Books / Digital Text
Although first published 25 years ago, Murray Rothbard’s The Mystery of Banking continues to be the only book that clearly and concisely explains the modern fractional reserve banking system, its origins, and its devastating effects on the lives of every man, woman, and child. It is especially appropriate in a year that will see; a surge in bank failures, central banks around the globe bailing out failed commercial and investment banks, double-digit inflation rates in many parts of the world and hyperinflation completely destroying Zimbabwe’s economy, that a new edition of Rothbard’s classic work be republished and made available through the efforts of Lew Rockwell and the staff at the Ludwig von Mises Institute at an obtainable price for students and laymen interested in the vagaries of banking and how inflation and business cycles are created.
In the absence of central-bank intervention, the current financial meltdown could be a healthy check on the inflation of the banking system as Rothbard points out in his scathing review of Lawrence H. White’s Free Banking in Britain: Theory, Experience, and Debate, 1800-1845 that first appeared in The Review of Austrian Economics and is included as a part of this new edition to correct Rothbard’s initial support of White’s work in the first edition. There have been virtually no bank failures in the United States since the early 1990s and as Rothbard surmised during that period where there was “an absence of failure” that “inflation of money and credit [was] all the more rampant.” Indeed, from January 1990 to April 2008, the United States M-2 money supply more than doubled from $3.2 trillion to $7.7 trillion. Bankers were living it up, “at the expense of society and the economy faring worse” (Rothbard’s emphasis).
Although ostensibly it is dodgy real estate loans that are bringing the banks down this year, in the seminal book that you hold, Rothbard shows that it is really the fraudulent nature of fractionalized banking that is the real culprit for the bankers’ demise.
But central bankers will never learn. “We should not have a system that’s this fragile, that causes this much risk to the economy,” New York Federal Reserve President Tim Geithner said after engineering J.P. Morgan’s bailout of the failed Bear Stearns investment bank in the first quarter of 2008 with the help of the central bank. Of course the thought of dismantling his employer, the government leaving the counterfeiting business, and a return to using the market’s money—gold—didn’t occur to him. More government regulation in which “the basic rules of the game establish stronger incentives for building more robust shock absorbers,” is what he prescribed.
Surely Murray is somewhere laughing.
My introduction to The Mystery of Banking came in 1992 as I was finishing my thesis at UNLV under Murray’s direction. I found the book in the university library and couldn’t put it down. The book was long out of print by that time and being prior to the start of Amazon.com and other online used book searches, I was unable to find a copy of the book for purchase. Thus, I fed dimes into the library copier one Saturday afternoon and made myself a copy. When the online searches became available I waited patiently and bought two copies when they surfaced, paying many times the original $19.95 retail price (as I write this AbeBooks.com has three copies for sale ranging from $199 to $225, and Bauman Rare Books recently sold a signed first edition for $650).
When I discovered Rothbard’s great work I had been a banker for six years, but like most people working in banking, I had no clear understanding of the industry. It is not knowledge that is taught on the job. Murray may have referred to me as “the efficient banker,” but he was the one who knew the evil implications of the modern fractionalized banking system: “the pernicious and inflationary domination of the State.”
DOUGLAS E. FRENCH
LAS VEGAS, NEVADA