The Mystery of Banking

322 Pages·2008·1.66 MB·English

by  Murray Rothbard

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The Mystery
of
BANKING
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The Ludwig von Mises Institute thanks
Mr. Douglas E. French and Ms. Deanna Forbush
for their magnificent sponsorship
of the publication of this book.
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The Mystery
of
BANKING
.
MURRAY N ROTHBARD
SECOND EDITION
Ludwig von Mises Institute
Auburn, Alabama
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Copyright © 2008 by the Ludwig von Mises Institute
All rights reserved. No part of this book may be reproduced in any
manner whatsoever without written permission except in the case
of reprints in the context of reviews.
For information write the Ludwig von Mises Institute, 518 West
Magnolia Avenue,Auburn, Alabama 36832. Mises.org.
ISBN:978-1-933550-28-2
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To Thomas Jefferson,
Charles Holt Campbell,
Ludwig von Mises
Champions of Hard Money
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C
ONTENTS
Preface by Douglas E. French . . . . . . . . . . . . . . . . . . . . . . . . xi
Foreword by Joseph T. Salerno. . . . . . . . . . . . . . . . . . . . . . . xv
I. Money: Its Importance and Origins. . . . . . . . . . . . . . . . . . . 1
1. The Importance of Money. . . . . . . . . . . . . . . . . . . . . . . 1
2. How Money Begins. . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
3. The Proper Qualities of Money . . . . . . . . . . . . . . . . . . . 6
4. The Money Unit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
II. What Determines Prices: Supply and Demand . . . . . . . . 15
III. Money and Overall Prices. . . . . . . . . . . . . . . . . . . . . . . . 29
1. The Supply and Demand for Money and Overall
Prices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
2. Why Overall Prices Change . . . . . . . . . . . . . . . . . . . . 35
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
vii
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viii The Mystery of Banking
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
VI. Loan Banking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
VII. Deposit Banking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85
1. Warehouse Receipts . . . . . . . . . . . . . . . . . . . . . . . . . . 85
2. Deposit Banking and Embezzlement . . . . . . . . . . . . . . 90
3. Fractional Reserve Banking . . . . . . . . . . . . . . . . . . . . . 94
4. Bank Notes and Deposits. . . . . . . . . . . . . . . . . . . . . . 104
VIII. Free Banking and the Limits on
Bank Credit Inflation. . . . . . . . . . . . . . . . . . . . . . . . . . . . 111
IX. Central Banking: Removing the Limits. . . . . . . . . . . . . 125
X. Central Banking: Determining Total Reserves . . . . . . . . 141
1. The Demand for Cash . . . . . . . . . . . . . . . . . . . . . . . . 141
2. The Demand for Gold. . . . . . . . . . . . . . . . . . . . . . . . 148
3. Loans to the Banks. . . . . . . . . . . . . . . . . . . . . . . . . . . 149
4. Open Market Operations. . . . . . . . . . . . . . . . . . . . . . 153
XI. Central Banking: The Process of Bank
Credit Expansion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 161
1. Expansion from Bank to Bank. . . . . . . . . . . . . . . . . . 161
2. The Central Bank and the Treasury . . . . . . . . . . . . . . 170
XII. The Origins of Central Banking. . . . . . . . . . . . . . . . . . 177
1. The Bank of England. . . . . . . . . . . . . . . . . . . . . . . . . 177
2. Free Banking in Scotland . . . . . . . . . . . . . . . . . . . . . . 183
3. The Peelite Crackdown, 1844–1845 . . . . . . . . . . . . . 186
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Contents ix
XIII. Central Banking in the United States I: The Origins. . 191
1. The Bank of North America and the First
Bank of the United States. . . . . . . . . . . . . . . . . . . . . 191
2. The Second Bank of the United States . . . . . . . . . . . . 198
XIV. Central Banking in the United States II:
The 1820s to the Civil War . . . . . . . . . . . . . . . . . . . . . . 207
1. The Jacksonian Movement and the Bank War . . . . . . 207
2. Decentralized Banking from the 1830s to the
Civil War . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 214
XV. Central Banking in the United States III: The National
Banking System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 219
1. The Civil War and the National Banking System . . . . 219
2. The National Banking Era and the Origins
of the Federal Reserve System . . . . . . . . . . . . . . . . . 229
XVI. Central Banking in the United States IV:
The Federal Reserve System . . . . . . . . . . . . . . . . . . . . . . . 235
1. The Inflationary Structure of the Fed . . . . . . . . . . . . 235
2. The Inflationary Policies of the Fed . . . . . . . . . . . . . 241
XVII. Conclusion: The Present Banking
Situation and What to Do About It . . . . . . . . . . . . . . . . 247
1. The Road to the Present . . . . . . . . . . . . . . . . . . . . . . 247
2. The Present Money Supply . . . . . . . . . . . . . . . . . . . . 252
3. How to Return to Sound Money . . . . . . . . . . . . . . . 261
Appendix: The Myth of Free Banking in Scotland . . . . . . . 269
Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 293