Inflation taxes your money because its value depreciates as price levels rise. Banks allow people to avoid part of that inflation tax. When banks provide credit cards to buy goods, and these are paid off at the end of the period, people can earn interest on their income deposits at the bank during the period. If that interest is as high as the inflation rate, they avoid some of the depreciation of currency that occurs from carrying around less cash during the period in which the price level rises.

Instead of carrying around currency that depreciates over the month, banks allow people to use private bank deposits for purchases and so avoid some of the inflation tax on public bank money in the form of currency. Having a well-insured bank system allows an optimal amount of inflation tax avoidance by people. Banking enables them to weigh the cost of the credit versus the amount of the inflation tax faced when using currency that depreciates.

When the bank system collapses in modern times, it can become harder to avoid the inflation tax. Even worse taxes can result, if the inflation rate is suppressed by bank regulators as they devise new means to provide insurance after the crash has already occurred. Having good bank insurance in place before a crisis is important because it can avoid the worse effects of bank panics.

Bank panics have long been a persistent feature of the US banking system. From 1873 to 1914, during the gold standard, the United States experienced a continual sequence of panics that decreased investment, leading to the creation of the Federal Reserve and, ultimately, the Federal Deposit Insurance Corporation.

The beginning of a US nationwide system of banking, in place until 1914, was created by the National Banking Acts of 1863 and 1864. Passed during the civil war to raise federal government funds, it allowed for the chartering of national banks that could issue the greenback notes, but in return for buying Treasury debt and depositing it at the Office of the Comptroller of the Currency. Banks also operated under state charters under these Acts, with their issuance of notes driven out in large part by the Acts imposing a new federal tax on state banknotes.