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Monday, April 4, 2005
Under a fiat money standard, governments (or their central banks) may obligate themselves to bail out, with increased issues of standard money, any bank or any major bank in distress. In the late nineteenth century, the principle became accepted that the central bank must act as the 'lender of last resort,' which will lend money freely to banks threatened with failure. Another recent American device to abolish the confidence limitation on bank credit is 'deposit insurance,' whereby the government guarantees to furnish paper money to redeem the banks' demand liabilities. These and similar devices remove the market brakes on rampant credit expansion.
— Murray Rothbard, Man, Economy, and State [1962]
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