in the middle of the night

There have been numerous recent explanations for how we came to the current financial crisis and what might happen next. The following commentary is one of the better summaries.

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“Little by little, business is enlarged with easy money. With the exhaustless reservoir of the Government of the United States furnishing easy money, the sales increase, the businesses enlarge, more new enterprises are started, the spirit of optimism pervades the community.

“Bankers are not free from it… They are human. The members of the Federal Reserve board will not be free of it. They are human…. Everyone is making money. Everyone is growing rich. It goes up and up, the margin between costs and sales continually growing smaller as a result of the operation of inevitable laws, until finally someone whose judgment was bad, someone whose capacity for business was small, breaks; and as he falls he hits the next brick in the row, and then another, and then another, and down comes the whole structure.

“That, sir…is no dream. That is the history of every movement of inflation since the world’s business began, and it is the history of many a period in our own country.”

- Elihu Root opposing establishment of the Federal Reserve System in 1913, as quoted in Is the Medicine Worse Than the Illness?

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And lest we forget, while inflation is good for borrowers, it’s deadly for savers.