The Mystery of Banking

266
The Mystery of Banking
Chapter Seventeen.qxp 8/4/2008 11:38 AM Page 266

---

criticism, and then let the banks take their chances like everyone
else. In that case, the new gold price would only have to be high
enough to redeem outfight the existing $131.91 billion in Federal
Reserve notes. The new gold price would then be, not $1,690,
but $500 an ounce. 
There is admittedly a great deal of charm to this position.
Why 
shouldn’t
the banks be open to the winds of a harsh but rig-
orous justice? Why shouldn’t they at last receive their due? But
against this rigor, we have the advantage of starting from Point
Zero, of letting bygones be bygones, and of insuring against a
wracking deflation that would lead to a severe recession and
numerous bankruptcies. For the logic of returning at $500 would
require a 
deflation
of the money supply down to the level of exist-
ing bank reserves. This would be a massive deflationary wringer
indeed, and one wonders whether a policy, equally sound and free
market oriented, which can avoid such a virtual if short-lived eco-
nomic holocaust might not be a more sensible solution. 
Our plan differs markedly from other gold standard plans
that have been put forward in recent years. Among other flaws,
many of them, such as those of Arthur Laffer and Lewis Lehrman,
retain the Federal Reserve System as a monopoly central bank.
Others, such as that of F.A. Hayek, doyen of the Austrian School
of Economics, abandon the gold standard altogether and attempt
to urge private banks to issue their own currencies, with their
own particular names, which the government would allow to
compete with its own money.
9
But such proposals ignore the fact
that the public is now irrevocably used to such currency names as
the dollar, franc, mark, and so on, and are not likely to abandon
the use of such names as their money units. It is vital, then, not
Conclusion
267
9
On the Lehrman, Laffer, and similar plans, see Joseph T. Salerno, “An
Analysis and Critique of Recent Plans to Re-establish the Gold Standard”
(unpublished manuscript, 1982). On Hayek’s plan to “denationalize
money,” see Murray N. Rothbard, “Hayek’s Denationalized Money,” 
The
Libertarian Forum
XV, nos. 5–6 (August 1981–January 1982): 9.
Chapter Seventeen.qxp 8/4/2008 11:38 AM Page 267

---

268
The Mystery of Banking
only to denationalize the issuing of money as well as the stock of
gold, but also to denationalize the dollar, to remove the good old
American dollar from the hands of government and tie it firmly
once again to a unit of weight of gold. Only such a plan as ours
will return, or rather advance, the economy to a truly free market
and noninflationary money, where the monetary unit is solidly
tied to the weight of a commodity produced on the free market.
Only such a plan will totally separate money from the pernicious
and inflationary domination of the State.
Chapter Seventeen.qxp 8/4/2008 11:38 AM Page 268

---

APPENDIX:
T
HE
M
YTH OF
F
REE
B
ANKING IN
S
COTLAND
“F
REE
B
ANKING
” 
IN
S
COTLAND
P
rofessor White’s 
Free Banking in Britain
has already had a
substantial impact on the economics profession. The main
influence has been exerted by one of the book’s major
themes: the “wonderful” results of the system of free banking in
Scotland, a system that allegedly prevailed from 1716 (or 1727)
until suppressed by the Peel Act in 1845.
1
White’s Scottish free-
banking thesis consists of two crucial propositions. The first is
that Scottish banking, in contrast to English, was free during this
era; that while the English banking system was dominated by the
Bank of England, pyramiding their notes and deposits on top of
the liabilities of that central bank, the Scottish system, in stark
contrast, was free of the Bank of England. In White’s words, Scot-
land “rather maintained a system of ‘each tub on its own bottom.’
Each bank held onto its own specie reserves.”
2