The recurring boom and busts are not inherent with the free market. The culprit has always been the expansion of bank credit. It not only produces rising prices but it also distort the production process.
Read Murray Rothbard’s book— A History Of Money and Banking In The United States.
Here’s my recollection–
Before the US central bank came into being in 1913, private banks issued their own notes. They could not however, coordinate their issuing. In fact, when one over issues the other immediately redeems them in specie, so inflation was arrested in this manner.
The arrival of the US central bank and government decree to use government issued bank notes changed the game entirely. Bank credit can now be coordinated by a central authority. Expanding bank credit caused the 1929 bank panic and turned into a great depression by government economic policies.
The US have in fact defaulted on its obligations when Nixon simply refused to honor our commitment
to the Bretton Woods agreement. The US dollar was
being used as a reserve currency in which the foreign central banks can pyramid their own currencies. The main feature of the agreement was that foreign central banks has the right to redeem their paper dollars for gold. The American peoples gold was confiscated by Roosevelt and had Fort Knox built to store it, so they had no redemption option.
The foreign central banks continued to redeem paper dollars for gold up until Nixons time because they realized that the US is devaluing their dollar holdings by continuing to inflate.
American productivity backs the debt the US Treasury
issues.
When the central bank “buys” US debt from the Treasury , it “credits” the govts account with the central bank. New money just created and the govt funds their projects with the new money.
When the central bank “buys” govt bonds from commercial banks, they also pay for it by “crediting” the banks account with the district Fed.
Based on this “reserves” from the Fed, commercial banks can expand credit trough the loan market.
This money often create job creating booms so the illusion of prosperity is there, until the Fed reverses its monetary stance and the bust arrives.
