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Murray N Rothbard - The Case Against the Fed (1994)

Murray N Rothbard - The Case Against the Fed (1994)

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Published by: Ragnar Danneskjold on Oct 05, 2009
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Two kinds of warehouse receipts for deposit banks have
developed over the centuries. One is the regular form of
receipt, familiar to anyone who has ever used any sort of
warehouse: a paper ticket in which the warehouse guaran-
tees to hand over, on demand, the particular product men-
tioned on the receipt, e.g., "The Rothbard Bank will pay to
the bearer of this ticket on demand/' 10 dollars in gold coin,
or Treasury paper money, or whatever. For deposit banks,
this is called a "note" or ''bank note." Historically, the bank
note is the overwhelmingly dominant form of warehouse

Another form of deposit receipt, however, emerged in
the banks of Renaissance Italy. When a merchant was large-
scale and very well-known, he and the bank found it more


For more on business cycles, see Murray N. Rothbard, "The Positive
Theory of the Cycle," in America's Great Depression, 4th ed. (New York:
Richardson & Snyder, 1983), pp. 11-38.

The Ludwig von Mises Institute • 55

The Case Against the Fed

convenient for the warehouse receipt to be invisible, that is,
to remain as an "open book account" on the books of the
bank. Then, if he paid large sums to another merchant, he did
not have to bother transferring actual bank notes; he would
just write out a transfer order to his bank to shift some of his
open book account to that of the other merchant. Thus,
Signor Medici might write out a transfer order to the Ricci
Bank to transfer 100,000 lira of his open book account at the
Bank to Signor Bardi. This transfer order has come to be
known as a "check," and the open book deposit account at
the bank as a "demand deposit," or "checking account." Note
the form of the contemporary transfer order known as a
check:"I, Murray N. Rothbard, direct the Bank of America to
pay to the account of Service Merchandise 100 dollars."

It should be noted that the bank note and the open book
demand deposit are economically and legally equivalent.
Each is an alternative form of warehouse receipt, and each
takes its place in the total money supply as a surrogate, or
substitute, for cash. However, the check itself is not the
equivalent of the bank note, even though both are paper tickets.
The bank note itself is the warehouse receipt, and therefore the
surrogate, or substitute for cash and a constituent of the
supply of money in the society. The check is not the ware-
house receipt itself, but an order to transfer the receipt, which
is an intangible open book account on the books of the bank.

If the receipt-holder chooses to keep his receipts in the
form of a note or a demand deposit, or shifts from one to
another, it should make no difference to the bank or to the
total supply of money, whether the bank is practicing 100-
percent or fractional-reserve banking.

56 • The Ludwig von Mises Institute

Murray N. Rothbard

But even though the bank note and the demand deposit
are economically equivalent, the two forms will not be
equally marketable or acceptable on the market. The reason
is that while a merchant or another bank must always trust
the bank in question in order to accept its note, for a check to
be accepted the receiver must trust not only the bank but also
the person who signs the check. In general, it is far easier for a
bank to develop a reputation and trust in the market economy,
than for an individual depositor to develop an equivalent
brand name. Hence, wherever banking has been free and
relatively unregulated by government, checking accounts
have been largely confined to wealthy merchants and busi-
nessmen who have themselves developed a widespread
reputation. In the days of uncontrolled banking, checking
deposits were held by the Medicis or the Rockefellers or their
equivalent, not by the average person in the economy. If
banking were to return to relative freedom, it is doubtful if
checking accounts would continue to dominate the economy.

For wealthy businessmen, however, checking accounts
may yield many advantages. Checks will not have to be
accumulated in fixed denominations, but can be made out
for a precise and a large single amount; and unlike a loss of
bank notes in an accident or theft, a loss of check forms will
not entail an actual decline in one's assets.

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