The Mystery of Banking

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to The
Mystery of Banking
, newly published this week by the Mises

Long out of
print, The Mystery of Banking is perhaps the least appreciated
work among Murray Rothbard’s prodigious body of output. This is
a shame because it is a model of how to apply sound economic theory,
dispassionately and objectively, to the origins and development
of real-world institutions and to assess their consequences. It
is "institutional economics" at its best. In this book,
the institution under scrutiny is central banking as historically
embodied in the Federal Reserve System – the "Fed"
for short – the central bank of the United States.

The Fed has
long been taken for granted in American life and, since the mid-1980s
until very recently, had even come to be venerated. Economists,
financial experts, corporate CEOs, Wall Street bankers, media pundits,
and even the small business owners and investors on Main Street
began to speak or write about the Fed in awed and reverential terms.
Fed Chairmen Paul Volcker and especially his successor Alan Greenspan
achieved mythic stature during this period and were the subjects
of a blizzard of fawning media stories and biographies. With the
bursting of the high-tech bubble in the late 1990s, the image of
the Fed as the deft and all-seeing helmsman of the economy began
to tarnish. But it was the completely unforeseen eruption of the
wave of subprime mortgage defaults in the middle of this decade,
followed by the Fed’s panicky bailout of major financial institutions
and the onset of incipient stagflation, that has profoundly shaken
the widespread confidence in the wisdom and competence of the Fed.
Never was the time more propitious for the radical and penetrating
critique of the Fed and fractional-reserve banking that Rothbard
offers in this volume.

Before taking
a closer look at the book’s contents and contributions, a brief
account of its ill-fated publication history is in order. It was
originally published in 1983 by a short-lived and eclectic publishing
house, Richardson & Snyder, which also published around the
same time God’s Broker, the controversial book on the life
of Pope John Paul II by Antoni Gronowicz. The latter book was soon
withdrawn, which led to the dissolution of the company. A little
later, the successor company, Richardson & Steirman, published
the highly touted A Time for Peace by Mikhail Gorbachev,
then premier of the USSR. This publishing coup, however, did not
prevent this firm from also winding up its affairs in short order,
as it seems to have disappeared after 1988.

addition to its untimely status as an orphan book, there were a
number of other factors that stunted the circulation of The Mystery
of Banking. First, several reviewers of the original edition
pointedly noted the lax, or nonexistent, copy editing and inferior
production standards that disfigured its appearance. Second, in
an important sense, the book was published "before its time."
In 1983, its year of publication, the efforts of the Volcker Fed
to rein in the double-digit price inflation of the late 1970s had
just begun to show success. Price inflation was to remain at or
below 5 percent for the rest of the decade. During the 1990s, inflation,
as measured by the Consumer Price Index, declined even further and
hovered between 2 and 3 percent. This led the Greenspan Fed and
most professional monetary economists to triumphantly declare victory
over the inflation foe and even to raise the possibility of a return
of the deflation bogey.

Despite the
adverse circumstances surrounding its publication, however, The
Mystery of Banking has gone on to become a true underground
classic. At the time of this writing, four used copies are for sale
on for between $124.50 and $256.47. These prices are
many times higher than the pennies asked for standard money-and-banking
textbooks published in the 1980s and even exceed the wildly inflated
prices of the latest editions of these textbooks that are extracted
from captive audiences of college students. Such price discrepancies
are a good indication that Rothbard’s book is very different –
in content, style, and organization – from standard treatments
of the subject.

the rest of the article

27, 2008

Salerno [send him mail] is a senior fellow
at the Ludwig von Mises Institute, professor
of economics at Pace University, and editor of the Quarterly
Journal of Austrian Economics

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