The Mystery of Banking

If What Has The Government Done To Our Money? is an hors d’oeuvre, then The Mystery of Banking is the main appetiser in our quest to understand how the current financial global crisis arose.  Far meatier than its predecessor, The Mystery of Banking paints the Mona Lisa’s face, where the earlier book simply sketches out the smile.

There are some who say that Murray N. Rothbard’s greatest work is Man, Economy, and State, which some hail as the successor to Human Action.  Others say that the mantle of his greatest work lies with The Ethics of Liberty, the pulsating heart of the American libertarian movement.  Yet more people declare that it must be Conceived in Liberty, the stunning four-volume series describing the genesis of the American revolution.

Everyone, of course, is right.  Because all choices are subjective.  However, if I were to be forced to become a Robinson Crusoe and made to occupy a desert island, with hopefully an inexhaustible supply of Gin & Tonic, and only allowed by some great Dictator in the sky to take just one Rothbard masterpiece to the island, then it would have to be The Mystery of Banking, in the same sense that if given the choice of whether to take Beethoven or Mozart, I would have to take Mozart, because although Beethoven is much deeper than our Salzburgian hero, Mozart carries a good tune which I could whistle on the beach.  (Though I might also be tempted by The History of Economic Thought, but that’s a different thread in a different story.)

The Mystery of Banking has become an underground classic, with dog-eared copies of the book recently fetching hundreds of dollars on Amazon before the Mises Institute re-published a new edition, also making available a lovingly-produced PDF of the book online.  (There is also a stunning version available on Scribd.)

The book has gained a hard-core underground following because it is simply amazing in the sense that it maps out the incredibly dense maze of fractional reserve banking, the Aladdin’s nest of myth and fantasy which since the Florentine banking domination of the Medici clan, has taken the western world to the brink of absolute financial collapse more times than Madonna has re-engineered her underwear.  Man, Economy, and State and Conceived in Liberty are perhaps the greater works, due to their sheer undiluted mass, but pound for pound, The Mystery of Banking packs a far more devastating power-to-weight ratio as a water-slashing racing boat skating between high-momentum supertankers.

From its opening, with its dedication to three hard money champions — Thomas Jefferson, Charles Holt Campbell, and Ludwig von Mises — The Mystery of Banking is a remorseless Austrian dissection of what lies at the heart of the western world’s financial system; which some might say is “absolutely nothing at all” and which others might say is “fractional reserve banking”. (Or do I repeat myself?)

Professor Rothbard spends the first hundred pages of his incisive book describing money, its origins out of barter, its purposes, its uses, and its evolution, eventually leading towards the creation of loan banking and free banking from the late medieval period onwards.

Rothbard then describes a more developed world in which twenty dollars became a fixed weight of gold just under one ounce, and how the mathematical genius Isaac Newton defined the pound as a fixed weight of gold just under a quarter of an ounce.  (From these fixed weights and their stable exchange rate, the division of labour between the two currency areas can thus be easily integrated into a single wealth-creating whole.)

Although Man, Economy, and State remains the more powerful book, The Mystery of Banking is far more dangerous to the establishment, because it blows the gaffe on their monopoly of money management and reveals who always benefits first from their nefarious practices of printing money directly from thin air (i.e. the government and its friends) and who pays for this benefit (i.e. everyone else).

Although this is obvious to all when a private counterfeiter spends his ill-gotten “money” in local stores, government has wrapped so many emerald-coloured curtains around the alchemy of their nationalisation of the money supply, that this wealth transference effect is much harder to discern with government-regulated fractional reserve banking.

Rothbard shreds these curtains, making it clear how the government always benefits first and why they are motivated to do it — even given an ability to tax — and how they have escaped detection for so long, with otherwise intelligent economic commentators in recent times demanding that governments engage in quantitative easing, to “help” the rest of us, which is like a householder demanding that a burglar steal his possessions in order to help with his insurance claim.

Rothbard blows away the rulers of the emerald city through clear analogy and example, such as beaming down the Angel Gabriel from heaven to double the supply of money in everyone’s pockets overnight, before examining the results of such an action in the morning, thus revealing that any supply of money is equally optimal; this leads to some startling implications.

However, this is just one example. There are many others like it, in the book.

Having carefully used historical precedent to reveal the history of money, in the second half of the book, Rothbard then gradually un-weaves the most insidious double-blind deception in history, which is the rise of central banking and the creeping nationalisation of the banking industry, to follow the nationalisation of money. Starting in England, and then spreading like a virus to the rest of the world, Rothbard lifts stone after stone in his unrelenting mission to expose the light-shy creatures underlying central banking, allowing none of these segmented arthropods to escape back into the darkness and the slime before he scores them with his acidic pen.

The final section of the book examines a Rothbardian seven-part plan, in the Cobden and Bright tradition, to return us all to a hard money standard.  The annotated highlights of this plan are:

  • Redefining money to be a fixed weight of gold
  • Government gold deposits to be returned to their rightful owners, i.e. the holders of government paper money
  • Central banks to be abolished
  • Fractional reserve banking to be replaced by 100% gold reserve banking for all demand deposits
  • Banks to become free to issue their own gold-certificate cash notes
  • The complete de-nationalisation of money and the removal of government guarantees on bank accounts, to re-introduce the ‘healthy gale’ of bank runs back into the banking industry — one of Rothbard’s alleged favourite movie scenes is the collapse of the bank of Danglars in The Count of Monte Cristo!
  • The abolition of government-mints to be replaced once again by the private minting of gold money

For all true followers of hard money, The Mystery of Banking is thus an essential element on the pathway to understanding how and why we can achieve the goal of honest money, which even the former alchemist Isaac Newton knew was impossible to manipulate over the long term.  Let us also hope that if the Rothbardian plan outlined above comes to pass, that the new international name for the fixed weight of gold will be “The Rothbard”, in memory of this hero of hard money, whether this is one gramme, 10 grammes, or a good old-fashioned one Troy-ounce of gold.