All Commentary
Sunday, January 1, 1984

Book Review: The Mystery of Banking by Murray N. Rothbard

(Richardson & Snyder, 25 Broad Street, New York, N.Y. 10004), 1983
286 pages • $19.95 cloth

this book is an introduction to the fractional reserve banking system, its history and its consequences. The approach is straightforward, with each chapter building upon previous chapters, much in the manner of an introductory course in money and banking.

Professor Rothbard begins by examining the origins of money and how individual prices are determined by supply and demand. The text is easy to follow, although some readers might be more comfortable with fewer supply and demand curves. The professor completes his introductory remarks by showing how the supply and demand for money determine the general level of prices.

Turning to the theory of banking, Rothbard distinguishes between loan banking and deposit banking. The hallmark of a loan is that the money is due on some agreed-upon date, and the debtor pays the creditor interest. But a deposit is almost the exact opposite. In this case, the bank must pay on demand—whenever the depositor presents his receipt. No interest is paid; in fact the depositor may pay the bank to safeguard his valuables.

Unfortunately, these two banking functions have become commingled, so that banks can engage in credit expansion via fractional reserves. Credit expansion is held in check when banks are free to compete with one another because bankers must maintain reserves so that competing banks can redeem their notes. With the advent of central banking, however, the last market check on credit expansion was abolished.

In the last third of this book Professor Rothbard surveys the history of central banking in England and the United States. He shows how central banking was politically imposed on these nations, with the resulting inflations, instability, and depressions which have plagued the Western world for more than a century.

Rothbard concludes by proposing that the dollar once again be tied to gold, and the Federal Reserve System be abolished. In today’s political climate, such proposals receive scant attention. But as foreign debts pile up and the fractional reserve banking system grows ever shakier, events may compel us to return to the discipline of a market-determined money.