The Mystery of Banking
by Gary North: Debt
Impasse: Fake and Real
Mystery of Banking
is a unique academic treatise on money and banking, a book that
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."
I am happy
to see this book back in print. I had negotiated with Dr. Rothbard
in 1988 to republish 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 republish this book. It is the only
money-and-banking textbook I have read that forthrightly identifies
the process of central banking as both immoral and economically
destructive. It identifies fractional-reserve banking as a form
of embezzlement. 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.
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 student is morally disarmed. The purchase
of a debt instrument generally a national government's debt
instrument by the central bank must be balanced in the T-account
by a liability to the bank: a unit of money. It all looks so innocuous:
a government's liability is offset by a bank's liability. It seems
to be a mere technical transaction one in which no moral
issue is involved. But what seems to be the case is not the case,
and no economist has been more forthright about this than Murray
of government debt by a central bank in a fractional-reserve banking
system is the basis of an unsuspected transfer of wealth that is
inescapable in a world of monetary exchange. Through the purchase
of debt by a bank, fiat money is injected into the economy. Wealth
then moves to those market participants who gain early access to
this newly created fiat money. Who loses? Those who gain access
to this fiat money only later in the process, after the market effects
of the increase of money have rippled through the economy. In a
period of price inflation, which is itself the product of prior
monetary inflation, this wealth transfer severely penalizes those
who trust the integrity the language of morality again
of the government's currency and save it in the form of various
monetary accounts. Meanwhile, the process benefits those who distrust
the currency unit and who immediately buy goods and services before
prices rise even further.
as Ludwig von Mises showed, this process of central-bank credit
expansion ends in one of two ways:
- the crack-up
boom the destruction of both monetary order and economic
productivity in a wave of mass inflation or
- a deflationary
contraction in which men, businesses, and banks go bankrupt when
the expected increase of fiat money does not occur.
What the textbooks
do not explain or even admit is this: the expansion of fiat money
through the fractional-reserve banking system launches the boom-bust
business cycle the process explained so well in chapter 20
of Mises's classic treatise, Human
Action (1949). Dr. Rothbard applied Mises's theoretical
insight to American economic history in his own classic but neglected
Great Depression (1963).
In The Mystery
of Banking, he explains this process by employing traditional
analytical categories and terminology.
been a few good books on the historical background of the Federal
Reserve System. Elgin Groseclose's book, Fifty
Years of Managed Money (1966), comes to mind. There have
been a few good books on the moral foundations of specie-based money
and the immorality of inflation. Groseclose's Money
and Man (1961), an extension of Money:
The Human Conflict (1935), comes to mind.
But until The
Mystery of Banking, there was no introduction to money and banking
that explained the process by means of traditional textbook categories
and that also showed how theft by embezzlement is inherent in the
fractional-reserve banking process. I would not recommend that any
student enroll in a money-and-banking course who has not read this
book at least twice. Of course, had I thought that there was even
the slightest chance that such students would heed my advice, I
never would have relinquished the rights to republish this book.
P.G.M. Dickson. The
Financial Revolution in England: A Study in the Development of Public
Credit, 16881756 (New York: St. Martin's, 1967); John
Sinews of Power: War, Money and the English State, 16881783
(New York: Knopf, 1988).
The historian Paul Johnson rediscovered America's Great Depression
and relied on it in his account of the origins of the Great Depression.
See his widely acclaimed book, Modern
Times (New York: Harper & Row, 1983), pp. 23337.
He was the first prominent historian to accept Rothbard's thesis.
North [send him mail]
is the author of Mises
on Money. Visit http://www.garynorth.com.
He is also the author of a free 20-volume series, An
Economic Commentary on the Bible.
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