The traditional method of inflation is the production of fiduciary media of exchange (“counterfeit money”) by fractional reserve banks (see the section “fractional reserve banking”). Although such crises have been known since the 14th century, they became most widespread and powerful starting in the 19th century. The fact that crises acquired a regular character (“trade cycles”) is related to the peculiarities of how they are triggered and how they unfold. They begin with credit expansion, when banks, by reducing the reserve ratio, create fiduciary money by issuing loans against demand deposits. This cheapens credit and forces other banks to follow the example of the expansionist bank, otherwise they will not be able to attract new borrowers. This creates a wave of cheap credit, which is called credit expansion.
A reduction in the interest rate (speaking of it in its form as loan interest) in the economy is possible with the growth of savings, that is, when the number of people willing to lend money to the bank (make a “term deposit”) increases. In a normal situation, this would be a sign of growth in wealth and savings (that is, an increase in the quantity of trousers and boots, or a decrease in monetary demand for them). However, in our case, the cheapening of credit is a consequence of money supply growth. Since trousers and boots do not become more numerous from money supply growth, the expansion of production that begins under artificially lowered interest rates has nothing to rely on—there are no resources. The market perceives the rate reduction as a sign of abundance (it cannot perceive it otherwise), but in reality, only the money supply has grown. Entrepreneurs make errors in the allocation of efforts and resources. Then prices begin to rise, there is a scramble for new loans, which suddenly become more expensive, and so forth. In general, after some time, all these ventures burst.
Of course, the mechanics of crises are quite complex; they are described and studied in detail by the “Austrian school” (our crisis of 2008 coincided on all points with the “Austrian” description of the stages of crisis). However, what matters is that the overwhelming majority of crises—except those caused by wars or natural disasters—have the same nature: the credit expansion of fiduciary media.
In the 19th century, crises were short (gold halted credit expansion), and those who took the biggest risks bore the losses. Then central banks took control of the management of bank reserves, that is, the issuance of fiduciary money. This not only did not help, but made everything significantly worse. Crises did not disappear; they became far more devastating and prolonged.