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The Mystery of Banking by Murray N. Rothbard

Although first published over 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.

In the absence of central-bank intervention, the current financial meltdown could be a healthy check on the inflation of the banking system.

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”.

Although ostensibly it is dodgy real estate loans that are bringing the banks down this year, 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.

Click here to open "The Mystery of Banking" by Murray N. Rothbard (PDF 1.5MB)

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