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1
Ludwig von Mises, Human Action: A Treatise on Economics (Auburn, AL: The
Ludwig von Mises Institute, 1998).
2
A good question put forth by Clarence B. Carson, Basic Economics (Phenix City, AL:
American Textbook Committee, 2003).
3
Murray Rothbard, The Meaning of Revolution, Libertarian Forum, Vol. I, No. VII,
July 1, 1969, p. 1. Available at: http://mises.org/journals/lf/1969/1969_07_01.pdf.
Accessed June 1, 2010.
4
Randall W. Forsyth, Ignoring the Austrians Got Us In This Mess, Barrons, March
2009.
5
There are many other organizations and think tanks in the United states dedicated to
free market economics, though not necessarily in the tradition of the Austrian School.
6
Henry Hazlitt, quoted in Fifteen Great Austrian Economists (Auburn, AL: The
Ludwig von Mises Institute, 1999), pp. 178-179.
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1
Frank Chodorov, The Rise & Fall of Society (Auburn, AL: The Ludwig von Mises
Institute, 2007), p. 153.
2
Chodorov, The Rise & Fall of Society, p. 8.
3
Murray Rothbard, The Case Against the Fed (Auburn, AL: The Ludwig von Mises
Institute, 1994), p. 3. Available at: http://mises.org/books/fed.pdf. Accessed June 2,
2010.
4
John Maynard Keynes, The Economic Consequences of the Peace (1919), pp. 235-
236. Available at: http://www.gutenberg.org/etext/15776. Accessed June 2, 2010.
5
Henry Hazlitt, Thinking as a Science (New York: E. P. Dutton & Co., 1920), p. 244.
Available at: http://mises.org/books/thinking.pdf. Accessed June 2, 2010.
6
Frederic Bastiat, The Law (Irvington-on-Hudson, NY: The Foundation for Economic
Education, 2004), p. 5.
7
James Madison, The Federalist No. 51 (1788). Available at:
http://www.constitution.org/fed/federa51.htm. Accessed June 2, 2010.
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#
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########################################################
1
Ludwig von Mises, Human Action (Auburn, AL: The Ludwig von Mises Institute,
1998).
2
Murray Rothbard, Man, Economy, and State (Auburn, AL: The Ludwig von Mises
Institute, 2004), pp. 4-5, some emphasis removed.
3
Rothbard, Man, Economy, and State, p. 47.
4
Rothbard, Man, Economy, and State, p. 169.
5
Clarence B. Carson, Basic Economics (Phenix City, AL: American Textbook
Committee, 2003), p. 23.
6
Carson, Basic Economics, p. 21.
7
Paul Cleveland, Government: The Good, the Bad, and the Ugly, The Journal of
Private Enterprise, 1997, pp. 81-99.
8
Adam Smith, An Inquiry Into the Nature and Causes of the Wealth of Nations (1776),
Book IV, Chapter 2.
9
Cleveland, Government: The Good, the Bad, and the Ugly.
10
Mises, Human Action, p. 854.
!!" !"#$%&'()*'+,-'
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"
 Chapter 4!
Losing Our Spirit

The most efficient organization in the

world is not any group of people but a
single person. A normal person can
conceive a plan, figure out how to carry
it out, and communicate the orders to
do the task to his faculties instantly,
with minimum likelihood they will be
misinterpreted Moreover, an
individual who owns his own material,
has put up the investment for an
undertaking, and stands to gain
whatever profits arise from the
enterprise, must have the greatest
incentive to do the job well.
Clarence B. Carson1
#
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The term entrepreneur is derived from the French word which
means a person who organizes and manages a business undertaking,
assuming the risk for the sake of profit. More specifically, his role is
 !"#$%&'()*'+,$*$-' !N#
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!"
"
that of the individual who brings together the various means of
production to their final useful end. In essence he takes the elements of
production which are land, labor and capital and mixes them in such a
way that a product or service results. The entrepreneur can be a great
industrialist or he can be a farmer operating on a parcel of land.
One thing is certain: producing a product or service is not for the
faint of heart. The endeavor is filled with uncertainty, beginning first
with the simple fact that the product or service may not sell! The idea of
having to gauge wants and needs from infinite human desires is all
calculated guess work! The quantities, categories, styles, size, weight
an endless variety of considerations like these, can easily be
overestimated. Plus, undertaking production may be on borrowed money
or credit and interest rates may rise. What about competition? All of
these factors are uncertainties. Obviously, one prominent characteristic
of the entrepreneur is that of risk taker. Without question he is an
individual who operates one step away from total failure, a lifestyle not
for everyone in society. To the outsider the entrepreneur appears to be a
person of great independence with power to wield in an organization. In
reality the entrepreneur is at all times keenly aware of the perilous risks
he must take in making his decisions. As Rothbard explains:

The entrepreneur is not creating uncertainties for the fun of it. On the
contrary, he tries to reduce them as much as possible. The
uncertainties he confronts are already inherent in the market
"4# !"#$%&'()*'+,$*$-'
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"
situation, indeed in the nature of human action; someone must deal
with them, and he is the most skilled or willing candidate.2
'''''''''''''''''''''''''''''''''''''''''''''''''"
The Market

The entrepreneurs arena is the market place. Anywhere two or

more people meet to engage in buying and selling is a market.
Economists refer to the market as a concept, knowing that markets
exist everywhere in great varieties and numbers, with things common to
all. The varieties and kinds of products and services in a nation such as
ours are complex and extensive. It boggles the mind to gauge the
demand for such products and services against existing or non-existing
supplies.
And what about setting prices for all these goods and services?
Who or what determines price? Certainly, the cost of production will
play an important role in pricing, but since people acting in the market
tend to buy the highest quality goods at the lowest prices possible, cost
of production is always subordinated to supply and demand. In effect,
cost of production is irrelevant to the buyer.
Another factor to consider, is that all markets will invariably
have competition. A successful product or service will quickly have
many imitators. Competitors can run away with much needed sales! This
phenomenon is most clearly seen in fads, trends, and styles that can
create windfall profits for some producers while completely destroying
others. An entrepreneur enters this arena and carefully calculates the
 !"#$%&'()*'+,$*$-' "O#
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"
pros and cons of his planned innovation. It is the action he takes that
starts the whole ball rolling. It is a most courageous undertaking. The
environment is filled with uncertainty. Yet, this is what he does and
society reaps the rewards.
All things being equal, the unhampered market has always been
seen by classical theorists as a mighty and efficient instrument of social
order. For example: with regards to prices, the market itself eventually
dictates the going price because a price in a free market is the amount
a willing seller will take and willing buyer will pay. In other words,
prices are arrived at by agreement between buyer and seller. Even the
simplest purchase involves an unspoken agreement. This market price is
the result of the interplay of a changing supply and demand because
these elements are dynamic. Nothing in the free market stands still for
long. And as far as competition goes, it and it alone is the stimulant to
market efficiency, both in price and quality. Competition keeps
producers from charging exorbitant prices. It is actually the friend of the
consumer. Therefore, in what can only be explained as a true marvel, the
free and unhampered market operates like an invisible hand, as Adam
Smith described it, or in Rothbards description:

[T]he free marketcreates a delicate and even awe-inspiring

mechanism of harmony, adjustment, and precision in allocating
productive resources, deciding upon prices, and gently but swiftly
guiding the economic system toward the greatest possible
satisfaction of the desires of all the consumers.3
"P# !"#$%&'()*'+,$*$-'
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"
"#$%&'()*+(&*)"
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Every entrepreneur invests in a process of production because he
expects to make a profit; however, it is an error to think of the economy
in which he operates as being made up of only profits. In reality it is a
profit and loss economy. A loss occurs when an entrepreneur has made
poor judgments in estimating his future prices and sales. He understands
that a free market rewards its efficient entrepreneurs and penalizes its
inefficient ones. His goal is to be efficient; however, his biggest problem
is that profit and losses are intertwined with the going interest returns. It
is this rate of interest, especially when artificially manipulated, which
ultimately creates the greatest threat to his success. This process of
artificial manipulation is hidden. He does not see it coming. In effect he
is tricked! The results, of course, are always disastrousbusiness losses,
business failure or bankruptcy. For society at large the results are
massive unemployment, recessions, depressions and the dangerous
possibility of a complete collapse of the monetary system. As Austrian
economist Hans Sennholz writes:

Inflation and credit expansion always precipitates business

maladjustments and malinvestments that must later be liquidated.
The expansion artificially reduces and thus falsifies interest rates,
and thereby misguides businessmen in their investment decisions. In
the belief that declining rates indicate growing supplies of capital
savings, they embark upon new production projects. The creation of
 !"#$%&'()*'+,$*$-' "3#
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"
money gives rise to an economic boom. It causes prices to rise,
especially prices of capital goods used for business expansion. But
these prices constitute business costs. They soar until business is no
longer profitable, at which time the decline begins. In order to
prolong the boom, the monetary authorities may continue to inject
new money until finally frightened by the prospects of a runaway
inflation. The boom that was built on the quicksand of inflation then
comes to a sudden end.4
"
,#-%*#$!./0+#*%/&!

It is difficult for entrepreneurs to put enough money aside to

invest in even a small business enterprise. In this century, entrepreneurs
have learned to organize in order to raise enough money to go into
business. Aside from borrowing, the most common way is partnering
with others who have saved money to put up for capital. However, the
greatest limitation to partnerships is that there is no shield against
creditors in case of business failure. The individual partners can be held
individually liable for all debts of the partnership. Consequently,
partnerships are most often very small enterprises. In fact most
businesses in the United States are small: The latest figures from the
U.S. Census Bureau list 25,409,525 businesses in the United States, of
which only 5,885,784 have one or more employees. All the others do not
report a payroll.
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There is a strange phenomenon with regards to corporations,
securities and the stock market which merits discussion here: Americans
hold a belief that the stock market is the driving force behind
corporations and American industry. Many believe declining stock
prices on the New York Stock Exchange or NASDAQ and other
exchanges signifies that the entire national economy is declining, and
that rising stock prices indicate that prosperity is ahead. This is indeed a
strange reaction to the stock market. Most Americans do not feel that
way about other products and services when they go up or down in
price. Why should stocks be any different? Clearly it is the manner the
stock market news is reported by the media, however, the major culprit
is misinformation about the stock market and how it functions.
The New York Stock Exchange, the NASDAQ and the several
other stock exchanges in the United Sates, including those abroad, are
just that, exchanges. As Professor Carson notes, the entrepreneur would
more properly refer to it as the used stock market because that is all that
is offered for sale, used stock! New stock issues that are sold in return
 !"#$%&'()*'+,$*$-' ""#
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"
for money are not offered on these types of exchanges. Actual wealth or
capital is transferred to the corporation at the time of the initial public
offering of the stock, or IPO. This is a one-time event. It represents the
true stock market for the corporation, occurring whenever IPOs are
offered to the public for sale. Some financial firms specialize in these
special securities, but the point here is that the stock exchanges, as in the
New York Stock Exchange or the NASDAQ, for all the daily trading
they do, provide no capital whatsoever for American industry.
Also, individuals who buy and sell stocks are frequently referred
to as investors. This too, can be confusing. We must not forget that
these individuals are only buying and trading shares. Although they may
be purchasing a return in dividends, their real motivation to buy a stock
is for the opportunity to sell at a profit when prices rise. In effect, they
are really speculators. They are primarily focusing on the exchange
value of the commodity. This is why purchasers of stocks only want bull
markets. On the stock exchanges, speculation is rewarded by the rising
price of a stock. When prices fall, all those who bet on the increase will
lose. It is this anticipatory element that defines speculation.
For example: On the famous Black Monday, October 19,
1987, the stock market was shocked by the loss of $500 billion in one
day. In reality this colossal amount of wealth simply vanished into thin
air because it existed only in the quoted price of the stocks on the stock
exchange. Factories and computers didnt disappear on Black Monday;
doctors and engineers didnt forget their skills. All that happened on
"A# !"#$%&'()*'+,$*$-'
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"
Black Monday was that the prices of many corporations shares of stock
plummeted.
Do not misunderstand; stock speculators do serve a social
purpose. By selling (or shorting) overvalued shares and buying
undervalued ones, speculators help correct mispriced stocks. It is
important for stocks to have the right market price, because the
stockholders are the actual owners of the corporation and are ultimately
responsible for its fate. With accurate share prices, these owners
understand just how socially valuable their property is, and will have the
incentive to exercise the appropriate amount of oversight.5
However, important as stock speculation is, it is not an activity
for the average household, and certainly should not be confused with
old-fashioned saving. The typical American has been conditioned to
believe that investing in the stock market is the same thing as saving
for retirement. Americans have been lulled into a false sense of
security, in which investing in tech stocks is admittedly classified as
speculative and risky, while investing in the whole S&P 500 is
considered the epitome of caution. But even people with a diversified
portfolio can lose 40 percent in a single year, as recent events have
shown!
Additionally, we are pointing to the fact that stock trading can be
a highly emotionally charged activity. False signals are frequently sent
into the economy by either overvaluing or undervaluing particular
stocks. Naturally, when prices start to rise, trading tends to become
 !"#$%&'()*'+,$*$-' "N#
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"
irrational. Predictably, people panic when prices fall. Much of the
liquidity crisis created during the Crash of 1929 was that the irrational
thinking created by skyrocketing prices made a lot of stock speculators
borrow on credit (margin), or from other lenders, in order to buy stocks.
Buying stocks on credit has the potential to achieve greater gains,
however, as prices plummeted, speculators who did not get out in time
scrambled for cash to meet their obligations. Of course the cash was
nowhere to be found and huge losses were incurred by many.
A similar situation occurred during the recent inflation of prices
in the housing market. Many borrowed from their home equity on home
prices that were overinflated in order to buy even more real estate. Great
losses were suffered by those who did not flip those purchases fast
enough before market prices on homes crashed.
Erratic movement in the stock market is prompted by other
outside forces which we know to be artificial bubbles in the economy,
caused by monetary policy. Austrian economists refer to them as boom
and bust business cycles. Nevertheless, one still wonders why people
speculate on stocks? What is the attraction? While it is true that some
professional traders have the ability to profit on prices going up or down
and can exit the market quickly, not everyone has this advantage.
Furthermore, it is still speculation. No one can predict with accuracy
each and every time. Many have discovered too late that speculation in
stocks can be an extremely risky endeavor especially if ones entire
lifes savings are vested in it.
A4# !"#$%&'()*'+,$*$-'
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"
Unfortunately this has become a large problem for many middle
class Americans. Huge losses have been suffered by individuals who
unknowingly were driven into the stock market via their employment
benefits, disguised as their retirement savings. These good people, who
for the most part are living from paycheck to paycheck, are taking great
risks with what they believe is their retirement savings. Individual
retirement accounts, the 401(k), 403(b), and other government
sponsored programs, all have their underlying assets invested in the
stock market mostly through mutual funds. Furthermore, these allocated
funds are virtually untouchable till age 59! unless one is willing to
incur a 10% penalty, plus pay the federal income tax which has only
been deferred.
All this has presented an unpleasant dilemma for Americans and
their dreams for retirement. To put this in perspective, we should not
overlook the fact that the median income for a working couple in the
United States is only $47,500! That means that half of this nations
working couples make less than this! Only 2% of the entire nations
population makes an income larger than $355,000. This means that the
margin for financial planning error for virtually 98% of Americans is nil.
Any type of financial setback or losses in the market or anywhere else
for that matter can be financially catastrophic. Somehow the definition
of real savings has been obscured.
There is absolutely no way to retire from work without first
having stockpiled a substantial amount of real savings. For an average
 !"#$%&'()*'+,$*$-' AO#
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"
annual retirement income of $60,000 to $100,000, this means a stockpile
of several million inflation-plagued dollars! It simply cannot be done by
the average citizen in todays economic environment. As it now stands,
most Americans live day to day buried in a mountain of debt and with an
ever rising cost of living. Most of that cost is taxes, not only direct taxes,
but indirect taxes caused by inflation. Americans know they need to
save and want to save, they simply cannot. Unless they can become fully
informed of the real source of their money problem, they will not be able
to solve this dilemma. Mises explains:

Everything that is done by a government against the

purchasing power of the monetary unit is, under present conditions,
done against the middle classes and the working classes of the
population. Only these people dont know it. And this is the
tragedy.
These people can only provide for their old age practically
by either entering into labor contracts that give them a pension for
their later age, or they can save a part of their income and invest it in
such a way that they can use in later years. These investments can
either be either simple savings deposits with banks, or they can be
life insurance policies or bonds...6

There is a different position to consider when analyzing the middle class

employee to that of the business owner. Mises clarifies this distinction:

The man who owns an agricultural estate, the producer of

oil or foods, or the businessman who owns a factory is in a different
AP# !"#$%&'()*'+,$*$-'
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"
position. When the prices of the products that he is selling go up on
account of the inflation, he will not be hurt in the same way in which
other people are hurt by the inflation. The owner of common stock
will see that, by and large, most of this common stock is going up in
price to the same degree as the prices of commodities are going up
on account of the inflation.
But it is different for people with fixed incomes. The man,
who retired 25 years ago with a yearly pension, let us say of $3,000,
was by and large in a good situation or was believed to be in a good
situation. But this was at a time when prices were much lower than
they are today.
What I want to point out is that the greatest problem today
is precisely this, although the people dont realize it. The danger is
due to the fact that people consider inflation as something that hurts
other people. They realize very well that they too have to suffer
because the prices of the commodities they are buying go up
continually, but they dont realize fully that the greatest danger for
them is precisely the progress of inflation and the effect it will have
on the value of their savings.
We should not forget that over and above the
consequences of destroying a countrys monetary standard, there is
the danger that depriving the masses of their savings will make them
desperate.7
 !"#$%&'()*'+,$*$-' A3#
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In addition to this problem, is the fact that life has a way of

completely derailing the best and most disciplined savings plan. For
example, the fear of losing ones employment is a constant threat to
individuals these days, particularly during recessionary times. An
accident or illness that incapacitates the breadwinner for extended
periods of time can deplete savings and limit income. Since statistics
show that Americans can continue to pay living expenses for no more
than three months without income, bankruptcy is many times inevitable
under any one of these circumstances. The same is true in the case of
divorce or other form of lawsuit. What about the untimely death of the
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bread winner? Yes, life, as we all know, is fragile and filled with
uncertainties. When these life events are coupled with severe money
problems, is there any wonder why Americans are forced to turn to the
government as the ultimate care giver?

Finally, the current housing crisis has added insult to injury. The
American home, one of the most sought after dreams and storehouse of
savings for all Americans, has been completely undermined. Americans
are reaching levels of complete exasperation, a sense of total defeat and
hopelessness.
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########################################################
1
Clarence B. Carson, Basic Economics (Phenix City, AL: American Textbook
Committee, 2003), p. 185.
2
Murray Rothbard, Man, Economy, and State (Auburn, AL: The Ludwig von Mises
Institute, 2004), p. 555.
3
Rothbard, Man, Economy, and State, p. 1024.
4
Hans Sennholz, The Great Depression, reprinted from a Freeman article from
October 1969, posted June 24, 2009 at: http://mises.org/daily/3515. Accessed June 3,
2010.
5
See Robert P. Murphys The Social Function of Stock Speculators, November 22,
2006, at: http://mises.org/daily/2381. Accessed June 2, 2010.
6
Ludwig von Mises, Inflation Destroys Savings, excerpted from a speech given circa
1960s, posted May 18, 2010 at: http://mises.org/daily/4408. Accessed June 3, 2010.
7
Mises, Inflation Destroys Savings.
8
Carson, Basic Economics, p. 263.
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!

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 Chapter 5#
Money

Money is such a routine part of everyday

living that its existence and acceptance
ordinarily are taken for granted. A user
may sense that money must come into
being either automatically as a result of
economic activity or as an outgrowth of
some government operation. But just
how this happens all too often remains a
mystery.
Federal Reserve Bank of Chicago1
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What is the right quantity of money?

As we well know, there has been an astronomical increase of the

money supply by the Federal Reserve Bank during the last four decades,
especially in 2008. The general public innately knows that all this new
money creation is not a good thing for society simply because the more
we have of something the less it is worth. Before pondering the question
of the best or the optimal amount of money, try asking these
questions: What should the optimum amount of canned peas be in
society? Or: What is the optimum amount of fresh turkeys? Or:
watermelons? Or: cattle? or whatever commodity comes to mind. The
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point is that the more consumable goods we have in society the better it
is for everyone. In fact, more goods in the market help bring down
prices and our standard of living goes up, because there is more to
consume and enjoy per capita. However, this is not the case with more
money. An increase of money provides no social benefit whatsoever.
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#
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1
Federal Reserve Bank of Chicago, Modern Money Mechanics: A Workbook on Bank
Reserves and Deposit Expansion (1994), p. 1. Available at:
http://www.rayservers.com/images/ModernMoneyMechanics.pdf. Accessed June 3,
2010.
2
G. Edward Griffin, The Creature From Jekyll Island (Westlake Village, CA:
American Media, 2002), p. 315.
3
G. Edward Griffin, The Creature From Jekyll Island, pp. 317-318.
4
Quoted in Griffin, p. 323.
5
Quoted in Griffin, p. 329.
6
Frederic Bastiat, The Law (1850), available at: http://bastiat.org/en/the_law.html.
Accessed June 3, 2010.
 Chapter 6$
Deposit Banking

The actual process of money

creation takes place primarily in
banks.[B]anks can build up
deposits by increasing loans and
investments...This unique attribute of
the banking business was discovered
many centuries ago. It started with
goldsmiths.
%!"#"$%&'(")"$*"'+%,-'./'0123%4.5''
'

T he major control [of changes in the quantity of

' money] rests with the central bank. The actual
process of money creation takes place primarily in banks.2 This
statement, made in a 1994 Federal Reserve publication, can be
immensely helpful in dealing with one of the more difficult hurdles in
this intellectual debate. This hurdle has to do with the fact that some of
us reading this book are in the banking profession, or have friends and
family who are bankers. If this happens to be the case, there will be a
natural rising of our defenses not only to protect ourselves, but those
close to us that make an honest living being bankers. This is quite
understandable. Nearly everybody can appreciate this reaction regardless

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of his or her own profession. And most of us do have friends who are
bankers. We are also all aware of the criticism many times expressed
toward the legal professional, the medical doctor, the accountant, broker,
minister. No one is immune. Nevertheless, the main thing about this
statement made by the Federal Reserve is that it allows all of us,
regardless of profession or personal views, to confront the undeniable
fact it states: In our current financial system, money is ultimately created
and controlled by the Federal Reserve. It is a seat of power, set apart
from all other powers in society. It creates and controls what we use as
money, utilizing a system involving thousands of our commercial banks,
making this system unique.
However, what we must continually keep in mind is that banking
is a very old profession dating back centuries. Even the system we speak
of, the Federal Reserve System, was established almost 100 years ago.
All modern-day bankers, in fact, all citizens have been born into this
present system. Indeed, many bank professionals have probably never
even heard the type of analysis we present in this book. So we certainly
are not implying that the rank and file bank employee is consciously
participating in a sinister plot to defraud the general public.
At the same time, we must not be nave. As we demonstrate in
this book, the present financial system allows commercial banks to
literally create money out of thin air, for the benefit of their owners and
their major customers. This system did not fall out of the sky. It was
 !"#$%&'()*+,&+-( !!!$
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shaped and at times literally designed by the very people who stood to
profit from its creation.
The point of the present book is not to level accusations against
particular individuals. We are instead trying to alert the American public
to the fact that our current monetary and banking system rests on sand
(or more accurately, on paper). The primary purpose for studying the
path by which we arrived, is to demonstrate that it doesnt have to be
this way. Modern Americansincluding the vast majority of those who
currently work in the banking sectorhave little reason to suspect that
life would be possible without a central bank exercising complete
dominance over the nations money. For many people, the key to this
realization is learning that powerful groups benefited from morphing our
system into its present form, a form that would be unrecognizable to
Americans from the early days of the Republic.

The Mystery of Banking

The Federal Reserve and its banking system have always been
shrouded in mystery. In order to better understand this mystery it will
serve us well to continue to use a publication from the Federal Reserve
as our guide, in addition to Murray Rothbards historical account from
his book The Mystery of Banking.
We will begin our study with the following three selections from
a 1994 publication distributed by the Federal Reserve Bank of Chicago:
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Money is such a routine part of everyday living that its existence and
acceptance ordinarily are taken for granted. A user may sense that
money must come into being either automatically as a result of
economic activity or as an outgrowth of some government operation.
But just how this happens all too often remains a mystery.

The major control [of changes in the quantity of money] rests with
the central bank. The actual process of money creation takes place
primarily in banks.[B]anks can build up deposits by increasing
loans and investments...This unique attribute of the banking business
was discovered many centuries ago. It started with goldsmiths.

[B]ankers discovered that they could make loans merely by giving
their promises to pay, or bank notes, to borrowers. In this way, banks
began to create money. More notes could be issued than the gold and
coin on hand because only a portion of the notes outstanding would
be presented for payment at any one time.Transaction deposits are
the modern counterpart of bank notes. It was a small step from
printing notes to making book entries crediting deposits of
borrowers, which the borrowers in turn could spend by writing
checks, thereby printing their own money.3

We can all benefit by first acknowledging that the concept of

banking can be confusing. For example, one view of a bank is simply as
an institution that makes loans. By studying historical records we learn
that the earliest bankers were merchants who extended credit to their
customers and charged a fee for the delay of payment. This fee or
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interest was the price on time. This type of lending became a good
business practice where transactions of this sort multiplied and were
conducted outside in the market place with the merchants and their
customers sitting on bankasthe Italian word for benches, or banks.
One family in particular, in the 14th century, the Medici family, became
so successful at this type of business that they are regarded as the first
institutionalized bankers. But for our purposes, the important point is
that this type of banking was non-inflationary. In other words, the
business did not counterfeit or increase the money supply. It was simply
a legal and very profitable lending business.
Most people think of banks or bankers as businesspeople who
borrow money from one set of people and lend that money to another
group. These bankers charge an interest differential, or at least this is the
perception. This form of lending is known as loan banking. For our
purposes, the important distinction about loan banking is that it is non-
inflationary.
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Transaction deposits are the modern counterpart of bank notes. It was
a small step from printing notes to making book entries crediting
deposits of borrowers, which the borrowers in turn could spend by
writing checks, thereby printing their own money.

It would take many years of building a reputation of integrity

before a practice of counterfeiting warehouse receipts could actually be
done without being detected. Once the crime of counterfeiting has begun
there is the worry of being caught. The warehouseman could obviously
be accused of embezzlement and sent to jail. To prevent this from
happening it would be of utmost importance to hire attorneys and
financial experts to convince the courts that what the warehouseman was
doing was not a crime, but merely entrepreneurial activities. To make
this argument palatable, the courts would have to be convinced that the
deposits into the warehouse were not bailment contracts, but are actually
debt contracts.
At the time deposit banking was developing, bailment law had
not developed sufficiently to overcome the growth of deposit banking.
The British courts ruled in favor of deposit banking defining the money
deposit as a debt contract. These decisions were approved by American
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courts and were ultimately adopted as law. In 1848 the House of Lords
ruled in the case of Foley v. Hill and Others:

The money placed in the custody of a banker is, to all intents and
purposes, the money of the banker, to do with as he pleases; he is
guilty of no breach of trust in employing it; he is not answerable to
the principal if he puts it into jeopardy, if he engages in hazardous
speculation; he is not bound to keep it or deal with it as the property
of his principal; but he is, of course, answerable for the amount,
because he has contracted.4

This decision that we have to this day in the United States

completely overlooks the fact that in the case of a bank run where all
depositors demanded their money all at once, the banker could not
possibly live up to his contract. Furthermore, it also authorizes a banking
system structured on deceiving the public.

The Central Bank

In order to go a step further and obtain a full grasp of what we

have explained thus far, the reader must imagine being in the deposit
banking business. First of all, suppose you have been in business many
years in the community conducting an honest 100% reserve warehouse
business where all property was promptly returned to customers upon
presentation of their warehouse receipts. You have one million dollars in
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gold on deposit in the warehouse, but now decide you are going to make
a killing in this business and counterfeit five million dollars more in
warehouse receipts. You will then have five times more in warehouse
receipts than gold on deposit. As long as these warehouse receipts (bank
notes) trade as gold among your loyal clientele you are safe and will
make a lot of money.

But what if all of your customers decided to demand their gold

all at the same time, in effect a run on your bank? This event would not
only expose your fraud, but would be unstoppable. It would certainly
bankrupt you, law or no law!
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Apart from the bank run, there is another powerful limit on your
counterfeiting scheme. What if one of your customers passed one of
your fake (i.e. non-backed) receipts to a non-bank customer, who in turn
presented it to another competing bank for redemption? The competing
bank would then present the ticket to you in the course of normal inter-
bank clearing operations. Consequently, redemption is a real problem
especially if that one fake warehouse receipt happens to be a two million
dollar receipt. Once again, your chicanery would have led to your ruin.

Only one force can overcome this limitan agreement!

Developing an agreement with one or two competing banks whereby
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counterfeiting could be done together would be relatively easy to
accomplish. But in a society with thousands of banks it would not be
possible. To accomplish that feat, a central bank is needed.

Historically, the central bank has always had two major roles: (1)
To help finance the governments deficits, and (2) to form an alliance of
the private banks in a society in order to remove the two great market
limits of the bank run and redemption.
A significant fact is that the original central bank, the Bank of
England in the late 17th century, began as a crooked deal between a near
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bankrupt government and a corrupt group of financial promoters. Not
surprising since governments are always broke and short of money!
Over the centuries, other large nations eventually copied this
institution from England. Our United States was the last major nation to
establish a permanent central bank, adopting the Federal Reserve System
in 1913, which was explicitly modeled on the central banks that had
developed overseas. Our money and our society have never been the
same.
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1
Federal Reserve Bank of Chicago, Modern Money Mechanics: A Workbook on Bank
Reserves and Deposit Expansion (1994), p. 3. Available at:
http://www.rayservers.com/images/ModernMoneyMechanics.pdf. Accessed June 3,
2010.
2
Modern Money Mechanics, p. 3.
3
Modern Money Mechanics, pp. 1 and 3.
4
Murray Rothbard, The Case Against the Fed (Auburn, AL: The Ludwig von Mises
Institute, 1994), p. 42.
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1
Henry Hazlitt, What You Should Know About Inflation (New York: D. Van Nostrand
Company, Inc., 1965), p. 2.
2
Ludwig von Mises, Human Action (Auburn, AL: The Ludwig von Mises Institute,
1998), pp. 761-763.
3
See Robert P. Murphy, The Costs of Government, at:
http://www.econlib.org/library/Columns/y2010/Murphygovernmentcosts.html.
Accessed May 31, 2010. Government statisticians count government expenditures as
part of Gross Domestic Product, and so the ratio of government spending to the size of
the economy is artificially deflated. But once we recognize that many of the
governments services arent really worth what the politicians spend on them, the
true fraction of real economic output seized by the government becomes much larger.
4
The Keynes quotation is listed in a Paul Krugman blog post, Bush is right about
something, February 19, 2008, at:
http://krugman.blogs.nytimes.com/2008/02/19/bush-is-right-about-something/.
Accessed June 3, 2010.
5
For a full comparison of the Austrian and Keynesian theories, and their ability to
explain historical episodes, see Robert P. Murphys The Politically Incorrect Guide to
the Great Depression and the New Deal (Washington, D.C.: Regnery, 2009).
6
In practice, the Federal Reserve doesnt directly buy new bonds auctioned by the
Treasury. Instead, private dealers buy the new bonds, and then resell them to the Fed.
7
For a fuller description of this process, see Robert P. Murphy, The Fed as Giant
Counterfeiter, at: http://mises.org/daily/4029. Accessed May 31, 2010.
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1
Murray Rothbard, The Mystery of Banking (Auburn, AL: The Ludwig von Mises
Institute, 2008), p. 98.
2
For an excellent analysis of the changing composition of the Feds balance sheet over
time, see Catherine Rampells NYT blog post, Fed Balance Sheet Expansion: Some
Takeaways, May 7, 2009, at: http://economix.blogs.nytimes.com/2009/05/07/fed-
balance-sheet-expansion-some-takeaways/. Accessed June 3, 2010.
3
The reason we have posted a slightly outdated chartin which the excess reserves
had not yet topped $800 billionis that the St. Louis Fed truncated its data history
soon after the chart in the text was captured. Consequently, if one tries to generate the
most recent chart of excess reserves, it will only go back to the 1959, rather than our
chart which goes back to the 1920s.
4
The St. Louis Federal Reserve lists these statistics at:
http://research.stlouisfed.org/fred2/data/M1NS.txt. Accessed June 3, 2010.
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1
Friedrich A. Hayek (ed. W. W. Bartley III), The Fatal Conceit: The Errors of
Socialism (Chicago: The University of Chicago Press, 1988), p. 6.
2
Hayek, The Fatal Conceit, p. 7.
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1
Frederic Bastiat, Property and Law (1848), at:
http://bastiat.org/en/property_law.html. Accessed June 4, 2010.
2
Hans Hoppe, A Theory of Socialism and Capitalism (U.S.A.: Kluwer Academic
Publishers, 1990), p. 18. Available at: http://mises.org/books/Socialismcapitalism.pdf.
Accessed May 25, 2010.
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1
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1994), pp. 261-262.
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1
Ludwig von Mises, Bureaucracy, p. 53, available at:
http://mises.org/etexts/mises/bureaucracy/section1.asp. Accessed June 4, 2010.
2
Friedrich A. Hayek, The Use of Knowledge in Society (1945), American Economic
Review, XXXV, No. 4, pp. 519-530, available at:
http://www.econlib.org/library/Essays/hykKnw1.html. Accessed June 4, 2010.
3
Hayek, Foreword to Ludwig von Mises, Socialism (Indianapolis: Liberty Fund,
1981), pp. xix and xxi.
4
Mises, Bureaucracy, p. 226.
5
Mises, Bureaucracy, p. 227.
6
Mises, Human Action (Auburn, AL: The Ludwig von Mises Institute, 1998), p. 696.
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1
Ludwig von Mises, Planning for Freedom, p. 92.
2
Jess Huerta de Soto, Money, Bank Credit, and Economic Cycles (Auburn, AL: The
Ludwig von Mises Institute, 2009), p. 586.
3
Huerta de Soto, footnote 104, pp. 586-587.
4
See for example Robert P. Murphy, The Source of Air-Travel Insecurity,
November 26, 2001, at: http://mises.org/daily/836. Accessed June 1, 2010.
5
Murray Rothbard, For a New Liberty (San Francisco: Fox & Wilkes, 1994), pp. 217-
218.
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1
Ludwig von Mises, Economic Freedom and Interventionism, p. 244.
2
For a very readable introduction, see Robert P. Murphys The Politically Incorrect
Guide to Capitalism (Regnery, 2007).
3
Mises, The Theory of Money and Credit, p. 461.
4
See Hankes calculations at: http://www.cato.org/zimbabwe. Accessed May 20, 2010.
5
G. Edward Griffin, The Creature From Jekyll Island (Westlake Village, CA:
American Media, 2002), pp. 187-188.
6
Quoted in Creature, p. 188.
7
Rothbard, The Case Against the Fed (Auburn, AL: The Ludwig von Mises Institute,
1994), pp. 62-63.
8
Robert P. Murphy, The Politically Incorrect Guide to the Great Depression and the
New Deal (Washington, D.C.: Regnery, 2009).
9
These facts are cited in Murphys book on the Great Depression, though some are
documented in his online article The New Deal Was a Bad Deal, August 10, 2009,
at: http://www.publicsquare.net/article_new-deal-was-a-bad-deal-302.htm. Accessed
June 3, 2010.
10
Herbert Hoover, The Memoirs of Herbert Hoover: The Great Depression, 1929-1941
(New York: The Macmillan Company, 1952), p. 29.
11
Herbert Hoover, quoted in Murray Rothbard, Americas Great Depression, Fifth
Edition (U.S.A.: The Ludwig von Mises Institute, 2008), p. 321.
12
A. C. Miller, quoted in Lionel Robbins, The Great Depression (Auburn, AL: The
Ludwig von Mises Institute, 2007 [1934]), p. 53.
13
John Kenneth Galbraith, quoted in G. Edward Griffin, The Creature From Jekyll
Island, p. 425.
14
Letter from Benjamin Strong, quoted in G. Edward Griffin, The Creature From
Jekyll Island, p. 426.
15
Thomas E. Woods, Jr., Meltdown:A Free-Market Look at Why the Stock Market
Collapsed, the Economy Tanked, and Government Bailouts Will Make Things Worse
(Washington, D.C.: Regnery, 2009), pp. 26-27.
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1
Ludwig von Mises, The Theory of Money and Credit, p. 454.
2
Mises, The Theory of Money and Credit, p. 480.
3
See the Wikipedia entry at: http://en.wikipedia.org/wiki/Gold_reserve. We also
acknowledge that many cynics doubt the Federal Reserves official numbers. An added
benefit of our hypothetical scenario is that it would force the Fed to prove the
authenticity of its reports. (The Fed currently does not submit to outside audits of its
gold holdings.)
4
Ron Paul, End the Fed (New York: Grand Central Publishing, 2009), pp. 202-203.
5
See http://www.federalreserve.gov/releases/h41/current/.
6
Quoted in G. Edward Griffin, The Creature From Jekyll Island (Westlake Village,
CA: American Media, 2002), pp. 352-353.
7
Quoted in Griffin, The Creature From Jekyll Island, pp. 354-355.
8
John Kenneth Galbraith, quoted in Griffin, Creature, p. 351.
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1
R. Nelson Nash, Becoming Your Own Banker, Fifth Edition (Birmingham, AL:
Infinite Banking Concepts, 2008), p. 18.
2
Nash, Becoming Your Own Banker, p. 3.
3
Dwayne Burnell, A Path to Financial Peace of Mind (Bothell, WA:
FinancialBallGame Publishing, 2010).
4
We are simplifying somewhat in this section of the text, in order to introduce the
mechanics of a policy loan. In practice, some insurance companies reduce the dividend
that they pay to a policyholder, based on the size of any outstanding policy loan. (In
other words, if two policyholders had identical whole life policies and cash values, but
one had an outstanding loan while the other did not, some insurance companies would
pay higher dividends to the second policyholder.) The advantages of self-financing
through policy loans are obviously reduced, if doing so slows the internal rate of return
on a policys cash values. However, this slight complication does not change the fact
that the borrower still does much better by obtaining his financing at much lower
interest rates from the insurer, than by turning to a traditional finance company.
5
The psychological motivation is not the only advantage of IBC. Depending on the
specifics, it is possible that the internal rate of return on a whole life policys cash
values are greater than the after-tax yield on bank CDs. Nashs Table 1 (p. 45)
illustrates a plausible scenario in which someone eventually accumulates more wealth
by financing car purchases through IBC, rather than by using a sinking fund involving
bank CDs.
6
Nash, Becoming Your Own Banker, pp. 17-18.
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1
R. Nelson Nash, Becoming Your Own Banker, Fifth Edition (Birmingham, AL:
Infinite Banking Concepts, 2008), p. 77.
2
Cash value in life insurance: Whats it worth to you? from
http://www.insure.com/articles/lifeinsurance/cash-value.html, accessed May 25, 2010.
3
The presentation was given by Scott Bretl, president of The Financial Self Reliance
Group.
4
See Robert Wenzels blog post:
http://www.economicpolicyjournal.com/2010/02/where-did-links-go-that-point-
to.html, accessed May 25, 2010.
5
See Nelson Nash, Tax-Qualified Retirement Plans, Etc. at:
http://www.lewrockwell.com/orig8/nash2.1.1.html, accessed May 25, 2010.
6
Jess Huerta de Soto, Money, Bank Credit, and Economic Cycles (Auburn, AL: The
Ludwig von Mises Institute, 2009), p. 590.
7
Huerta de Soto, Money, Bank Credit, and Economic Cycles, pp. 590-591.
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1
Jess Huerta de Soto, Money, Bank Credit, and Economic Cycles (Auburn, AL: The
Ludwig von Mises Institute, 2009), p. 587.
2
Joe Salerno, Rothbardian Antibank League on the Rise, at:
http://blog.mises.org/11773/rothbardian-antibank-league-on-the-rise/. Accessed May
27, 2010.
3
Percy Greaves, quoted in Huerta de Soto, footnote 106, p. 592. The italics have been
added by de Soto.
4
Huerta de Soto, pp. 594-595.
5
Huerta de Soto, pp. 161-162, italics in original.
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1
Ludwig von Mises, Human Action (Auburn, AL: The Ludwig von Mises Institute,
1998), p. 861.
2
Lara and Murphys respective websites are http://www.usatrustonline.com/ and
http://consultingbyrpm.com/.
3
Robert Higgs, Crisis and Leviathan: Critical Episodes in the Growth of American
Government (U.S.A.: Oxford University Press, 1989).
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