《Money, Bank Credit, and Economic Cycles》

Can the market fully manage the money and banking sector?

Jesús Huerta de Soto, professor of economics at the Universidad Rey Juan Carlos, Madrid, has made history with this mammoth and exciting treatise that it has and can again, without inflation, without business cycles, and without the economic instability that has characterized the age of government control.

Such a book as this comes along only once every several generations: a complete comprehensive treatise on economic theory. It is sweeping, revolutionary, and devastating--not only the most extended elucidation of Austrian business cycle theory to ever appear in print but also a decisive vindication of the Misesian-Rothbardian perspective on money, banking, and the law.

Jörg Guido Hülsmann has said that this is the most significant work on money and banking to appear since 1912, when Mises's own book was published and changed the way all economists thought about the subject.

Its five main contributions:

a wholesale reconstruction of the legal framework for money and banking, from the ancient world to modern times,

an application of law-and-economics logic to banking that links microeconomic analysis to macroeconomic phenomena,

a comprehensive critique of fractional-reserve banking from the point of view of history, theory, and policy,

an application of the Austrian critique of socialism to central banking,

the most comprehensive look at banking enterprise from the point of view of market-based entrepreneurship.

Those are the main points but, in fact, this only scratches the surface. Indeed, it would be difficult to overestimate the importance of this book. De Soto provides also a defense of the Austrian perspective on business cycles against every other theory, defends the 100% reserve perspective from the point of view of Roman and British law, takes on the most important objections to full reserve theory, and presents a full policy program for radical reform.

It was Hülsmann's review of the Spanish edition that inspired the translation that led to this Mises Institute edition in English. The result is astonishing: an 875-page masterpiece that utterly demolishes the case for fiat currency and central banking, and shows that these institutions have compromised economic stability and freedom, and, moreover, are intolerable in a free society.

De Soto has set new scholarly standards with this detailed discussion of monetary reform from an Austro-libertarian point of view. Huerta de Soto’s solid elaboration of his arguments along these lines makes his treatise a model illustration of the Austrian approach to the study of the relationship between law and economics.

It could take a decade for the full implications of this book to be absorbed but this much is clear: all serious students of these subject matters will have to master this treatise.

875 page hardback

CONTENTS

Preface to the English-Language Edition

Preface to the Second Spanish Edition

Introduction

Chapter 1: The Legal Nature of the Monetary Irregular-Deposit Contract

A Preliminary Clarification of Terms: Loan Contracts (Mutuum and Commodatum)and Deposit Contracts

The Commodatum Contract

The Mutuum Contract

The Deposit Contract

The Deposit of Fungible Goods or "Irregular" Deposit Contract

The Economic and Social Function of Irregular Deposits

The Fundamental Element in the Monetary Irregular Deposit

Resulting Effects of the Failure to Comply with the Essential Obligation in the Irregular Deposit

Court Decisions Acknowledging the Fundamental Legal Principles which Govern the Monetary Irregular-Deposit Contract (100-Percent Reserve Requirement)

The Essential Differences Between the Irregular Deposit Contract and the Monetary Loan Contract

The Extent to Which Property Rights are Transferred in Each Contract

Fundamental Economic Differences Between the Two Contracts

Fundamental Legal Differences Between the Two Contracts

The Discovery by Roman Legal Experts of the General Legal Principles Governing the Monetary Irregular-Deposit Contract

The Emergence of Traditional Legal Principles According to Menger, Hayek and Leoni

Roman Jurisprudence

The Irregular Deposit Contract Under Roman Law

Chapter 2: Historical Violations of the Legal Principles Legal Principles Governing the Monetary Irregular-Deposit Contract

Introduction

Banking in Greece and Rome

Trapezitei, or Greek Bankers

Banking in the Hellenistic World

Banking in Rome

The Failure of the Christian Callistus's Bank

The Societates Argentariae

Bankers in the Late Middle Ages

The Revival of Deposit Banking in Mediterranean Europe

The Canonical Ban on Usury and the "Depositum Confessatum"

Banking in Florence in the Fourteenth Century

The Medici Bank

Banking in Catalonia in the Fourteenth and Fifteenth Centuries: The Taula de Canvi

Banking During the Reign of Charles V and the Doctrine of the School of Salamanca

The Development of Banking in Seville

The School of Salamanca and the Banking Business

A New Attempt at Legitimate Banking: The Bank of Amsterdam.

Banking in the Seventeenth and Eighteenth Centuries

The Bank of Amsterdam

David Hume and the Bank of Amsterdam

Sir James Steuart, Adam Smith and the Bank of Amsterdam

The Banks of Sweden and England

John Law and Eighteenth-Century Banking in France

Richard Cantillon and the Fraudulent Violation of the Irregular-Deposit Contract

Chapter 3: Attempts to Legally Justify Fractional-Reserve Banking

Introduction

Why it is Impossible to Equate the Irregular Deposit with the Loan or Mutuum Contract

The Roots of the Confusion

The Mistaken Doctrine of Common Law

The Doctrine of Spanish Civil and Commercial Codes

Criticism of the Attempt to Equate the Monetary Irregular-Deposit Contract with the Loan or Mutuum Contract

The Distinct Cause or Purpose of Each Contract

The Notion of the Unspoken or Implicit Agreement

An Inadequate Solution: The Redefinition of the Concept of Availability

The Monetary Irregular Deposit, Transactions with a Repurchase Agreement and Life Insurance Contracts

Transactions with a Repurchase Agreement

The Case of Life Insurance Contract

Chapter 4: The Credit Expansion Process

Introduction

The Bank's Role as a True Intermediary in the Loan Contract

The Bank's Role in the Monetary Bank-Deposit Contract

The Effects Produced by Bankers' Use of Demand Deposits: The Case of an Individual Bank

The Continental Accounting System

Accounting Practices in the English-speaking World

An Isolated Bank's Capacity for Credit Expansion and Deposit Creation

The Case of a Very Small Bank

Credit Expansion and Ex Nihilo Deposit Creation by a Sole, Monopolistic Bank

Credit Expansion and New Deposit Creation by the Entire Banking System

Creation of Loans in a System of Small Banks

A Few Additional Difficulties

When Expansion is Initiated Simultaneously by All Banks

Filtering Out the Money Supply From the Banking System

The Maintenance of Reserves Exceeding the Minimum Requirement

Different Reserve Requirements for Different Types of Deposits

The Parallels Between the Creation of Deposits and the Issuance of Unbacked Banknotes

The Credit Tightening Process

Chapter 5: Bank Credit Expansion and Its Effects on the Economic System

The Foundations of Capital Theory

Human Action as a Series of Subjective Stages

Capital and Capital Goods

The Interest Rate

The Structure of Production

Some Additional Considerations

Criticism of the Measures used in National Income Accounting

The Effect on the Productive Structure of an Increase in Credit Financed under a Prior Increase in Voluntary Saving

The Three Different Manifestations of the Process of Voluntary Saving

Account Records of Savings Channeled into Loans

The Issue of Consumer Loans

The Effects of Voluntary Saving on the Productive Structure

First: The Effect Produced by the New Disparity in Profits Between the Different Productive Stages

Second: The Effect of the Decrease in the Interest Rate on the Market Price of Capital Goods

Third: The Ricardo Effect

Conclusion: The Emergence of a New, More Capital-Intensive Productive Structure

The Theoretical Solution to the "Paradox of Thrift"

The Case of an Economy in Regression

The Effects of Bank Credit Expansion Unbacked by an Increase in Saving: The Austrian Theory or Circulation Credit Theory of the Business Cycle

The Effects of Credit Expansion on the Productive Structure

The Market's Spontaneous Reaction to Credit Expansion

Banking, Fractional-Reserve Ratios and the Law of Large Numbers

Chapter 6: Additional Considerations on the Theory of the Business Cycle

Why no Crisis Erupts when New Investment is Financed by Real Saving (And Not by Credit Expansion)

The Possibility of Postponing the Eruption of the Crisis: The Theoretical Explanation of the Process of Stagflation

Consumer Credit and the Theory of the Cycle

The Self-Destructive Nature of the Artificial Booms Caused by Credit Expansion: The Theory of "Forced Saving"

The Squandering of Capital, Idle Capacity and Malinvestment of Productive Resources

Credit Expansion as the Cause of Massive Unemployment

National Income Accounting is Inadequate to Reflect the Different Stages in the Business Cycle

Entrepreneurship and the Theory of the Cycle

The Policy of General-Price-Level Stabilization and its Destabilizing Effects on the Economy

How to Avoid Business Cycles: Prevention of and Recovery from the Economic Crisis

The Theory of the Cycle and Idle Resources: Their Role in the Initial Stages of the Boom

The Necessary Tightening of Credit in the Recession Stage: Criticism of the Theory of "Secondary Depression"

The "Manic-Depressive" Economy: The Dampening of the Entrepreneurial Spirit and Other Negative Effects Recurring Business Cycles Exert on the Market Economy

The Influence Exerted on the Stock Market by Economic Fluctuations

Effects the Business Cycle Exerts on the Banking Sector

Marx, Hayek and the View that Economic Crises are Intrinsic to Market Economies

Two Additional Considerations

Empirical Evidence for the Theory of the Cycle

Business Cycles Prior to the Industrial Revolution

Business Cycles From the Industrial Revolution Onward

The Roaring Twenties and the Great Depression of 1929

The Economic Recessions of the Late 1970s and Early 1990s

Some Empirical Testing of the Austrian Theory of the Business Cycle

Conclusion

Chapter 7: A Critique of Monetarist and Keynesian Theories

Introduction

A Critique of Monetarism

The Mythical Concept of Capital

Austrian Criticism of Clark and Knight

A Critique of the Mechanistic Monetarist Version of the Quantity Theory of Money

A Brief Note on the Theory of Rational Expectations

Criticism of Keynesian Economics

Say's Law of Markets

Keynes's Three Arguments On Credit Expansion

Keynesian Analysis as a Particular Theory

The So-Called Marginal Efficiency of Capital

Keynes's Criticism of Mises and Hayek

Criticism of the Keynesian Multiplier

Criticism of the "Accelerator" Principle

The Marxist Tradition and the Austrian Theory of Economic Cycles: The Neo-Ricardian Revolution and the Reswitching Controversy

Conclusion

Appendix on Life Insurance Companies and Other Non-Bank Financial Intermediaries

Life Insurance Companies as True Financial Intermediaries

Surrender Values and the Money Supply

The Corruption of Traditional Life-Insurance Principles

Other True Financial Intermediaries: Mutual Funds and Holding and Investment Companies

Specific Comments on Credit Insurance

Chapter 8: Central and Free Banking Theory

A Critical Analysis of the Banking School

The Banking and Currency Views and the School of Salamanca

The Response of the English-Speaking World to these Ideas on Bank Money

The Controversy Between the Currency School and the Banking School

The Debate Between Defenders of the Central Bank and Advocates of Free Banking

Parnell's Pro-Free-Banking Argument and the Responses of McCulloch and Longfield

A False Start for the Controversy Between Central Banking and Free Banking

The Case for a Central Bank

The Position of the Currency-School Theorists who Defended a Free-Banking System

The "Theorem of the Impossibility of Socialism" and its Application to the Central Bank

The Theory of the Impossibility of Coordinating Society Based on Institutional Coercion or the Violation of Traditional Legal Principles

The Application of the Theorem of the Impossibility of Socialism to the Central Bank and the Fractional-Reserve Banking System

(a) A System Based on a Central Bank Which Controls and Oversees a Network of Private Banks that Operate with a Fractional Reserve

(b) A Banking System which Operates with a 100-Percent Reserve Ratio and is Controlled by a Central Bank

(c) A Fractional-Reserve Free-Banking System

Conclusion: The Failure of Banking Legislation

A Critical Look at the Modern Fractional-Reserve Free-Banking School

The Erroneous Basis of the Analysis: The Demand for Fiduciary Media, Regarded as an Exogenous Variable

The Possibility that a Fractional-Reserve Free-Banking System May Unilaterally Initiate Credit Expansion

The Theory of "Monetary Equilibrium" in Free Banking Rests on an Exclusively Macroeconomic Analysis

The Confusion Between the Concept of Saving and that of the Demand for Money

The Problem with Historical Illustrations of Free-Banking Systems

Ignorance of Legal Arguments

Conclusion: The False Debate between Supporters of Central Banking and Defenders of Fractional-Reserve Free Banking

Chapter 9: A Proposal for Banking Reform: The Theory of a 100-Percent Reserve Requirement

A History of Modern Theories in Support of a 100-Percent Reserve Requirement

The Proposal of Ludwig von Mises

F.A. Hayek and the Proposal of a 100-Percent Reserve Requirement

Murray N. Rothbard and the Proposal of a Pure Gold Standard with a 100-Percent Reserve Requirement

Maurice Allais and the European Defense of a 100-Percent Reserve Requirement

The Old Chicago-School Tradition of Support for a 100-Percent Reserve Requirement

Our Proposal for Banking Reform

Total Freedom of Choice in Currency

A System of Complete Banking Freedom

The Obligation of All Agents in a Free-Banking System to Observe Traditional Legal Rules and Principles, Particularly a 100-Percent Reserve Requirement on Demand Deposits

What Would the Financial and Banking System of a Totally Free Society be Like?

An Analysis of the Advantages of the Proposed System

Replies to Possible Objections to our Proposal for Monetary Reform

An Economic Analysis of the Process of Reform and Transition toward the Proposed Monetary and Banking System

A Few Basic Strategic Principles

Stages in the Reform of the Financial and Banking System

The Importance of the Third and Subsequent Stages in the Reform: The Possibility They Offer of Paying Off the National Debt or Social Security Pension Liabilities

The Application of the Theory of Banking and Financial Reform to the European Monetary Union and the Building of the Financial Sector in Economies of the Former Eastern Bloc

Conclusion: The Banking System of a Free Society

Bibliography

Index of Subjects

Index of Names