The Mystery of Banking - Mises Institute

1 BANKINGofThe Mystery Front 8/4/2008 11:37 AM Page iThe Ludwig von Mises Institute thanksMr. Douglas E. French and Ms. Deanna Forbushfor their magnificent sponsorship of the publication of this 8/4/2008 11:37 AM Page iiBANKINGThe Mystery ofLudwig von Mises InstituteAuburn, AlabamaMURRAY EDITIONF ront 8/4/2008 11:37 AM Page iiiCopyright 2008 by the Ludwig von Mises InstituteAll rights reserved. No part of this book may be reproduced in anymanner whatsoever without written permission except in the caseof reprints in the context of reviews. For information write the Ludwig von Mises Institute , 518 WestMagnolia Avenue, Auburn, Alabama 36832. : 978-1-933550-28-2 Front 8/4/2008 11:37 AM Page ivTo Thomas Jefferson, Charles Holt Campbell, Ludwig von MisesChampions of Hard MoneyFront 8/4/2008 11:37 AM Page vFront 8/4/2008 11:37 AM Page viCONTENTSP reface by Douglas E.

2 French .. xiForeword by Joseph T. Salerno .. xvI. Money: Its Importance and Origins .. 11. The Importance of Money .. 1 2. How Money Begins .. 33. The Proper Qualities of Money .. 64. The Money Unit .. 8II. What Determines Prices: Supply and Demand .. 15 III. Money and Overall Prices .. 29 1. The Supply and Demand for Money and OverallPrices .. 292. Why Overall Prices Change .. 35IV. The Supply of Money .. 431. What Should the Supply of Money Be? .. 44 2. The Supply of Gold and the Counterfeiting Process .. 473. Government Paper Money .. 514. The Origins of Government Paper Money .. 55viiFront 8/4/2008 11:37 AM Page viiV. The Demand for Money.

3 591. The Supply of Goods and Services .. 592. Frequency of Payment .. 603. Clearing Systems .. 634. Confidence in the Money .. 655. Inflationary or Deflationary Expectations .. 66VI. Loan Banking .. 75 VII. Deposit Banking .. 851. Warehouse Receipts .. 852. Deposit Banking and Embezzlement .. Reserve Banking .. Notes and Deposits .. 104 VIII. Free Banking and the Limits on Bank Credit Inflation.. 111IX. Central Banking : Removing the Limits .. 125X. Central Banking : Determining Total Reserves .. Demand for Cash .. Demand for Gold .. to the Banks.. Market Operations .. 153XI. Central Banking : The Process of BankCredit Expansion .. from Bank to Bank.

4 Central Bank and the Treasury .. 170 XII. The Origins of Central Banking .. Bank of England .. Banking in Scotland .. Peelite Crackdown, 1844 1845 .. 186viiiThe Mystery of BankingFront 8/4/2008 11:37 AM Page viiiXIII. Central Banking in the United States I: The Origins.. Bank of North America and the First Bank of the United States.. Second Bank of the United States .. 198 XIV. Central Banking in the United States II:The 1820s to the Civil War .. Jacksonian Movement and the Bank War .. 2072. Decentralized Banking from the 1830s to the Civil War .. 214XV. Central Banking in the United States III: The National Banking System .. Civil War and the National Banking System.

5 National Banking Era and the Originsof the Federal Reserve System .. 229 XVI. Central Banking in the United States IV: The Federal Reserve System .. 2351. The Inflationary Structure of the Fed .. 2352. The Inflationary Policies of the Fed .. 241 XVII. Conclusion: The Present BankingSituation and What to Do About It .. 2471. The Road to the Present .. 2472. The Present Money Supply .. 2523. How to Return to Sound Money .. 261 Appendix: The Myth of Free Banking in Scotland .. 269 Index .. 293 ContentsixFront 8/4/2008 11:37 AM Page ixFront 8/4/2008 11:37 AM Page xPREFACEA lthough first published 25 years ago, Murray Rothbard sThe Mystery of Banking continues to be the only book thatclearly and concisely explains the modern fractionalreserve Banking system, its origins, and its devastating effects onthe lives of every man, woman, and child.

6 It is especially appro-priate in a year that will see; a surge in bank failures, centralbanks around the globe bailing out failed commercial and invest-ment banks, double-digit inflation rates in many parts of theworld and hyperinflation completely destroying Zimbabwe seconomy, that a new edition of Rothbard s classic work be repub-lished and made available through the efforts of Lew Rockwelland the staff at the Ludwig von Mises Institute at an obtainableprice for students and laymen interested in the vagaries of bank-ing and how inflation and business cycles are the absence of central-bank intervention, the current finan-cial meltdown could be a healthy check on the inflation of thebanking system as Rothbard points out in his scathing review ofLawrence H.

7 White s Free Banking in Britain: Theory, Experience,and Debate, 1800 1845that first appeared in The Review of Aus-trian Economics and is included as a part of this new edition tocorrect Rothbard s initial support of White s work in the first edi-tion. There have been virtually no bank failures in the UnitedxiFront 8/4/2008 11:37 AM Page xiStates since the early 1990s and as Rothbard surmised during thatperiod where there was an absence of failure that inflation ofmoney and credit [was] all the more rampant. Indeed, from Jan-uary 1990 to April 2008, the United States M-2 money supplymore than doubled from $ trillion to $ trillion. Bankerswere living it up, at the expense of society and the economy far-ing worse (Rothbard s emphasis).

8 Although ostensibly it is dodgy real estate loans that are bring-ing the banks down this year, in the seminal book that you hold,Rothbard shows that it is really the fraudulent nature of fraction-alized Banking that is the real culprit for the bankers demise. But central bankers will never learn. We should not have asystem that s this fragile, that causes this much risk to the econ-omy, New York Federal Reserve President Tim Geithner saidafter engineering Morgan s bailout of the failed Bear Stearnsinvestment bank in the first quarter of 2008 with the help of thecentral bank. Of course the thought of dismantling his employer,the government leaving the counterfeiting business, and a returnto using the market s money gold didn t occur to him.

9 Moregovernment regulation in which the basic rules of the gameestablish stronger incentives for building more robust shockabsorbers, is what he prescribed. Surely Murray is somewhere laughing. My introduction to The Mystery of Bankingcame in 1992 asI was finishing my thesis at UNLV under Murray s direction. Ifound the book in the university library and couldn t put it book was long out of print by that time and being prior tothe start of and other online used book searches, Iwas unable to find a copy of the book for purchase. Thus, I feddimes into the library copier one Saturday afternoon and mademyself a copy. When the online searches became available Iwaited patiently and bought two copies when they surfaced, pay-ing many times the original $ retail price (as I write has three copies for sale ranging from $199 to$225, and Bauman Rare Books recently sold a signed first editionfor $650).

10 XiiThe Mystery of BankingFront 8/4/2008 11:37 AM Page xiiWhen I discovered Rothbard s great work I had been a bankerfor six years, but like most people working in Banking , I had noclear understanding of the industry. It is not knowledge that istaught on the job. Murray may have referred to me as the effi-cient banker, but he was the one who knew the evil implicationsof the modern fractionalized Banking system: the pernicious andinflationary domination of the State. DOUGLASE. FRENCHLASVEGAS, NEVADAJUNE2008 PrefacexiiiFront 8/4/2008 11:37 AM Page xiiiFront 8/4/2008 11:37 AM Page xivFOREWORDLong out of print, The Mystery of Bankingis perhaps theleast appreciated work among Murray Rothbard s prodi-gious body of output.