the great trading companies of all across Europe were lenders to the Spanish Crown, many were pushed to the brink of bankruptcy and some beyond. The debts had to be recognized in full, but at least the interest was lowered.

The situation deteriorated again with the war in [[Wikipedia:Dutch Revolt|Netherlands]], which turned from a major income source into a major financial burden. The hostilities against England and the sinking of the [[Wikipedia:Spanish Armada|Armada]] did not help either. More taxes were raised, carried mainly by [[Wikipedia:Crown of Castile|Castile]]; and Portugal came under Philip's control. But at the time of his death in 1598 was the debt estimated at one hundred million ducats, Spain's economy seriously damaged by his measures.

Until this moment has the Crown resisted meddling with its currency. The son, [[Wikipedia:Philip III of Spain|Philip III]] left much of the reign to the [[Wikipedia:Duke of Lerma|Duke of Lerma]]. To his credit, he achieved peace with France, Netherlands and even England. But in turn, the royal court became incredibly wasteful (the Duke and his family became wealthy as well).

To have any income at all, in 1599 was the vellon (based upon the accounting unit [[Wikipedia:Spanish maravedí|maravedí]]) coined from pure copper, devoid of any silver content. The [[Wikipedia:Cortes Generales|Cortes]] protested to no avail. In 1602 was the coin reduced to a half weight and the copper price was fixed to prevent its rise. The huge profits were undercut by foreigners, who produced their own coins and smuggled them into Spain by the shipholds - buying up the fine gold and silver coins for cheap. The government soon received its taxes in the debased copper coins. When a new tax was sought in 1608, the Cortes allowed it, despite threats and attempted bribes, only in exchange for a promise to not make any more vellon coins with or without silver for the next twenty years.

The successor, [[Wikipedia:Philip IV of Spain|Philip IV]] did not feel bound to the promises of his father. He has cut the expenses of the court to a half, but immediately started inflating. The massive increase in currency was first blamed on smugglers, threatened with a death sentence. But the situation became unbearable and the vellons were in 1628 devaluated by a half, the king promised to never again change the rate, not should his successors. But in 1636 were all coins withdrawn and by re-stamping their nominal value tripled. Attempts to reform the system were halted by the war with France and an uprising in [[Wikipedia:Catalan Revolt|Catalonia]]. In 1641 was the coin value multiplied again. The consequent growth of prices created a great unrest, and the king reduced the coin values, promising to not raise them. It took less than a year to break the promise. Until the [[Wikipedia:Treaty of the Pyrenees|peace]] with France in 1659, several such inflations and deflations followed.

In the period of inflation, most payments were done in vellons. In the country with the largest silver mines in the world have gold and silver vanished from circulation. Larger payments required separate rooms to store the money, and officials were required just to count, sort and weigh it. Perhaps the most surprising is the loyalty, which the Spanish felt to the Crown, despite serious losses to all the financial manipulations. Finally, in 1660 was minted a new silver coin, the moneda, and the inflation ended.<ref name="Gaettens_Spain">Richard Gaettens. ''Geschichte der Inflationen Von Altertum bis zum Gegenwart'' (German: History of Inflations from Old Ages to the Present), ''Die Velloninflation in Kastilien'' (The Vellon inflation in Castile) p. 52-73. ISBN: ISBN 3-87045-211-0. Referenced 2010-01-30.</ref>

==The kipper and wipper inflation in the Habsburg lands==
After the peak of silver production in the [[Wikipedia:Holy Roman Empire|Holy Roman Empire]] in 16th century, the rising silver prices made silver coins more worth than their nominal value - and so were they molten down or exported. But a larger problem was the too high precious metal content in small coins (the [[Wikipedia:Pfennig|pfennigs]], [[Wikipedia:Kreuzer|kreuzer]] and [[Wikipedia:Groschen|groschen]]), that were coined at a loss to the minter. The demand for them was so large, that many small minters produced lesser coins against the regulations. The practice was forbidden, but despite many calls and resolutions have reached alarming proportions by the beginning of the 17th century. Many of the mints have been rented and sold, run for purely fiscal reasons. An additional motive were the preparations and arming for [[Wikipedia:Thirty Years' War|war]], which many have seen coming by 1615. Paradoxically, the inflation came before a war and ended in its beginning phases in 1623.

Many merchants have taken up the trading and exchanging of coins. The "kipper" and "wipper" were the dealers with money (named after the weighing of coins to filter out high quality pieces and melt them down or [[Wikipedia:Coin clipping|shave]] them - see the [[Wikipedia:Tipper and See-Saw Time|Tipper and See-Saw Time]], in German ''[[Wikipedia:de:Kipper- und Wipperzeit|Kipper- und Wipperzeit]]''). Mints have been popping up everywhere. In 1610 was the currency formally reformed, making the production of small coins profitable. But many minters have continued to make devalued coins, and the good [[Wikipedia:Thaler|Thaler]] continued to vanish abroad.

In particularly hit [[Wikipedia:Electorate of Saxony|Saxony]], where 110-130 of good ''groschen'' were once made from a [[Wikipedia:Mark (mass)|mark]]* silver, and in 1610-1617 they were not more than 170, by 1619 it was already up to 270. This rose to 320 in 1620 and 330 groschen on a mark in 1621. The inflation of the Schinderlings was 150 years ago and not widespread, so the dangers of inflation were not recognized. Everybody enjoyed the easy money and believed to get rich quickly, and at first there seemed to be an economic boom. But the prices have risen in consequence. Those with fixed incomes were hit first, by 1621 were the complaints universal. Particularly clergymen have seen in this the work of the devil. In 1622 was the unrest widespread; miners have rioted and plundered the coin dealers. Copper itself has become so expensive, that housewives sold their pans and kettels to the mints. Everyone paid their debts and taxes, and many lawsuits followed due to paying with bad money. The thalers were requested for all payments and the devalued coins were rejected. Some towns held public collections to protect clergy and teachers from misery.

{| border="1" cellspacing="0" cellpadding="5" style="text-align:center"
! Prices of cereals in [[Wikipedia:Dresden|Dresden]]:<ref name="Gaettens_Kipper" />
| 1600-1620
| 1621
| 1622
| 1623
|-
! a ''[http://en.wiktionary.org/wiki/Scheffel scheffel]'' of wheat
| 2 thaler 15 groschen
| 5 thaler 13 groschen
| 11 thaler 5 groschen
|
|-
! a ''scheffel'' of rye
| 2 thaler
| 4 thaler 19 groschen
| 9 thaler 19 groschen
| 11 thaler 10 groschen
|}

The course of the Reichstaler rose from 1 florin 32 Kreuzer in 1618 to 6 fl. in 1622 (i.e., the value quadrupled) when averaged over different states of the Empire. It climbed to 7 fl. in Frankfurt, 10 fl. in Southern Germany, 11 fl. 15 Kr. in Bohemia, and 15 fl. in Electoral Saxony ("Kursachsen"). (1 florin equals 60 Kreuzers.)<ref name=""> [http://www.aeaweb.org/annual_mtg_papers/2008/2008_258.pdf "The "Kipper- und Wipperzeit" and the Foundation of Public Deposit Banks"], by Isabel Schnabel, Max Planck Institute, Bonn and Hyun Song Shin, Princeton University. November 2006, referenced 2010-02-22.</ref>

The inflation has grown after the [[Wikipedia:Battle of White Mountain|Battle of White Mountain]] in 1620 and the integration of [[Wikipedia:Bohemia|Bohemia]]. [[Wikipedia:Karl I, Prince of Liechtenstein|Karl I, Prince of Liechtenstein]] was appointed to stadtholder and viceroy of Bohemia, and quickly began to inflate. In 1622 was all currency-making loaned to a consortium co-owned by the prince and [[Wikipedia:Albrecht von Wallenstein|Albrecht von Wallenstein]], among others. (The profit was also used to buy land of protestants in Bohemia; an estimated ⅔ of its land area was confiscated after their defeat). A rapid inflation followed, the export of good coins was forbidden, and they were soon melted down. The rising prices caused a general unrest and a rebellion almost broke out in Vienna.

To bring the situation under control, some cities began to take measures by 1618. In 1622, Lower Saxony demanded according to old laws the personal introduction and swearing in of every [[Wikipedia:Münzmeister|Münzmeister]], upon which most of them vanished. 1623 followed Lower Saxony suit, and returned to the old currency. The debased coins were withdrawn and replaced with good coins, the losses mostly carried by the population. Finally, the emperor ordered to stop the production of the 'easy coins' in all Habsburg lands and return to to the Viennese standard. 100 debased thalers were exchanged for 13,3 ''reichsthaler'' from silver. Germany was more destroyed by inflation than by the [[Wikipedia:Thirty Years' War|Thirty Years' War]] and likened by some pamphlets to pestilence.<ref name="Gaettens_Kipper">Richard Gaettens. ''Geschichte der Inflationen Von Altertum bis zum Gegenwart'' (German: History of Inflations from Old Ages to the Present), ''Die Zeit der Kipper und Wipper'' (The time of kippers and wippers) p. 74-99. ISBN: ISBN 3-87045-211-0. Referenced 2010-02-04.</ref>

*) In Germany became the Cologne mark standard, with 233,856 g. The English mark was 233,275, the Spanish 230,348, the Portugese mark 229,50 g.

==John Law's inflation in France==
Following the ideas of [[John Law]], paper money was introduced in France, producing first an economic and speculative boom from 1718, and ending with a disastrous crash in 1721.<ref name="Gaettens_Law_France">Richard Gaettens. ''Geschichte der Inflationen Von Altertum bis zum Gegenwart'' (German: History of Inflations from Old Ages to the Present), ''John Law und die französischen Finanzprobleme nach dem Tode Ludwigs XIV.'' (John Law and the French financial troubles after the death of Louis XIV.) p. 100-126. ISBN: ISBN 3-87045-211-0. Referenced 2010-02-23.</ref><ref name="French_John_Law">Doug French. [http://mises.org/story/3569 "John Law and the Invention of Modern Finance"], July 2009, referenced 2010-02-27.</ref>

{{Main|John Law inflation in France}}

==The Swedish crisis under Charles XII.==
The Scandinavian lands including Sweden used the [[Wikipedia:Mark (money)|mark]] introduced by the leading [[Wikipedia:Hanseatic League|Hanseatic]] cities, first in coins of 1/3 an 2/3. 1 Swedish mark was 8 [[Wikipedia:Öre|Öre]], like the shilling from [[Wikipedia:Lübeck|Lübeck]]. Later were produced 8-, 4-, 2- abd 1-mark pieces, the 4-marks were called in the 17th century "Daler Carolin" or "crowns", like the crowns made in Denmark and Norway. The 2-marks were named "Carolin". Under Gustav Wasa was introduced the [[Wikipedia:Swedish riksdaler|riksdaler]] similar to the German Thaler. [[Wikipedia:Gustavus Adolphus of Sweden|Gustav Adolph]] began to use the wealth in copper for coinage. After their devaluation to a half in 1635 people started to calculate in ''Silvermynt'' and ''Koppermynt'' (S.M. and K.M.), using two parallel currencies. In 1633-1643 was a daler-silvermynt equal to 2 daler koppermynt, in 1643-1662 2 1/2, from 1664 3 daler koppermynt. Queen [[Wikipedia:Christina of Sweden|Christine]] brought copper in large plates into circulation, the "Platmynts" from 1 to 10 talers - the 10 talers weighed 19,7 kg. Under Charles XII was 1 riksdaler = 3 daler S.M. = 9 daler K.M.

Sweden was by the year 1715 in a difficult situation. After twenty years of war and loss at the [[Wikipedia:Battle of Poltava|battle of Poltava]] was the country exhausted. It lost important territories in Northern Germany and the Baltic, but it still had a wealth of copper and iron. But the king [[Wikipedia:Charles XII of Sweden|Charles XII]] was not interested in peace. Returning to his country after fifteen years, there was little enthusiasm for war. He found an eager helper and advisor in baron [[Wikipedia:Georg Heinrich von Görtz|Georg Heinrich von Görtz]], a man of great financial knowledge, but few scruples. To mask his authorship of the unpopular decrees, that followed, the king has left the announcements to the "Contribution Rent Office", an institution created by the [[Wikipedia:Riksdag of the Estates|Riksdag]].

The taxes were raised, but didn't bring much income, foreign loans were also limited. Instead of slowly devaluing coins, Görtz aimed for pure credit money. First were introduced 'wage notes' as payment of state officials, that should be accepted as money. Later came obligations as payment for supplies, especially war supplies. First only for large sums. smaller denominations were soon introduced as well.

The king borrowed in Netherlands 2 million [[Wikipedia:Swedish riksdaler|riksdaler]] in exchange for obligations, the right to make Swedish coins and trade with Sweden's most important export goods - esp. copper, brass, iron, tar, etc. Their buying price was set by the king, and all goods had to be delivered to royal warehouses. Instead of payment were given 'weight bills', later also given the status of currency. The goods were exported for silver and gold. But it was the new coinage, that brought the real income.

The introduction of pure credit coins took a full year to realize due to resistance of many officials, the emission was in May 1716. For a lack of sound currency and to "prevent the export of silver coins" was issued 1 million dalers from copper, denominated as silver (S.M.). The coins would be used to pay taxes, and were promised to be repaid.

In October 1716 it was announced, that these coins, marked with the symbol of a crown, would be withdrawn and exchanged for coins inscribed with the words "Publica Fide". The king, worried about the wellbeing of his subjects, wanted to prevent counterfeiting or imports from other lands. The coins with the crown, withdrawn until May 1717,were reissued as token coins of 3 Öre K.M. or 10 Öre S.M. to "avoid waste". The "Publica Fide" coins were issued in over 3.800.000 pieces until June 1717. Meanwhile, another issue was announced, marked with the image of a knight and designated as "Wett och wappen", also to replace the previous issue. Over 9 million of them were made. The old coins were again reused as token coins, first as 4 Öre K.M., later were both types of coins set to 6 Öre K.M. and 6 Öre S.M. In January 1718 was announced another issue, with the image of a knight and a lion and the inscription "Flink och färdig". Over 7.300.000 were issued. In June 1718 were announced five more issues with images of Saturn, Jupiter, Mars, Phoebus and Mercury, to replace the previous coins.

At the time of king's death (November 1718) were 24.527.000 coins denominated to 1 S.M. in circulation. In addition there were 2.6 million dalers in money notesand 15 millions in obligations. Compare this to Görtz' estimate of currency in circulation from 1715 - 2 million dalers (which was probably too low - the state income of that year was 4 to 5 million).

The value of copper platmynts was raised in 1715 by 50%. Speculators made a lot of money on the revaluation, while debtors suffered, but all complaints were ignored by the king. Passed ostensibly to prevent their export, the measure worked and some platmynts were even re-imported. In 1718, copper was set to the original value, but could be in the meantime exchanged for notes, obligations or token coins, to aid in their circulation. Shortly after the devaluation, the platmynts had to be stamped under threat of confiscation, and then were to be revalued again. But the tricks did not bring the desired income as Görtz declared during his trial.

The export of gold and silver was already banned, it was renewed in 1717 with serious punishments. By March 1718 no private person could own the silver "Carolins" or foreign silver coin. From July could no one own any coins or unprocessed silver, all had to be exchanged for obligations and token coins, or confiscated.

But the new coins were not welcome. Punishment awaited those unwilling to accept them as early as 1717. The officers complained, that nobody wanted them, and copper miners could not buy anything from the peasants. At the end of 1717 had all trading to be supervised by soldiers and able folk, informants were richly rewarded. The peasants were duty-bound to bring their wares into cities. In Stockholm, trading except on public places and markets was banned. Withdrawing of wares from the market was punished and anyone's home could be searched. In 1718 were introduced price controls, for the goods bought by the army, the prices of bakers, brewers and all grains. The number of breweries and inns was reduced. Mining has suffered, but fines had to be paid if the planned production was not fulfilled.

In July 1717 was the agio of the token coins against sound coin reported as 22-24%. In May 1718 it was written, that 4 daler koppermynt buy more than 6 token dalers - which would be over 50%. After king's death were the token coins in 1719 devalued, the reports speak of 200 to 400%. A private report speaks of prices rising twentyfold, an official of 6-, 8- and 12-fold increases.

After the unclear [[Wikipedia:Charles XII of Sweden#Death|death of Charles XII]] (there are claims of a conspiracy by his own soldiers) were attempts to continue with the issues of new money, but were eventually stopped. The token coins were to be exchanged from 1719 for half of their nominal value. But most of it was paid in debt obligations, the repayment of which took decades. Many of their owners got nothing in the end.

Görtz was successful in establishing a pure credit money and giving the king the means to wage a war. Even the economy was upheld for some time, though it had to became a planned economy of a sort, the freedoms of the subjects severely limited. After the king was dead, he was arrested and blamed for all the ills of the country. Without due process he was quickly sentenced to death and executed.<ref name="Gaettens_Sweden">Richard Gaettens. ''Geschichte der Inflationen Von Altertum bis zum Gegenwart'' (German: History of Inflations from Old Ages to the Present), ''Die Schwedische Geldkrise unter Karl XII'' (The Swedish crisis under Charles XII) p. 127-146. ISBN: ISBN 3-87045-211-0. Referenced 2010-04-19.</ref>

==The Seven Year War and Frederick the Great==
When [[Wikipedia:Frederick II of Prussia|Frederick the II.]] came to power in 1740, [[Wikipedia:Kingdom of Prussia|Prussia]] was very far from a united country. The currency was silver, as in the rest of German lands, but Prussia did not have any significant silver mines, it relied on imports from America. The prices of gold and silver changed from 1701 to 1710 from about 1:15,27, to 1:14,93 in 1740-50. In Germany has the Reichstag in Regensburg (1737-38) set the ratio to 1:15,1.

After complaints about the lack of coin has Frederick decided to reform the currency. The 10-''Reichsthaler'' piece (a "double-[[Wikipedia:Friedrich d'or|Friedrischdor]]") should be made 17 1/2 pieces on a [[Wikipedia:Mark (mass)|mark]]* of gold, the 5-''Reichsthaler'' (a "Friedrischdor") 35 on a mark, and the 2 1/2 thaler coins at 70. The silver thaler should be fixed againts gold, with 5 Thaler equal to one ''Friedrischdor''. From 1 mark silver should be made 10 1/2 thaler; half-thaler coins 21 on the mark and quarter-thalers 42 on a mark. The ratio of gold to silver was seen as too high and set to 1:13.793 for Prussia. The name [[Wikipedia:Prussian thaler|Reichsthaler]] reflected Frederick's expectations and it indeed became the first step towards a unified German coinage.

Frederick, who saw the upcoming war, had to change his monetary policy and rented his mints to capable Jewish money traders, who were able to make them profitable. Most coins were in the contracts exactly defined in weight and purity, but some token coins circulating outside of Prussia were wildly inflated. In [[Wikipedia:Polish–Lithuanian Commonwealth|Poland]] were no coins made throughout the 18th century. It became an ideal target for devalued coins, the trouble this caused suited the king's long-term plans well (the First Separation of Poland in 1772 was being justified by the economical disorder). When the 18-groschen pieces ("tympfs") from Königsberg became popular, the Polish king and Saxon ''[[Wikipedia:Prince-elector|Kurfürst]]'' decided to make more of them in [[Wikipedia:Electorate of Saxony|Saxony]]. Since it and Poland were separated, they had to be transported through Prussia, and would be a competition for his minters, Frederick forbade the transport. In response were his coins from Königsberg banned. Frederick has responded by coining money with the seal and all marks of Saxon coins.

And it was Saxony, that was captured first in the [[Wikipedia:Seven Years' War|Seven Years' War]], not least because of its wealthy silver mines. The coins were minted as before, but were not allowed in Prussian lands. Their small silver content showed after some use, and the new coins were dubbed ''[[Wikipedia:Ephraimiten|Ephraimiten]]'', according to their minter. Silver-white at first, the copper shone after a while through, as in the verse "From outside Frederick, from inside Ephraim."

The suggestion to make money with such a low content in Prussia in 1757 was strongly rejected by the king, the "infamous coins" should not circulate in his own lands. The king went as far as to destroy the records of his inflation, so not much is known about its magnitude - except for the mint in Dresden, which was briefly occupied by the enemy.

In 1758 was all coinage, even in Prussia, unified on 19 3/4 thalers per mark. In December 1758 were the ''Friedrichsdors'' devalued by 41%. In 1760 was the content set down to 30 thalers on a mark, only the Prussian 'Kurantgeld' (coins used to pay taxes) were left on the older standard. The new devalued coins were intentionally minted with the year 1753 to hide their true nature.

The situation in the war forced the king to look for more sources of income. The golden Saxon ''Augustdor'' was minted with old years, on the beginning of 1761 at 11 carat, later that year 7 carat. Since 1759 are in the contracts with minters also "other coins." Frederick's devalued coins were an inspiration to many other German nobles, who inflated their currencies as well. Frederick used the opportunity to mint copies of these coins for more profit. By 1760 was the war going badly for Prussia. That was noticeable in the exchange rates as well - the price of silver that had to be bought from Netherlands rose from 19 to 28 ''Reichsthaler'' per mark. The war money became harder to deploy, the armies to spend it were separated from homeland, in many places were Saxon coins forbidden and in some was their mere possession reason for imprisonment. It was decided to mint Saxon and "foreign" coins at 40 ''Reichsthaler'' per mark, the "Tympfs" were to be made in any amount desired. The mints in Anhalt and Schwerin were forcibly closed as undesired competition.

By end of 1762 was a return to normality possible, for a start was the money improved to 19 3/4 ''Reichsthaler'' per mark. The old money was being withdrawn, the Saxon 1/3 thalers were accepted at a discount of 70%, the [[Wikipedia:Groschen|groschen]] at 117,50%. A lack of new money was noticeable until the end of 1763. In 1764 was the standard finally returned to 14 ''Reichsthaler'' per mark for the thaler and its parts . The golden ''Friedrichsdor'' was again coined by the standard from 1750. The mints were again run by the Prussian state.

In the Seven-Years' War Frederick faced the forces of Austria, France and Russia, allied only with England. Wars were typically financed by taxes, loans or inflation. Frederick chose not to take out loans. War taxes were used, especially in occupied territories (Saxony alone paid 50 million thaler). Subsidies from England were paid in gold and silver, and they too pointed the way to reliable currency devaluation. And never before found inflation so many new ways. The money streamed in all directions, whether to hostile or neutral lands. The years on coins were often faked. The Austrian army paid its troops with Saxon war money. Even the French army used them. A large number of German mints have also depreciated their currency, including those run by religious leaders. These currencies were then copied by Frederick's minters. Poland, that gave minting some time ago, became an ideal target for devalued coins, and the trouble this caused suited the king's long-term plans well (the First Separation of Poland in 1772 was being justified by the economical disorder).

How many coins were actually minted and what the total income from this inflation was, is unknown. Documents exist only for the mint in [[Wikipedia:Dresden|Dresden]] from 1758 to 1759. In a year and three months were made over 8 million coins. The treasure paid by the mints totaled almost 30 million Reichsthaler. An estimated 50 million went to the Prussian crown for the privilege of making war money (note that these payments were made in good coin). The profit of the minters was estimated at 25 million. The losses of Prussian holders of money, judged by the conversion criteria after war, were on average 67%.

Frederick came out of the war as a winner and his disconnected lands could be united by keeping the wealthy Silesia. Since a long period of peace followed, the Prussian economy recovered rather fast.<ref name="Gaettens_Seven_War">Richard Gaettens. ''Geschichte der Inflationen Von Altertum bis zum Gegenwart'' (German: History of Inflations from Old Ages to the Present), ''Die Finanzierung des Siebenjährigen Krieges durch Friedrich den Grossen'' (The financing of the Seven Years' War by Frederick the Great) p. 147-172. ISBN: ISBN 3-87045-211-0. Referenced 2010-07-12.</ref>

*) In Germany became the Cologne mark standard, with 233,856 g. The English mark was 233,275, the Spanish 230,348, the Portugese mark 229,50 g.

==Inflation during the French Revolution==
The [[Wikipedia:French Revolution|French Revolution]] brought with it a massive inflation of the paper money called [[Wikipedia:Assignats|assignats]]. It was nominally backed by confiscated lands, when introduced in 1789. But eventually it was printed to finance all government's expenses and has lost most of its value by 1796 when its production has stopped.<ref name="Gaettens_Assignats">Richard Gaettens. ''Geschichte der Inflationen Von Altertum bis zum Gegenwart'' (German: History of Inflations from Old Ages to the Present), ''Die Assignaten der Französischen Revolution'' (The Assignats of the French Revolution) p. 173-198. ISBN: ISBN 3-87045-211-0. Referenced 2010-07-15.</ref><ref name="Trask_French_Revolution">H.A. Scott Trask. [http://mises.org/daily/1504 "Inflation and the French Revolution: The Story of a Monetary Catastrophe"], Mises Daily, April 2004, referenced 2010-07-14.</ref>

{{Main|Inflation during the French Revolution}}

==References==
{{Reflist}}
[[Category:Historical]]

Inflations

2010-09-17T10:04:44Z

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This page lists various historical [[inflation]]s, many were known in the cause of [[History of Money and Banking|human history]]. Well documented is it in [[Money and banking in Ancient Rome|Ancient Rome]], more examples are below.

==The schinderling inflation in Austria==
The fall of the Roman Empire brought an economic decline in Europe's Middle Ages. Luckily, it was spared for the most part from major inflations.

The coinage in Western Europe was inspired by the [[Money and banking in Ancient Rome|Romans]] and later reformed by [[Wikipedia:Charlemagne|Charlemagne]] to a silver standard. The [[Wikipedia:Pfennig|Pfennig]] remained a key coin, the privilege was given to many cities and high nobles, so by the 13th century many local pfennigs circulated in Austria and surrounding countries. Many local lords recalled the coins every year, exchanging them for new coins, keeping a part of them; some did so even more often. [[Wikipedia:Rudolf IV, Duke of Austria|Duke Rudolf IV]] made an end to this practice and instituted a tax instead. But the purity and value of the pfennigs kept sinking.

After the death of [[Wikipedia:Albert II of Germany|Albert II]], a conflict inflamed between the brothers [[Wikipedia:Frederick III, Holy Roman Emperor|Frederick IV]] and [[Wikipedia:Albert VI, Archduke of Austria|Albert VI]] over the inheritance. Frederick, who was very capable with finances did not have the means to finance the war, which has broken out in 1457. He started to massively devalue the currency and gave the privilege to others; binding them to maintain the same quality as of his own coins. Albert followed suit, and the practice has spread further. Besides the white pfennigs appeared "black pfennigs", then grey pfennigs, and all the bad coins came soon to be called ''hebrenko'' or ''schinderlings''. Finally, they turned into copper coins.

The continuing inflation of the pfennig (1 pound was 8 schillings and 240 pfennigs) could be seen in its exchange rate against the Hungarian gulden, a solid gold coin based on the [[Wikipedia:Ducat|ducat]]. At the beginning of 1458 was the rate 1 gulden = 7 schillings 12 pfennig (222 pfennigs). In April 1460 was 1 gulden exchanged for 15 pounds 2 schillings 26 pfennig (3686 pfennig - over 15 times the rate!). The price was going up daily by 20 to 30 pfennigs. By 1460 was the situation so bad, that people complained to the emperor, "that he may order a better coin to be made, for all wars, robberies and fires did not impoverish the land as the bad coins did". Frederick blamed others and promised a new coin to be made, but it failed completely and the prices continued to rise. Eventually was the minting of the bad coins stopped.

This devaluation carried many signs of a modern inflation. People refused the money, and no goods were to be had, unless one happened to have the good old money or the Bohemian [[Wikipedia:Prague groschen|groschen]]. The chronicles describe the great suffering in the lands of [[Wikipedia:Archduchy of Austria|Austria]] and neighboring [[Wikipedia:Bavaria|Bavaria]], and there are reports of deaths of individuals as entire families, and the destruction of countless livelihoods. The return to normal was possible with a return to good currency.<ref name="Gaettens_Austria">Richard Gaettens. ''Geschichte der Inflationen Von Altertum bis zum Gegenwart'' (German: History of Inflations from Old Ages to the Present), ''Die Zeit der Schilderlinge'' (The Time of the Schilderlings) p. 40-51. ISBN: ISBN 3-87045-211-0. Referenced 2010-01-29.</ref>

==Vellon inflation in Spain==
After the [[Wikipedia:Reconquista|unification]] of Spain, king Charles the 1st (emperor [[Wikipedia:Charles V, Holy Roman Emperor|Charles V]]) reigned over all the lands of the Habsburg line, Germany, Netherlands and large parts of Italy. The discovery of the [[Wikipedia:New World|New World]] made Spain a colonial empire upon which the sun would never set. Though it enjoyed growth from trade, it kept little of the treasures of silver and gold, that streamed through it into Europe.

Though he was the most powerful ruler in Europe, Charles the Fifth had huge problems with his finances. The constant wars meant huge expenses, the incomes from his lands were varied and insufficient. The taxes, tariffs and various donatives were much larger than the incomes from silver and gold imports, still it was not enough. The interest rates were 10-20% high (at times up to 30%), incomes had to be often pawned or sold off. It is estimated, that at his abdication had his government a debt of 20 Million ducats, the interest ate most of the incomes.

When [[Wikipedia:Philip II of Spain|Philip II]] took over, he was advised to renounce the debts of his father, but chose not to as it would mean effective bankruptcy. The introduction of new special tariffs, selling of monopolies on salt and noble titles and offices brought some temporary relief. He also confiscated several shipments of gold and silver, which caused many bankruptcies. By 1564 was the debt 23 Million ducats, in 1574 already 35 Millions. Since the interest consumed all incomes, in 1575 were all payments stopped and the public debt should be revised by a commission, the interest lowered. Since so many of the great trading companies of all across Europe were lenders to the Spanish Crown, many were pushed to the brink of bankruptcy and some beyond. The debts had to be recognized in full, but at least the interest was lowered.

The situation deteriorated again with the war in [[Wikipedia:Dutch Revolt|Netherlands]], which turned from a major income source into a major financial burden. The hostilities against England and the sinking of the [[Wikipedia:Spanish Armada|Armada]] did not help either. More taxes were raised, carried mainly by [[Wikipedia:Crown of Castile|Castile]]; and Portugal came under Philip's control. But at the time of his death in 1598 was the debt estimated at one hundred million ducats, Spain's economy seriously damaged by his measures.

Until this moment has the Crown resisted meddling with its currency. The son, [[Wikipedia:Philip III of Spain|Philip III]] left much of the reign to the [[Wikipedia:Duke of Lerma|Duke of Lerma]]. To his credit, he achieved peace with France, Netherlands and even England. But in turn, the royal court became incredibly wasteful (the Duke and his family became wealthy as well).

To have any income at all, in 1599 was the vellon (based upon the accounting unit [[Wikipedia:Spanish maravedí|maravedí]]) coined from pure copper, devoid of any silver content. The [[Wikipedia:Cortes Generales|Cortes]] protested to no avail. In 1602 was the coin reduced to a half weight and the copper price was fixed to prevent its rise. The huge profits were undercut by foreigners, who produced their own coins and smuggled them into Spain by the shipholds - buying up the fine gold and silver coins for cheap. The government soon received its taxes in the debased copper coins. When a new tax was sought in 1608, the Cortes allowed it, despite threats and attempted bribes, only in exchange for a promise to not make any more vellon coins with or without silver for the next twenty years.

The successor, [[Wikipedia:Philip IV of Spain|Philip IV]] did not feel bound to the promises of his father. He has cut the expenses of the court to a half, but immediately started inflating. The massive increase in currency was first blamed on smugglers, threatened with a death sentence. But the situation became unbearable and the vellons were in 1628 devaluated by a half, the king promised to never again change the rate, not should his successors. But in 1636 were all coins withdrawn and by re-stamping their nominal value tripled. Attempts to reform the system were halted by the war with France and an uprising in [[Wikipedia:Catalan Revolt|Catalonia]]. In 1641 was the coin value multiplied again. The consequent growth of prices created a great unrest, and the king reduced the coin values, promising to not raise them. It took less than a year to break the promise. Until the [[Wikipedia:Treaty of the Pyrenees|peace]] with France in 1659, several such inflations and deflations followed.

In the period of inflation, most payments were done in vellons. In the country with the largest silver mines in the world have gold and silver vanished from circulation. Larger payments required separate rooms to store the money, and officials were required just to count, sort and weigh it. Perhaps the most surprising is the loyalty, which the Spanish felt to the Crown, despite serious losses to all the financial manipulations. Finally, in 1660 was minted a new silver coin, the moneda, and the inflation ended.<ref name="Gaettens_Spain">Richard Gaettens. ''Geschichte der Inflationen Von Altertum bis zum Gegenwart'' (German: History of Inflations from Old Ages to the Present), ''Die Velloninflation in Kastilien'' (The Vellon inflation in Castile) p. 52-73. ISBN: ISBN 3-87045-211-0. Referenced 2010-01-30.</ref>

==The kipper and wipper inflation in the Habsburg lands==
After the peak of silver production in the [[Wikipedia:Holy Roman Empire|Holy Roman Empire]] in 16th century, the rising silver prices made silver coins more worth than their nominal value - and so were they molten down or exported. But a larger problem was the too high precious metal content in small coins (the [[Wikipedia:Pfennig|pfennigs]], [[Wikipedia:Kreuzer|kreuzer]] and [[Wikipedia:Groschen|groschen]]), that were coined at a loss to the minter. The demand for them was so large, that many small minters produced lesser coins against the regulations. The practice was forbidden, but despite many calls and resolutions have reached alarming proportions by the beginning of the 17th century. Many of the mints have been rented and sold, run for purely fiscal reasons. An additional motive were the preparations and arming for [[Wikipedia:Thirty Years' War|war]], which many have seen coming by 1615. Paradoxically, the inflation came before a war and ended in its beginning phases in 1623.

Many merchants have taken up the trading and exchanging of coins. The "kipper" and "wipper" were the dealers with money (named after the weighing of coins to filter out high quality pieces and melt them down or [[Wikipedia:Coin clipping|shave]] them - see the [[Wikipedia:Tipper and See-Saw Time|Tipper and See-Saw Time]], in German ''[[Wikipedia:de:Kipper- und Wipperzeit|Kipper- und Wipperzeit]]''). Mints have been popping up everywhere. In 1610 was the currency formally reformed, making the production of small coins profitable. But many minters have continued to make devalued coins, and the good [[Wikipedia:Thaler|Thaler]] continued to vanish abroad.

In particularly hit [[Wikipedia:Electorate of Saxony|Saxony]], where 110-130 of good ''groschen'' were once made from a [[Wikipedia:Mark (mass)|mark]]* silver, and in 1610-1617 they were not more than 170, by 1619 it was already up to 270. This rose to 320 in 1620 and 330 groschen on a mark in 1621. The inflation of the Schinderlings was 150 years ago and not widespread, so the dangers of inflation were not recognized. Everybody enjoyed the easy money and believed to get rich quickly, and at first there seemed to be an economic boom. But the prices have risen in consequence. Those with fixed incomes were hit first, by 1621 were the complaints universal. Particularly clergymen have seen in this the work of the devil. In 1622 was the unrest widespread; miners have rioted and plundered the coin dealers. Copper itself has become so expensive, that housewives sold their pans and kettels to the mints. Everyone paid their debts and taxes, and many lawsuits followed due to paying with bad money. The thalers were requested for all payments and the devalued coins were rejected. Some towns held public collections to protect clergy and teachers from misery.

{| border="1" cellspacing="0" cellpadding="5" style="text-align:center"
! Prices of cereals in [[Wikipedia:Dresden|Dresden]]:<ref name="Gaettens_Kipper" />
| 1600-1620
| 1621
| 1622
| 1623
|-
! a ''[http://en.wiktionary.org/wiki/Scheffel scheffel]'' of wheat
| 2 thaler 15 groschen
| 5 thaler 13 groschen
| 11 thaler 5 groschen
|
|-
! a ''scheffel'' of rye
| 2 thaler
| 4 thaler 19 groschen
| 9 thaler 19 groschen
| 11 thaler 10 groschen
|}

The course of the Reichstaler rose from 1 florin 32 Kreuzer in 1618 to 6 fl. in 1622 (i.e., the value quadrupled) when averaged over different states of the Empire. It climbed to 7 fl. in Frankfurt, 10 fl. in Southern Germany, 11 fl. 15 Kr. in Bohemia, and 15 fl. in Electoral Saxony ("Kursachsen"). (1 florin equals 60 Kreuzers.)<ref name=""> [http://www.aeaweb.org/annual_mtg_papers/2008/2008_258.pdf "The "Kipper- und Wipperzeit" and the Foundation of Public Deposit Banks"], by Isabel Schnabel, Max Planck Institute, Bonn and Hyun Song Shin, Princeton University. November 2006, referenced 2010-02-22.</ref>

The inflation has grown after the [[Wikipedia:Battle of White Mountain|Battle of White Mountain]] in 1620 and the integration of [[Wikipedia:Bohemia|Bohemia]]. [[Wikipedia:Karl I, Prince of Liechtenstein|Karl I, Prince of Liechtenstein]] was appointed to stadtholder and viceroy of Bohemia, and quickly began to inflate. In 1622 was all currency-making loaned to a consortium co-owned by the prince and [[Wikipedia:Albrecht von Wallenstein|Albrecht von Wallenstein]], among others. (The profit was also used to buy land of protestants in Bohemia; an estimated ⅔ of its land area was confiscated after their defeat). A rapid inflation followed, the export of good coins was forbidden, and they were soon melted down. The rising prices caused a general unrest and a rebellion almost broke out in Vienna.

To bring the situation under control, some cities began to take measures by 1618. In 1622, Lower Saxony demanded according to old laws the personal introduction and swearing in of every [[Wikipedia:Münzmeister|Münzmeister]], upon which most of them vanished. 1623 followed Lower Saxony suit, and returned to the old currency. The debased coins were withdrawn and replaced with good coins, the losses mostly carried by the population. Finally, the emperor ordered to stop the production of the 'easy coins' in all Habsburg lands and return to to the Viennese standard. 100 debased thalers were exchanged for 13,3 ''reichsthaler'' from silver. Germany was more destroyed by inflation than by the [[Wikipedia:Thirty Years' War|Thirty Years' War]] and likened by some pamphlets to pestilence.<ref name="Gaettens_Kipper">Richard Gaettens. ''Geschichte der Inflationen Von Altertum bis zum Gegenwart'' (German: History of Inflations from Old Ages to the Present), ''Die Zeit der Kipper und Wipper'' (The time of kippers and wippers) p. 74-99. ISBN: ISBN 3-87045-211-0. Referenced 2010-02-04.</ref>

*) In Germany became the Cologne mark standard, with 233,856 g. The English mark was 233,275, the Spanish 230,348, the Portugese mark 229,50 g.

==John Law's inflation in France==
Following the ideas of [[John Law]], paper money was introduced in France, producing first an economic and speculative boom from 1718, and ending with a disastrous crash in 1721.<ref name="Gaettens_Law_France">Richard Gaettens. ''Geschichte der Inflationen Von Altertum bis zum Gegenwart'' (German: History of Inflations from Old Ages to the Present), ''John Law und die französischen Finanzprobleme nach dem Tode Ludwigs XIV.'' (John Law and the French financial troubles after the death of Louis XIV.) p. 100-126. ISBN: ISBN 3-87045-211-0. Referenced 2010-02-23.</ref><ref name="French_John_Law">Doug French. [http://mises.org/story/3569 "John Law and the Invention of Modern Finance"], July 2009, referenced 2010-02-27.</ref>

{{Main|John Law inflation in France}}

==The Swedish crisis under Charles XII.==
The Scandinavian lands including Sweden used the [[Wikipedia:Mark (money)|mark]] introduced by the leading [[Wikipedia:Hanseatic League|Hanseatic]] cities, first in coins of 1/3 an 2/3. 1 Swedish mark was 8 [[Wikipedia:Öre|Öre]], like the shilling from [[Wikipedia:Lübeck|Lübeck]]. Later were produced 8-, 4-, 2- abd 1-mark pieces, the 4-marks were called in the 17th century "Daler Carolin" or "crowns", like the crowns made in Denmark and Norway. The 2-marks were named "Carolin". Under Gustav Wasa was introduced the [[Wikipedia:Swedish riksdaler|riksdaler]] similar to the German Thaler. [[Wikipedia:Gustavus Adolphus of Sweden|Gustav Adolph]] began to use the wealth in copper for coinage. After their devaluation to a half in 1635 people started to calculate in ''Silvermynt'' and ''Koppermynt'' (S.M. and K.M.), using two parallel currencies. In 1633-1643 was a daler-silvermynt equal to 2 daler koppermynt, in 1643-1662 2 1/2, from 1664 3 daler koppermynt. Queen [[Wikipedia:Christina of Sweden|Christine]] brought copper in large plates into circulation, the "Platmynts" from 1 to 10 talers - the 10 talers weighed 19,7 kg. Under Charles XII was 1 riksdaler = 3 daler S.M. = 9 daler K.M.

Sweden was by the year 1715 in a difficult situation. After twenty years of war and loss at the [[Wikipedia:Battle of Poltava|battle of Poltava]] was the country exhausted. It lost important territories in Northern Germany and the Baltic, but it still had a wealth of copper and iron. But the king [[Wikipedia:Charles XII of Sweden|Charles XII]] was not interested in peace. Returning to his country after fifteen years, there was little enthusiasm for war. He found an eager helper and advisor in baron [[Wikipedia:Georg Heinrich von Görtz|Georg Heinrich von Görtz]], a man of great financial knowledge, but few scruples. To mask his authorship of the unpopular decrees, that followed, the king has left the announcements to the "Contribution Rent Office", an institution created by the [[Wikipedia:Riksdag of the Estates|Riksdag]].

The taxes were raised, but didn't bring much income, foreign loans were also limited. Instead of slowly devaluing coins, Görtz aimed for pure credit money. First were introduced 'wage notes' as payment of state officials, that should be accepted as money. Later came obligations as payment for supplies, especially war supplies. First only for large sums. smaller denominations were soon introduced as well.

The king borrowed in Netherlands 2 million [[Wikipedia:Swedish riksdaler|riksdaler]] in exchange for obligations, the right to make Swedish coins and trade with Sweden's most important export goods - esp. copper, brass, iron, tar, etc. Their buying price was set by the king, and all goods had to be delivered to royal warehouses. Instead of payment were given 'weight bills', later also given the status of currency. The goods were exported for silver and gold. But it was the new coinage, that brought the real income.

The introduction of pure credit coins took a full year to realize due to resistance of many officials, the emission was in May 1716. For a lack of sound currency and to "prevent the export of silver coins" was issued 1 million dalers from copper, denominated as silver (S.M.). The coins would be used to pay taxes, and were promised to be repaid.

In October 1716 it was announced, that these coins, marked with the symbol of a crown, would be withdrawn and exchanged for coins inscribed with the words "Publica Fide". The king, worried about the wellbeing of his subjects, wanted to prevent counterfeiting or imports from other lands. The coins with the crown, withdrawn until May 1717,were reissued as token coins of 3 Öre K.M. or 10 Öre S.M. to "avoid waste". The "Publica Fide" coins were issued in over 3.800.000 pieces until June 1717. Meanwhile, another issue was announced, marked with the image of a knight and designated as "Wett och wappen", also to replace the previous issue. Over 9 million of them were made. The old coins were again reused as token coins, first as 4 Öre K.M., later were both types of coins set to 6 Öre K.M. and 6 Öre S.M. In January 1718 was announced another issue, with the image of a knight and a lion and the inscription "Flink och färdig". Over 7.300.000 were issued. In June 1718 were announced five more issues with images of Saturn, Jupiter, Mars, Phoebus and Mercury, to replace the previous coins.

At the time of king's death (November 1718) were 24.527.000 coins denominated to 1 S.M. in circulation. In addition there were 2.6 million dalers in money notesand 15 millions in obligations. Compare this to Görtz' estimate of currency in circulation from 1715 - 2 million dalers (which was probably too low - the state income of that year was 4 to 5 million).

The value of copper platmynts was raised in 1715 by 50%. Speculators made a lot of money on the revaluation, while debtors suffered, but all complaints were ignored by the king. Passed ostensibly to prevent their export, the measure worked and some platmynts were even re-imported. In 1718, copper was set to the original value, but could be in the meantime exchanged for notes, obligations or token coins, to aid in their circulation. Shortly after the devaluation, the platmynts had to be stamped under threat of confiscation, and then were to be revalued again. But the tricks did not bring the desired income as Görtz declared during his trial.

The export of gold and silver was already banned, it was renewed in 1717 with serious punishments. By March 1718 no private person could own the silver "Carolins" or foreign silver coin. From July could no one own any coins or unprocessed silver, all had to be exchanged for obligations and token coins, or confiscated.

But the new coins were not welcome. Punishment awaited those unwilling to accept them as early as 1717. The officers complained, that nobody wanted them, and copper miners could not buy anything from the peasants. At the end of 1717 had all trading to be supervised by soldiers and able folk, informants were richly rewarded. The peasants were duty-bound to bring their wares into cities. In Stockholm, trading except on public places and markets was banned. Withdrawing of wares from the market was punished and anyone's home could be searched. In 1718 were introduced price controls, for the goods bought by the army, the prices of bakers, brewers and all grains. The number of breweries and inns was reduced. Mining has suffered, but fines had to paid if the planned production was not fulfilled.

In July 1717 was the agio of the token coins against sound coin reported as 22-24%. In May 1718 it was written, that 4 daler koppermynt buy more than 6 token dalers - which would be over 50%. After king's death were the token coins in 1719 devalued, the reports speak of 200 to 400%. A private report speaks of prices rising twentyfold, an official of 6-, 8- and 12-fold increases.

After the unclear [[Wikipedia:Charles XII of Sweden#Death|death of Charles XII]] (there are claims of a conspiracy by his own soldiers) were attempts to continue with the issues of new money, but were eventually stopped. The token coins were to be exchanged from 1719 for half of their nominal value. But most of it was paid in debt obligations, the repayment of which took decades. Many of their owners got nothing in the end.

Görtz was successful in establishing a pure credit money and giving the king the means to wage a war. Even the economy was upheld for some time, though it had to became a planned economy of a sort, the freedoms of the subjects severely limited. After the king was dead, he was arrested and blamed for all the ills of the country. Without due process he was quickly sentenced to death and executed.<ref name="Gaettens_Sweden">Richard Gaettens. ''Geschichte der Inflationen Von Altertum bis zum Gegenwart'' (German: History of Inflations from Old Ages to the Present), ''Die Schwedische Geldkrise unter Karl XII'' (The Swedish crisis under Charles XII) p. 127-146. ISBN: ISBN 3-87045-211-0. Referenced 2010-04-19.</ref>

==The Seven Year War and Frederick the Great==
When [[Wikipedia:Frederick II of Prussia|Frederick the II.]] came to power in 1740, [[Wikipedia:Kingdom of Prussia|Prussia]] was very far from a united country. The currency was silver, as in the rest of German lands, but Prussia did not have any significant silver mines, it relied on imports from America. The prices of gold and silver changed from 1701 to 1710 from about 1:15,27, to 1:14,93 in 1740-50. In Germany has the Reichstag in Regensburg (1737-38) set the ratio to 1:15,1.

After complaints about the lack of coin has Frederick decided to reform the currency. The 10-''Reichsthaler'' piece (a "double-[[Wikipedia:Friedrich d'or|Friedrischdor]]") should be made 17 1/2 pieces on a [[Wikipedia:Mark (mass)|mark]]* of gold, the 5-''Reichsthaler'' (a "Friedrischdor") 35 on a mark, and the 2 1/2 thaler coins at 70. The silver thaler should be fixed againts gold, with 5 Thaler equal to one ''Friedrischdor''. From 1 mark silver should be made 10 1/2 thaler; half-thaler coins 21 on the mark and quarter-thalers 42 on a mark. The ratio of gold to silver was seen as too high and set to 1:13.793 for Prussia. The name [[Wikipedia:Prussian thaler|Reichsthaler]] reflected Frederick's expectations and it indeed became the first step towards a unified German coinage.

Frederick, who saw the upcoming war, had to change his monetary policy and rented his mints to capable Jewish money traders, who were able to make them profitable. Most coins were in the contracts exactly defined in weight and purity, but some token coins circulating outside of Prussia were wildly inflated. In [[Wikipedia:Polish–Lithuanian Commonwealth|Poland]] were no coins made throughout the 18th century. It became an ideal target for devalued coins, the trouble this caused suited the king's long-term plans well (the First Separation of Poland in 1772 was being justified by the economical disorder). When the 18-groschen pieces ("tympfs") from Königsberg became popular, the Polish king and Saxon ''[[Wikipedia:Prince-elector|Kurfürst]]'' decided to make more of them in [[Wikipedia:Electorate of Saxony|Saxony]]. Since it and Poland were separated, they had to be transported through Prussia, and would be a competition for his minters, Frederick forbade the transport. In response were his coins from Königsberg banned. Frederick has responded by coining money with the seal and all marks of Saxon coins.

And it was Saxony, that was captured first in the [[Wikipedia:Seven Years' War|Seven Years' War]], not least because of its wealthy silver mines. The coins were minted as before, but were not allowed in Prussian lands. Their small silver content showed after some use, and the new coins were dubbed ''[[Wikipedia:Ephraimiten|Ephraimiten]]'', according to their minter. Silver-white at first, the copper shone after a while through, as in the verse "From outside Frederick, from inside Ephraim."

The suggestion to make money with such a low content in Prussia in 1757 was strongly rejected by the king, the "infamous coins" should not circulate in his own lands. The king went as far as to destroy the records of his inflation, so not much is known about its magnitude - except for the mint in Dresden, which was briefly occupied by the enemy.

In 1758 was all coinage, even in Prussia, unified on 19 3/4 thalers per mark. In December 1758 were the ''Friedrichsdors'' devalued by 41%. In 1760 was the content set down to 30 thalers on a mark, only the Prussian 'Kurantgeld' (coins used to pay taxes) were left on the older standard. The new devalued coins were intentionally minted with the year 1753 to hide their true nature.

The situation in the war forced the king to look for more sources of income. The golden Saxon ''Augustdor'' was minted with old years, on the beginning of 1761 at 11 carat, later that year 7 carat. Since 1759 are in the contracts with minters also "other coins." Frederick's devalued coins were an inspiration to many other German nobles, who inflated their currencies as well. Frederick used the opportunity to mint copies of these coins for more profit. By 1760 was the war going badly for Prussia. That was noticeable in the exchange rates as well - the price of silver that had to be bought from Netherlands rose from 19 to 28 ''Reichsthaler'' per mark. The war money became harder to deploy, the armies to spend it were separated from homeland, in many places were Saxon coins forbidden and in some was their mere possession reason for imprisonment. It was decided to mint Saxon and "foreign" coins at 40 ''Reichsthaler'' per mark, the "Tympfs" were to be made in any amount desired. The mints in Anhalt and Schwerin were forcibly closed as undesired competition.

By end of 1762 was a return to normality possible, for a start was the money improved to 19 3/4 ''Reichsthaler'' per mark. The old money was being withdrawn, the Saxon 1/3 thalers were accepted at a discount of 70%, the [[Wikipedia:Groschen|groschen]] at 117,50%. A lack of new money was noticeable until the end of 1763. In 1764 was the standard finally returned to 14 ''Reichsthaler'' per mark for the thaler and its parts . The golden ''Friedrichsdor'' was again coined by the standard from 1750. The mints were again run by the Prussian state.

In the Seven-Years' War Frederick faced the forces of Austria, France and Russia, allied only with England. Wars were typically financed by taxes, loans or inflation. Frederick chose not to take out loans. War taxes were used, especially in occupied territories (Saxony alone paid 50 million thaler). Subsidies from England were paid in gold and silver, and they too pointed the way to reliable currency devaluation. And never before found inflation so many new ways. The money streamed in all directions, whether to hostile or neutral lands. The years on coins were often faked. The Austrian army paid its troops with Saxon war money. Even the French army used them. A large number of German mints have also depreciated their currency, including those run by religious leaders. These currencies were then copied by Frederick's minters. Poland, that gave minting some time ago, became an ideal target for devalued coins, and the trouble this caused suited the king's long-term plans well (the First Separation of Poland in 1772 was being justified by the economical disorder).

How many coins were actually minted and what the total income from this inflation was, is unknown. Documents exist only for the mint in [[Wikipedia:Dresden|Dresden]] from 1758 to 1759. In a year and three months were made over 8 million coins. The treasure paid by the mints totaled almost 30 million Reichsthaler. An estimated 50 million went to the Prussian crown for the privilege of making war money (note that these payments were made in good coin). The profit of the minters was estimated at 25 million. The losses of Prussian holders of money, judged by the conversion criteria after war, were on average 67%.

Frederick came out of the war as a winner and his disconnected lands could be united by keeping the wealthy Silesia. Since a long period of peace followed, the Prussian economy recovered rather fast.<ref name="Gaettens_Seven_War">Richard Gaettens. ''Geschichte der Inflationen Von Altertum bis zum Gegenwart'' (German: History of Inflations from Old Ages to the Present), ''Die Finanzierung des Siebenjährigen Krieges durch Friedrich den Grossen'' (The financing of the Seven Years' War by Frederick the Great) p. 147-172. ISBN: ISBN 3-87045-211-0. Referenced 2010-07-12.</ref>

*) In Germany became the Cologne mark standard, with 233,856 g. The English mark was 233,275, the Spanish 230,348, the Portugese mark 229,50 g.

==Inflation during the French Revolution==
The [[Wikipedia:French Revolution|French Revolution]] brought with it a massive inflation of the paper money called [[Wikipedia:Assignats|assignats]]. It was nominally backed by confiscated lands, when introduced in 1789. But eventually it was printed to finance all government's expenses and has lost most of its value by 1796 when its production has stopped.<ref name="Gaettens_Assignats">Richard Gaettens. ''Geschichte der Inflationen Von Altertum bis zum Gegenwart'' (German: History of Inflations from Old Ages to the Present), ''Die Assignaten der Französischen Revolution'' (The Assignats of the French Revolution) p. 173-198. ISBN: ISBN 3-87045-211-0. Referenced 2010-07-15.</ref><ref name="Trask_French_Revolution">H.A. Scott Trask. [http://mises.org/daily/1504 "Inflation and the French Revolution: The Story of a Monetary Catastrophe"], Mises Daily, April 2004, referenced 2010-07-14.</ref>

{{Main|Inflation during the French Revolution}}

==References==
{{Reflist}}
[[Category:Historical]]