Rothbard_The_Mystery_of_Banking.pdf

The Mystery of Banking Murray N. Rothbard

The Mystery of Banking

Murray N. Rothbard

Richardson & Snyder

1983

First Edition

The Mystery of Banking

by Murray N. Rothbard

Library of Congress

in publication Data:

1. Rothbard, Murray N.

2. Banking 16th Century-20th Century

3. Development of Modern Banking

4. Types of Banks, by Function, Bank Fraud and Pitfalls of Banking Systems

5. Money Supply. Inflation

The Mystery of Banking Murray N. Rothbard

Contents

Chapter I Money: Its Importance and Origins 1

1. The Importance of Money 1

2. How Money Begins 3

3. The Proper Qualifies of Money 6

4. The Money Unit 9

Chapter II What Determines Prices: Supply and Demand 15

Chapter III Money and Overall Prices 29

1. The Supply and Demand for Money and Overall Prices 29

2. Why Overall Prices Change 36

Chapter IV The Supply of Money 43

1. What Should the Supply of Money Be? 44

2. The Supply of Gold and the Counterfeiting Process 47

3. Government Paper Money 51

4. The Origins of Government Paper ,Money 55

Chapter V The Demand for Money 59

1. The Supply of Goods and Services 59

2. Frequency of Payment 60

3. Clearing Systems 63

4. Confidence in the Money 65

5. Inflationary or Deflationary Expectations 66

Chapter VI Loan Banking 77

Chapter VII Deposit Banking 87

1. Warehouse Receipts 87

2. Deposit Banking and Embezzlement 91

The Mystery of Banking Murray N. Rothbard

3. Fractional Reserve Banking 95

4. Bank Notes and Deposits 103

Chapter VIII Free Banking and The Limits on Bank Credit Inflation 111

Chapter X Central Banking: Determining Total Reserves 143

1. The Demand for Cash 143

2. The Demand for Gold 149

3. Loans to the Banks 150

4. Open Market Operations 154

Chapter XI Central Banking: The Process of Bank Credit Expansion 163

1. Expansion from Bank to Bank 163

2. The Central Bank and the Treasury 171

Chapter XII The Origins of Central Banking 179

1. The Bank of England 179

2. Free Banking in Scotland 185

3. The Peelite Crackdown, 1844-1845 187

Chapter XIII Central Banking in the United States The Origins 193

1. The Bank of North America and the First Bank of the United States 193

2. The Second Bank of the United States 199

Chapter IX Central Banking: Removing the Limits 127

Chapter XIV Central Banking in the United States

The 1820's to the Civil War

1. The Jacksonian Movement and the Bank War 209

2. Decentralized Banking from the 1830's to the Civil War 215

Chapter XV Central Banking in the United States

The National Banking System 221

1. The Civil War and the National Banking System 221

2. The National Banking Era and the Origins of the Federal Reserve System 230

The Mystery of Banking Murray N. Rothbard

Chapter XVI Central Banking in the United States

The Federal Reserve System 237

1. The Inflationary Structure of the Fed 237

2. The Inflationary Policies of the Fed 243

Chapter XVII Conclusion

The Present Banking Situation and What to Do About It 249

1. The Road to the Present 249

2. The Present Money Supply 254

3. How to Return to Sound Money 263

Notes 271

The Mystery of Banking Murray N. Rothbard

Foreword

by Gary North

You have here a unique academic treatise on money and banking, a book which combines erudition,

clarity of expression, economic theory, monetary theory, economic history, and an appropriate dose of

conspiracy theory. Anyone who attempts to explain the mystery of banking—a deliberately contrived mystery

in many ways—apart from all of these aspects has not done justice to the topic. But, then again, this is an area

in which justice has always been regarded as a liability. The moral account of central banking has been

overdrawn since 1694: “insufficient funds.” [footnote: P. G. M. Dickson. The Financial Revolution in

England: A Study in the Development of Public Credit, 1688-1756 (New York: St. Martin’s, 1967);

John Brewer, The Sinews of Power: War, Money and the English State, 1688-1783 (New York: Knopf,

1988).]

I am happy to see The Mystery of Money available again. I had negotiated with Dr. Rothbard in 1988

to re-publish it through my newsletter publishing company, but both of us got bogged down in other matters. I

dithered. I am sure that the Mises Institute will do a much better job than I would have in getting the book into

the hands of those who will be able to make good use of it.

I want you to know why I had intended to re-publish this book. It is the only money and banking

textbook I have read which forthrightly identifies the process of central banking as both immoral and

economically destructive. It identifies fractional reserve banking as a form of embezzlement. [footnote: See

Chapter 7.] While Dr. Rothbard made the moral case against fractional reserve banking in his wonderful little

book, What Has Government Done to Our Money? (1964), as far as I am aware, The Mystery of Banking

was the first time that this moral insight was applied in a textbook on money and banking.

Perhaps it is unfair to the author to call this book a textbook. Textbooks are traditional expositions

that have been carefully crafted to produce a near-paralytic boredom—“chloroform in print,” as Mark Twain

once categorized a particular religious treatise. Textbooks are written to sell to tens of thousands of students in

college classes taught by professors of widely varying viewpoints.

Textbook manuscripts are screened by committees of conventional representatives of an academic

guild. While a textbook may not be analogous to the traditional definition of a camel—a horse designed by a

committee—it almost always resembles a taxidermist’s version of a horse: lifeless and stuffed. The

academically captive readers of a textbook, like the taxidermist’s horse, can be easily identified through their

glassy-eyed stare. Above all, a textbook must appear to be morally neutral. So, The Mystery of Banking is

not really a textbook. It is a monograph.

Those of us who have ever had to sit through a conventional college class on money and banking have

been the victims of what I regard—and Dr. Rothbard regards—as an immoral propaganda effort. Despite the

rhetoric of value-free economics that is so common in economics classrooms, the reality is very different. By

means of the seemingly innocuous analytical device known in money and banking classes as the T-account, the

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