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The Mystery of Banking
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XIII. Central Banking in the United States I: The Origins. . 191
1.
The Bank of North America and the First
Bank of the United States. . . . . . . . . . . . . . . . . . . . . 191
2.
The Second Bank of the United States . . . . . . . . . . . . 198
XIV. Central Banking in the United States II:
The 1820s to the Civil War . . . . . . . . . . . . . . . . . . . . . . 207
1.
The Jacksonian Movement and the Bank War . . . . . . 207
2. Decentralized Banking from the 1830s to the
Civil War . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 214
XV. Central Banking in the United States III: The National
Banking System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 219
1.
The Civil War and the National Banking System . . . . 219
2.
The National Banking Era and the Origins
of the Federal Reserve System . . . . . . . . . . . . . . . . . 229
XVI. Central Banking in the United States IV:
The Federal Reserve System . . . . . . . . . . . . . . . . . . . . . . . 235
1. The Inflationary Structure of the Fed . . . . . . . . . . . . 235
2. The Inflationary Policies of the Fed . . . . . . . . . . . . . 241
XVII. Conclusion: The Present Banking
Situation and What to Do About It . . . . . . . . . . . . . . . . 247
1. The Road to the Present . . . . . . . . . . . . . . . . . . . . . . 247
2. The Present Money Supply . . . . . . . . . . . . . . . . . . . . 252
3. How to Return to Sound Money . . . . . . . . . . . . . . . 261
Appendix: The Myth of Free Banking in Scotland . . . . . . . 269
Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 293
Contents
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P
REFACE
A
lthough first published 25 years ago, Murray Rothbard’s
The Mystery of Banking
continues to be the only book that
clearly and concisely explains the modern fractional
reserve banking system, its origins, and its devastating effects on
the lives of every man, woman, and child. It is especially appro-
priate in a year that will see; a surge in bank failures, central
banks around the globe bailing out failed commercial and invest-
ment banks, double-digit inflation rates in many parts of the
world and hyperinflation completely destroying Zimbabwe’s
economy, that a new edition of Rothbard’s classic work be repub-
lished and made available through the efforts of Lew Rockwell
and the staff at the Ludwig von Mises Institute at an obtainable
price for students and laymen interested in the vagaries of bank-
ing and how inflation and business cycles are created.
In the absence of central-bank intervention, the current finan-
cial meltdown could be a healthy check on the inflation of the
banking system as Rothbard points out in his scathing review of
Lawrence H. White’s
Free Banking in Britain: Theory, Experience,
and Debate, 1800–1845
that first appeared in
The Review of Aus-
trian Economics
and is included as a part of this new edition to
correct Rothbard’s initial support of White’s work in the first edi-
tion. There have been virtually no bank failures in the United
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States since the early 1990s and as Rothbard surmised during that
period where there was “an absence of failure” that “inflation of
money and credit [was] all the more rampant.” Indeed, from Jan-
uary 1990 to April 2008, the United States M-2 money supply
more than doubled from $3.2 trillion to $7.7 trillion. Bankers
were living it up, “at the expense of society and the economy far-
ing
worse
” (Rothbard’s emphasis).
Although ostensibly it is dodgy real estate loans that are bring-
ing the banks down this year, in the seminal book that you hold,
Rothbard shows that it is really the fraudulent nature of fraction-
alized banking that is the real culprit for the bankers’ demise.
But central bankers will never learn. “We should not have a
system that’s this fragile, that causes this much risk to the econ-
omy,” New York Federal Reserve President Tim Geithner said
after engineering J.P. Morgan’s bailout of the failed Bear Stearns
investment bank in the first quarter of 2008 with the help of the
central bank. Of course the thought of dismantling his employer,
the government leaving the counterfeiting business, and a return
to using the market’s money—gold—didn’t occur to him. More
government regulation in which “the basic rules of the game
establish stronger incentives for building more robust shock
absorbers,” is what he prescribed.
Surely Murray is somewhere laughing.
My introduction to
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