Table Of Content

Front Matter.qxp 8/4/2008 11:37 AM Page i The Mystery of BANKING Front Matter.qxp 8/4/2008 11:37 AM Page ii The Ludwig von Mises Institute thanks Mr. Douglas E. French and Ms. Deanna Forbush for their magnificent sponsorship of the publication of this book. Front Matter.qxp 8/4/2008 11:37 AM Page iii The Mystery of BANKING . MURRAY N ROTHBARD SECOND EDITION Ludwig von Mises Institute Auburn, Alabama Front Matter.qxp 8/4/2008 11:37 AM Page iv 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 Front Matter.qxp 8/4/2008 11:37 AM Page v To Thomas Jefferson, Charles Holt Campbell, Ludwig von Mises Champions of Hard Money Front Matter.qxp 8/4/2008 11:37 AM Page vi Front Matter.qxp 8/4/2008 11:37 AM Page vii 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 Front Matter.qxp 8/4/2008 11:37 AM Page viii 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 Front Matter.qxp 8/4/2008 11:37 AM Page ix 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