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Source link: http://archive.mises.org/15291/a-story-of-boom-bust-and-bailout/

A Story of Boom, Bust, and Bailout

January 11, 2011 by

The national bank cut rates and fueled a speculative boom that collapsed, but then the Secretary of Treasury worked with New York banks to bring about a bailout, which then created a moral hazard leading to more speculative bubbles that popped ten years later.

The striking thing: this describes the Panic of 1792! The Mises Wiki has a great entry on the topic.

{ 2 comments }

Ohhh Henry January 11, 2011 at 3:34 pm

Prepare to be even more amazed …

I was reading the novel “I Claudius” which describes the period of Roman history under emperors Augustus, Tiberius and Caligula. I don’t know exactly where Robert Graves got this information (apparently he used the historians Tacitus and Suetonius heavily) but in one passage he describes how the government put a ceiling on interest rates under Tiberius, something of a bubble in land prices developed, then land prices collapsed, and the Roman government felt compelled to bail out the banks by lending them huge sums of money with the land offered as collateral. No doubt the values assigned to the land holdings were one of the earliest forms of “mark to myth”.

Some of the same fallacies seem to have been trotted out because part of the blame for the collapse was given to Tiberius for “hoarding” cash leaving an insufficient amount of coins in circulation – rather than blaming government for capping interest rates and debasing the coinage in the first place.

I tried to google more information just now, if anyone has access to the book “Money in the age of Tiberius” then I believe that it covers this incident (only fragments are shown on books.google.com).

augusto January 11, 2011 at 4:11 pm

For a historical perspective: “Forty Centuries of Wage and Price Controls: How Not To Fight Inflation”: http://mises.org/resources/3968/Forty-Centuries-of-Wage-and-Price-Controls-How-Not-To-Fight-Inflation

Also, to complement Ohhh Henry’s comment, there is passages on The Parfum, by Patrick Suskind, which make reference to govenment destroying private wealth. It talks about Madame Gaillard’s desire to save as much as possible so that she could buy a (private) annuity. The passage is here:

“She needed the money. She had figured it down to the penny. In her old age she wanted to buy an annuity, with just enough beyond that so that she could afford to die at home rather than perish miserably in the Hotel-Dieu as her husband had.”

So she saves a lot and buys the annuity:

“In 1782, just short of her seventieth birthday, she gave up her business, purchased her annuity as planned, sat in her little house, and waited for death. But death did not come.”

Now, wait for this… THE GOVERNMENT switches to paper currency:

“But then came the day when she no longer received her money in the form of hard coin but as little slips of printed paper, and that marked the beginning of her economic demise. Within two years, the annuity was no longer worth enough to pay for her firewood. Madame was forced to sell her house-at a ridiculously low price, since suddenly there were thousands of other people who also had to sell their houses. And once again she received in return only these stupid slips of paper, and once again within two years they were as good as worthless, and by 1797 (she was nearing ninety now) she had lost her entire fortune, scraped together from almost a century of hard work, and was living in a tiny furnished room in the rue des Coquilles.”

Seriously… have we learned anything in the past 200 years???

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