• 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    withdrawn, which led to the dissolution of the company.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 Amazon.com 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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