The Mystery of Banking


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

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 The latter book was soon withdrawn, which led to the dissolution of the company.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.

In 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.

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September 27, 2008