During the boom years, the rapid growth of central bank reserves was hailed as a wonderful thing. Bolstered by plentiful foreign exchange holdings, crises in emerging markets would become a thing of the past. Yet the expansion of central bank reserves played a key role in inflating the global credit bubble. Historically, periods of strong reserve expansion have been accompanied by great apparent prosperity. But they have always ended unhappily.

In Victorian times, a country had to pay for its imports or foreign investments with money gained from a surplus on trade. If more money was sent abroad than had been earned through exports, then gold would be packed onto ships to discharge foreign creditors. A declining stock of bullion would induce the central bank to raise interest rates in order to attract gold from abroad. Rising rates would produce a credit contraction, unemployment and general economic misery. The typical nineteenth-century economic crisis was severe, but short-lived.