Notes to The Mystery of Banking by Murray-Rothbard (1983

)
jwr47

Description
• • • The Mystery of Banking by Murray-Rothbard 322 pages Publisher: Richardson and Snyder, Dutton, 1983 and Ludwig von Mises Institute

Notes
→ Most interesting overview of banking business (Vividly written, but very detailed) • Rothbard’s book is targeted at a readership actively interested in learning about the subject and not at indifferent students slouching in the 500-seat amphitheatres of our “research” universities (xvii). Rothbard’s book has been ignored, because it is forbidden to even pose the question of “who benefits” (xx) Rothbard portrays the Fed as a cartelizing device that regulates competition within the lucrative fractional-reserve banking industry and stands ready to bail it out, thus guaranteeing its profits and socializing its losses (xxi). Money must always originate in the processes of the free market (1912, Ludwig von Mises) (3). The crucial element in barter is what is called the double coincidence of wants (4). Thus the “pound sterling” in Britain, was exactly that—one pound of silver (8). This profitable process of the Debasement is defined as the government’s repeatedly lightening the number of ounces or grams in the same monetary unit(11). The enormous charge for recoinage is called “seigniorage,” payment to the seignieur or sovereign, the monopoly minter of coins (11). Surplus - shortage, Supply – demand, equilibrium (22). Inflation as demand-side problem(28). The increase of the money supply was socially useless; any M is as good at per-forming monetary functions as any other (45) “Angel Gabriel” model – magically doubling everyone’s stock of money overnight. → Early spenders benefited at the expense of the late spenders(47). There is no need for government to intervene in money and prices because of changing population or for any other reason (47). The inflation process is counterfeiting (50). The first producers or holders of the new money will find their stock increasing before very many of their buying prices have risen (50). If the king could become a legalized monopoly counterfeiter, and simply issue “gold coins” by printing paper tickets with the same names on them, the king could inflate the money supply indefinitely (52). Gold is “old-fashioned,” outdated, “a barbarous relic” in J.M. Keynes’s famous dictum, and something that only hicks and hillbillies would wish to use as money. Sophisticates use paper (55). Allowing gold and paper dollars to circulate side-by-side meant that people could stop using paper and shift into gold(56). In short, if a sack of flour was originally worth $3, and is now worth the same $3 in gold, but $100 in paper, it becomes clear to the least sophisticated that something about paper is at fault(56),

• •

• • • • • • • •

• • •

• •

• • •

• •

• •

In Phase I of inflation, the government pumps a great deal of new money into the system. Government finance their deficits and subsidize favored political groups with cheap credit, and prices will rise only by a little bit!(68). In Phase II the public’s deflationary expectations have been superseded by inflationary ones. In Phase II of inflation, instead of a rising demand for money moderating price increases, a falling demand for money will intensify the inflation (70). There is no scientific way to predict at what point in any inflation expectations will reverse from deflationary to inflationary. (71).When prices are going up faster than the money supply, the people begin to experience a severe shortage of money, for they now face a shortage of cash balances relative to the much higher price levels. In Phase III’s runaway the money collapses in a wild “crack-up boom.” and destruction of the currency. (72-75). Double-entry bookkeeping (76): Equity plus Liabilities (right) = Assets (left) (77) Loan1 banking and deposit2 banking (85) To Foley and the previous decisions must be ascribed the major share of the blame for our fraudulent system of fractional reserve banking and for the disastrous inflations of the past two centuries. (93) For the duration of the deposit, the gold or silver now became an owned asset of the bank, with redemption due as a supposed debt, albeit instantly on demand. (94) It should be clear that modern fractional reserve banking is a shell game, a Ponzi scheme, a fraud in which fake warehouse receipts are issued and circulate as equivalent to the cash supposedly represented by the receipts. (97) Counterfeiters, too, create money out of thin air by printing something masquerading as money or as a warehouse receipt for money (98). Put another way, a bank is always inherently bankrupt, and would actually become so if its depositors all woke up to the fact that the money they believe to be available on demand is actually not there.(99) If the bridge builder may act on estimates of the small fraction of citizens who will use the bridge at any one time, why may not a banker likewise estimate what percentage of his deposits will be redeemed at any one time. (99). The important point is that fractional reserve banks are sitting ducks, and are always subject to contraction. When the banks’ state of inherent bankruptcy is discovered, for example, people will tend to cash in their deposits, and the contractionary, deflationary pressure could be severe. (102) The greater the inflation, the more the banks will be sitting ducks, and the more likely will there be a subsequent credit contraction touching off liquidation of credit and investments, bankruptcies, and deflationary price declines. (103) The buildup of trust is a prerequisite for any bank to be able to function, and it takes a long record of prompt payment and there-fore of noninflationary banking, for that trust to develop. (111) if there are only a few banks in a country, the limits on inflation will be increasingly relaxed, and there will be more room for inflation, and for a subsequent business cycle of contraction, deflation, and bank failures following an inflationary boom.(119) Government fiat paper has replaced com-modity money, and central banking has taken the place of free banking. Hence our chronic, permanent inflation problem, a problem which, if unchecked, is bound to accelerate eventually into the fearful destruction of the currency known as runaway inflation. (176)

1 Channeling savings to productive loans 2 Depositing gold in a warehouse and using warehouse receipts as surrogate for gold (gold certificates / money). Often, it is the depositor who pays the bank for the service of safeguarding his valuables. Finally, the shops began to issue and hand out more printed receipts than they had on deposit; (91)

• • •

In May 1696, the English government simply allowed the Bank of England to “suspend specie payment”—that is, to refuse to pay its contractual obligations of redeeming its notes in gold—yet to continue in operation, issuing notes and enforcing payments upon its own debtors. (180) Scotland enjoyed a developing, freely competitive banking system from 1727 to 1845. During that period, Scottish bank notes were never legal tender, yet they circulated freely through-out the country (184). Scottish banking, in contrast to English, was notably freer of bank failures, and performed much better and more stably during bank crises and economic contractions (185). The first commercial bank in the United States was also designed to be the first central bank (1781) (191). A crucial aspect of the free banking model is that the moment a bank cannot pay its notes or deposits in specie, it must declare bankruptcy and close up shop. (197) (...207) Conclusion (247) Historical overview up to 1971 (248-252): Fed established 1913, Boom (1920), to be followed by bust (1929), distrust, redemption in money and gold. The Fed tried to inflate, purchased and loaned to the banks. Interest went down and distrust of the banks became common. Excessive reserves were to be piled up. Roosevelt took the US-economy (domestically) off the gold standard (1933). The US$ was debased. US-citizens was forbidden to own gold, which has been confiscated and stored in Fort Knox. Massive government intervention prolonged the recession, which mutated to a chronic debilitating depression, including a inflationary boom of 1933–37 within a depression (→ “stagflations”). Worried about excess reserves piling up in the banks, the Fed suddenly doubled reserve requirements in 1937, precipitating the recession-within-a-depression of 1937–38. During the depression a currency and economic period of war started, in which the political lineup followed the economic lineup (249). After the war the Bretton Woods system was to be installed. US$ started to be piled up outside the USA. During the 1950 and 1960s, Germany, France and Switzerland switched to hard money politics and redeemed $ into gold. In 1971 President Nixon abandoned the gold standard. Since 1971 government and Fed have unlimited power to inflate. → greatest sustained inflationary surge in U.S. History. The market is always more clever than government regulators (256). December 31, 1981 the Fed’s total of gold certificates was $11.15 billion, which at a rate of 14.6:1 had been pyramided to $162.74 billion. On top of that, however, the banking system had created a money supply totaling $444.8 billion of M-1 for that date, a pyramiding of 2.73:1 on top of the monetary base, or, an ultimate pyramiding of 38.9:1 on top of the Fed’s stock of gold (261). Appendix: The Myth of free “Freebanking” in Scotland (269)

• •

• •

Sign up to vote on this title
UsefulNot useful