4. Credit Expansion and Speculative Manias

This examines the historical relationship between credit expansion, financial innovations, and economic instability, particularly focusing on the causes of speculative manias and financial crises. It highlights how increases in the supply of credit, often driven by new financial instruments or substitutes for traditional money, have consistently fueled economic booms and subsequent collapses throughout history. The document also explores the long-standing debate between the Currency School and the Banking School regarding the management of the money supply, illustrating their differing views on whether controlling money growth or accommodating business transactions is more crucial for economic stability. Furthermore, it analyzes various historical examples of credit expansion and financial panics, including the role of call money, bills of exchange, and securitization, ultimately emphasizing the inherent difficulty in controlling credit expansion due to continuous financial innovation and the complex interplay between money, credit, and economic activity.

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