For the moment investors are in shock, seeking reassurance and keenly intent on preserving their diminishing assets, instead of reflecting on the broader economic reasons behind it. To mainstream financial commentators, blame for a crash is always placed on remote factors, such as China's financial crisis, and has little to do with events closer to home. Analysis of this sort is selective and badly misplaced. The purpose of this article is to provide an overview of the economic background to today's markets as well as the likely consequences.

The origins of a developing crisis are deeply embedded in the financial system and date back to the invention of central banks, and more particularly to the Bretton Woods Agreement, which was the basis of the post-war monetary system. In the 1940s government economists were embracing the new Keynesian view that Say's law, the law of the markets, was irrelevant and supply and demand for goods and services could be regarded as independent from each other, and crucially, savings should be redirected into immediate consumption and replaced as a source of investment finance by a more flexible approach to money and credit.

Keynes wanted a new super-currency, which he called the bancor. Instead the world got the dollar and the "full faith and credit" of the US government expressed through her considerable gold reserves. While central banks could swap dollars for gold at $35 per ounce, there was no effective restraint on the issuance of dollar-money and credit. It allowed America to finance the Korean and Vietnam wars without resorting to domestic taxation. When those dollars-for-export returned home in the late sixties, the run against dollars and in favour of gold began, leading to the Nixon Shock, when the US finally consigned the Bretton Woods Agreement to the dustbin of history.

From the 1970s the dollar continued in its role as the world's reserve currency without any gold convertibility at all. As a deliberate policy the US government tried to remove gold's status as money by simply denying it had any such role. The propaganda persists to this day, expressed as progress in the development of government-issued currencies. Having thus disposed of the shackles of sound money, money and credit were expanded to pay for sharply higher oil prices in the early 1970s, and made available for Latin American borrowers without meaningful constraint. This was followed by an accelerating loss of the US dollar's purchasing power in the second half of that decade.