Recall, too, that because of the basic nature of land as a factor of production, land value takes an ever-greater portion of aggregate wealth as the economy grows. This means that an ever-greater portion of loans must go to the acquisition of land. And, since the higher speculative value of land pushes people to build more expensive buildings, this means that an ever-greater portion of loans also goes to buildings. These are long-term loans. Banks do not have unlimited funds to loan. Money committed to long-term loans for land and buildings is not available for short-term business loans.
These sort-term business loans are essential to the smooth running of the economy. If less loanable funds are available, the cost of doing business goes up, and the economy slows. But, the supply of these short-term loans is inexorably restricted, as more and more loanable funds go toward buying land and buildings. Recession looms. The irresistible incentive for the Federal Reserve is to allow the money supply to increase, by keeping interest rates and reserve requirements low. This can offset the reduced supply of funds businesses need for day-to-day operations. But not indefinitely, and not without limit: since the central bank cannot control banks' money-lending decisions, it cannot be sure that inflation won't run out of control.
The fact that inflation and unemployment are seen as inextricably linked — that we seem unable to reduce one without risking the other — shows that they are symptoms of the same underlying problem.
Many people note the intimate role of money and banking in economic cycles and asssume that the financial system is at the root of the problem. Undoubtedly, the financial system has a long history of "ratcheting up" the volatility of the speculative land market. This was painfully clear in the Great Depression, and again in the 2000s, after many depression-era banking regulations had been eliminated. However, although the Glass-Steagall act and other regulations served to soften boom/bust cycles, it did not eliminate them. And, land price bubbles have recurred throughout history, under many different banking and monetary systems. Unfortunately, the primary role of land values in economic cycles has been obscured by the mainstream economics establishment, which has persistently denied land's role as a distinct factor of production.