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Money, Bank Credit, and Economic Cycles

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Can the market fully manage the money and banking sector?
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3rd Edition - Updated and revised.

The three years since the publication of the previous English edition of Money, Bank Credit, and Economic Cycles have seen a continuation of the economic recession process set in motion after the 2007 financial crisis. This process has consisted of the inevitable microeconomic readjustment and realignment of a real productive structure which the credit expansion of the prior “speculative bubble” years had rendered unsustainable. Though governments’ fiscal and monetary policies have on many occasions been erratic and counterproductive, in the end, enormous growth in public deficits has brought on a sovereign public debt crisis in international markets. This crisis has been so severe that one by one, the different governments have been forced to take measures, even if timid ones, in the right direction, measures to reduce public spending, interventionism, and regulation of the economy, and to liberalize factor markets and make them more flexible, especially the labor market.


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. He integrates sweeping history and rigorous theory to make the good-as-gold case that the institutions of money and banking can be part of the free market -- without a central bank, without bailouts, 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.

Reviews

Average Rating:
(based on 9 reviews)

Showing 1 - 5 of 9 Reviews:

by Paul R.
on 4/25/2011
Amazing
This is easily one of the best books on economics ever written. A brilliant and clear analysis accompanied by the most impressive footnotes I've seen. The book gets more and more intense as it progresses. Halfway through you've learned more on economics than most learn in their entire lifetime. You've probably learned more than some professional economists. The book is about what it says on the cover, and de Soto discusses these topics from every angle imaginable.
by Tian
on 9/17/2010
Online Spanish Version
From the author's webpage: http://www.jesushuertadesoto.com/madre2.htm
by Michael Mahon
on 8/31/2010
Brilliant and Inspiring
I got this book for Christmas two years ago and devoured it immediately. The analysis and reasoning is top notch. It is also very well-organized, so that a reader can digest the materail in reasonable portions and also build from basic concepts to more complex applications. This work is definitely a worthy companion to the classics.
by Matthew Cory
on 6/15/2010
Best Presentation of Austrian Ideas Available
This book is truly the best resource and guide to Austrian economics that you will find. It is a well-researched and well-presented demonstration of the explanatory power of Austrian economics in relation to economic cycles and disturbances. It is indeed rare to encounter a scholarly work that presents its ideas in such a rigorous but clear way. I am so used to reading large tracts of rubbish that only people like De Soto keep me from losing my mind. A great challenge to think-tankers like Lawrence White and other more mainstream and influential economic crackpots and loons. Buy this book!
by Luis Daniel
on 3/22/2010
Spanish version
The spanish version: Unión Editorial - http://www.unioneditorial.co.uk/index.php?page=shop.product_details&flypage=shop.flypage&product_id=250&option=com_virtuemart&Itemid=27
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  • Preface to the Third English-Language Edition
  • Preface to the Second English-Language Edition
  • Preface to the First English-Language Edition
  • Preface to the Third Spanish 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

ISBN 9781610161893
eISBN 9781610163880
Publisher Ludwig von Mises Institute
Publication Date 03/14/2012
Edition 3rd
Binding HC
Page Length 940
Subject Business & Economics
Dimensions 6 x 9 x 1.75

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