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by Gary North

You have here a unique academic treatise on money and banking, a book which 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.” [footnote: P. G. M. Dickson. The Financial Revolution in

England: A Study in the Development of Public Credit, 1688-1756 (New York: St. Martin’s, 1967);

John Brewer, The Sinews of Power: War, Money and the English State, 1688-1783 (New York: Knopf,


I am happy to see The Mystery of Money available again. I had negotiated with Dr. Rothbard in 1988

to re-publish 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 re-publish this book. It is the only money and banking

textbook I have read which forthrightly identifies the process of central banking as both immoral and

economically destructive. It identifies fractional reserve banking as a form of embezzlement. [footnote: See

Chapter 7.] 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.

Perhaps it 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 Rothbard.

The purchase 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 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.

Ultimately, as Ludwig von Mises showed, this process of central bank credit expansion ends in one of two

ways: (1) the crack-up boom—the destruction of both monetary order and economic productivity in a wave of

mass inflation—or (2) 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’ theoretical insight

to American economic history in his own classic but neglected monograph, America’s Great Depression

(1963). [footnote: The English 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. 233-37. He was the first prominent historian to accept Rothbard’s

thesis.] In The Mystery of Banking, he explains this process by employing traditional analytical categories and


There have 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 which explained the process by

means of traditional textbook categories, and which 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.


Thomas Jefferson, Charles Holt Campbell, Ludwig von Mises

Champions of Hard Money [p. 1]