We are told that Silicon Valley Bank failed because it held Treasuries that they could not sell at face value in the bond market in order to get cash demanded by their depositors. Their depositors were Silicon Valley startups whose profits were lagging and who needed to withdraw deposits in order to meet payroll and pay their bills. The treasuries were issued when interest rates were very low thus investors received a low return. However, the treasuries the bank held had lost their value through the rise in interest rates.

The rise in interest rates was a result of central bank actions intended to curtail inflation. So where is the inflation coming from? The Federal Reserve assumes that it is because the money supply is rising too rapidly, with too much bank lending going on. The Federal Reserve can reduce bank lending by increasing interest rates which they believe will control inflation. But inflation has complex causes. Prices are rising because the supply of basic goods and services cannot keep up with demand. The supply side is limited because we are pushing the limits of Earth’s resources to supply our needs. War, the pandemic, and the devastating effects of climate change all contribute. Even if the war in Ukraine is brought to an end, the threat of future pandemics remains, and the devastation wrought by climate change will continue to intensify. Inflation will persist.

The Federal Reserve’s action to raise interest rates can slow bank lending. That will make it harder for the private sector to produce the innovations needed to address climate change. It will also decrease demand as the population becomes impoverished through rising unemployment. That may temper inflation, but inflation will remain. Inflation is built into the monetary system, which creates money as debt. Changes in monetary policy that the Federal Reserve can impose are entirely inadequate to deal with current problems. We are in for difficult times.

The reputation of Treasuries has been badly tarnished. They are no longer the “gold standard,” the safe investment. They lose value like keeping your money under a mattress. Will the demand for them drop? Will the US government find it increasingly difficult to find lenders willing to buy its bonds? What will that mean for government financing? Will the Fed become the only lender willing to buy Treasuries?

A change in the monetary system is critically needed to address climate change and to make resources available without increasing debt. But by itself, monetary reform will not be sufficient. Other major reforms in our political and economic lives are needed too.