The Ten Best Books on Money

0:00I'm going to talk about the ten best books on money. Unfortunately, if you read books on monetary theory, it doesn't enable you to make money. I think there's a story that Karl Marx's mother once said that she thought it was unfortunate that Karl wrote so much The first book I want to mention is one by an economist who is very different in his views from Karl Marx. It's one that Walter just talked about in his talk. It's the one by Murray Rothbard, What Has Government Done To Our Money? This is a very short book. I think it originally came out as a pamphlet with the Freedom School of Robert LeFave.

0:49I think the primary thesis of Murray Rothbard's book is some people have an idea that money is purely conventional. They'll say, well, why do we accept these pieces of paper in exchange? Well, we accept them because we know everybody else will accept them. For example, the philosopher John Searle, who's a very good philosopher of language but not so good on money, says exactly that. Exactly that, but according to Murray Rothbard, this is a completely false picture of money. What in money, in his view, is strictly, must begin and ought always to be strictly a commodity.

1:35He points out that originally the names for money were simply designated units of weight. For example, a British pound, the British pound before World War I, was defined as 113 grains of gold. So according to, as Rothbard said, well, money must be, if the economy is to work, probably, must be a commodity. Now, the problem comes in, this is again something Walter was discussing, is it's very often people find it inconvenient just to carry around, say, bars of gold. So they have the idea of having certificates where they'll be, instead of having to actually carry the gold, they'll just have certificates that are representing the money.

2:25So the problem comes in if you have more of these certificates than your actual money available. And this generates, allows government to inflate the currency and it will lead to business cycles and have all sorts of bad things. Murray, in the book, gives just a few page of capsule summary of monetary history, showing the bad effects of not maintaining money strictly as a commodity. Now, I just want to move on to a book that's quite a bit more difficult than What Has Government Done to Our Money.

3:10This is the book by Ludwig von Mises, originally came out in 1912, of course in German, called The Theory of Money and Credit. This is undoubtedly the greatest of all books on monetary theory. Mises in that book solved a big problem for monetary theory that economists had never been able previously to solve. The problem is this. In the subjective theory of value, which is one that Austrian economics uses, the prices of goods are explained by the subjective values that consumers put on them, say, why, if you say, why does an apple have a certain price, it's because consumers value an apple so much on their preference scale compared with other things.

4:05The problem seems to be that if you ask what's the value of money, that depends on what the prices of all the other goods are. If you try to have a subjective theory of money, you seem to be engaging in a circle. Well, the value of the price of money depends on the value consumers assign it, but the value of money in turn depends on the prices. So this was a problem economists couldn't solve, but Mises figured out a way to solve it.

4:51I won't go through his solutions, famous money regression theorem. You'll be able to see that in the book. Now, Mises in that theory of money and credit develops also the theory of the business cycle that was dependent on expansion of bank credit, and he applies this theory in a volume that you can get on the causes of the economic crisis. Mises, in 1928, was able to foresee that there would be a crisis coming.

5:38He was able to see that if the inflationary policy of the 1920s continued, there was going to be a depression. A lot of other economists, such as the great American economist Irving Fisher, were saying, I know that we've reached permanent prosperity, but Mises said, look, if you have the government expanding the money supply and have an increase in bank credit, this is going to generate all sorts of problems. And he also, in this book, there's an essay he has just called, Cause of the Economic Crisis, it was a lecture I think he gave in 1931. And he asks the question, well, why is this crisis more severe than past depressions?

6:25And he points out that the governments are interfering in the economy in various ways. For example, they're propping up wage rates. They're not allowing wage rates to fall, and this is leading to unemployment. Now, as I said, Mises relied on the theory of the business cycle But probably the most elaborate account of the Austrian business cycle theory, the best account, is in the book called Prices in Production by Friedrich Hayek. This you can get, the very good edition that's just come out edited by Joe Salerno, Prices in Production and Other Works.

7:12Hayek, in that book, elaborates in detail on the mechanism by which the Austrian theory develops. What you have is, if the bank expands credit, this will lower the monetary rate of interest below what's called the natural rate of interest. Natural Rate of Interest According to the Austrian theory, natural rate of interest depends on the rate of time preference, the rate by which people prefer present goods over future goods. So if there's an increase in bank credit, then the government, then businesses will tend to take the money and they'll expand their business. In particular, Invest more heavily in capital goods industry. Hayek calls this an expansion.

8:04They'll expand the production of these capital goods industry, but they'll expand the structure of production. Then, after the monetary expansion stops, then they'll most probably be returned to the true rate of interest dependent on, which is termed by time preference. and then he found out that these businesses are not good investments. They'll have to be all liquidated and this is precisely the depression. It's the liquidation of all these businesses. Now one thing you find in the book by Hayek particularly with the additional works that Joseph Salerno was included is Hayek was quite deadly in his replies to critics.

8:55He was really a very tough critic. If you think, say, some of my reviews and Mises' review are bad, you should see what he said. It reminded me, when I was reading, particularly, say, he had an essay criticizing Frank Knight on the Capitol, it reminded me of a comment that American critic Dwight MacDonald made when he was reviewing a book, There was a military manual during World War II by Colonel Rex Applegate called Kill or Get Killed and McDonald said that the thesis of this book could be summarized always kick below the belt especially when the other man is down so this is what Hayek is like when he takes after some opponent of his theories, an extremely good critic Now, a later book that I want to mention is also on the Austrian Theory of the Business Cycle.

10:02It's one by the Spanish economist Jesus Huerta de Soto, and this is called Money, Bank, Credit and Economic Cycle. And de Soto is particularly good at replying to the monetarists such as Milton Friedman And he makes a comment, which I think is very interesting in the book. He says that he thinks that compared to the Austrian theory, there isn't really that much difference between monetarists and Keynesians. Of course, in mainstream economics, the monetarists and Keynesians are very strongly opposed to each other. But he says, well, compared to the Austrian, you can really put them in the same category.

10:50and he also, besides being an economist, he's an expert on legal theory and he points out, he devotes a great deal of attention in the beginning of the book, to a criticism of the legal basis of fractional reserve banking, remember from Walter Block's talk, fractional reserve banking is the system in which a bank doesn't have to have gold or other and Commodity Money backing up all of the demand deposits that it has. It could issue credit beyond this. It has certain minimum reserve requirements, but it can issue credit beyond this.

11:35Werder de Soto said it's been impossible for lawyers really to come up with a good way of characterizing how the situation would be described legally. He said you can't really say it's a loan contract because in a genuine loan contract, while the loan is, while you have the money to say that you've borrowed, you can do whatever you want with it for that period say if I borrowed $500 from you for six months you can't come back to me say after two months say I want the money for the period loan I can do whatever I want with it of course if you loan the money to me for six months you wouldn't get it back in six months either but that that's a side point so he said well we can't call it a genuine loan contract, but because the people in a demand deposit, you can get your money back whenever you want.

12:44So he said, well, we can't really characterize this in any acceptable form. He goes on to describe all sorts of ways people tried to get around this point, but they haven't been able to do it. Now, I mentioned a few books on the Austrian business cycle theory, but now I want to turn to an application of that theory to a historical event, the American Great Depression. And this is the – I want to mention a great book of Murray Rothbard, which came out in 1963, called America's Great Depression. Now, what Rothbard does in the start of the book, he gives a very good account of Austrian business cycle theory, he stresses, and compares it with all sorts of other popular theories of business cycle, and he said the Austrian theory is the one that's able to explain, as the other theories can't, the key thing that business cycle theory has to account for is what he calls a cluster of entrepreneurial errors.

13:48Why is it that a lot of businesses are failing all at once? And he said, well, the reason for this is that just this process I mentioned before, that there's been an expansion of the bank credit that distorts the structure of production. So then when businesses find that the true rate of interest won't sustain their products, there's a liquidation of these unsound investments. and he applies this to explaining the great 1929 depression. He says there's been, there was a Federal Reserve during the 1920s under the, especially as determined by the most prominent person in the system, the governor of the Federal Reserve Bank of New York, Benjamin Strong, was inflating the money supply. In doing so, the reason that they were doing that, they were acting in conjunction with the head of the Bank of England, Montague Norman, who wanted the other countries to inflate, so he could try to, this would help the British pound, so Murray Rothbard says that American policy was really subservient to English interests.

15:13Now, there is an objection that people might give them, monetarists such as Milton Friedman, given this, they said, well, look, if you look at the 1920s, there wasn't a big increase in prices, so how can you say that the 1920s, the Federal Reserve policy was following an inflationist policy, the prices didn't go up, but here what you would have to do is say, well, what would have happened had they not expanded the money supply and prices would have fallen, so you see, there was actually it isn't the fact that prices weren't rising so much in the 20s doesn't contradict Rothbard's account because prices would otherwise have gone down and then later on in the book he goes on to explain the long summer lines to what Mises had done in this 1931 talk I gave I mentioned that he says the policies that the government especially at the end of Herbert Hoover's administration and the frustration established in propping up wage rates, interfering in the economy,

16:19prolonged the depression, made much worse than it otherwise would have been. I think Rothbard's work can be here, especially in the international aspect, very usefully supplemented by another book which came out I think in 1972 by Melchior Pali called Twilight of Gold. This was actually brought out after he died a couple years before but his wife brought it out. Pali was a Hungarian who taught in Germany for a long time. He was the chief He was the chief economist of the Deutsche Bank until I think he left in March 1933, right after Hitler had come to power in January.

17:08He was also a disciple of the great German sociologist Max Weber and in fact edited Max Weber's Festschrift. So, what Pally points out, again, continuing the theme that Rothbard had mentioned, he stresses the influence of Montague Norman on monetary policy after World War I. He contrasts Montague Norman with Lord Keynes. At that time, he wasn't Lord Keynes, he was just John Maynard Keynes. He said, Norman didn't want, wanted to try to restore the British, before returning to the full gold standard, he wanted to restore the British economy to a stronger position, but he did eventually want to return to the full gold standard, but he said Keynes didn't, Keynes was a full-fledged economic nationalist, and he didn't really want an international system based on the gold standard, and Pauli is very critical of Milton Friedman and the monetarists, and he says that Milton Friedman has an unduly narrow view of the monetary supply in the 1920s.

18:32If you had a longer view, a better view, you would see there was inflation in this period. In one point he differs with Rothbard. He thinks that the British could have restored the pre-war parity, when they restored the pre-war parity, the gold standard. He said this wasn't a bad thing to do. Rothbard said they shouldn't have done that, but he thinks they should. Now, one thing that Paoli mentions is, this is taken up by the next book that I want to mention is Jacques Rouef, The Monetary Sin of the West, is there's a very big difference between the classical gold standard and the system that was put in in the 1920s, which was called, after the General Conference in 1922, the gold exchange standard.

19:25On the classical gold standard, as the great British philosopher, David Hume, first explained, there's a very strict limit on how much inflation the government can perpetrate because if it increases the supply of money, then prices will go up and there's a mechanism by which it will lose gold, but in the gold exchange standard, it's just one or two countries in The American-Britain had money that was backed by gold, and all the others had money that was based on the British pound. The British pound also could pyramid on American dollars. It was a rather complicated system. This allowed much more inflation. Rueff applies this criticism with a Gold Exchange Angle. He thinks the gold exchange system marked the beginning and the end of Western civilization.

20:26So he applies this also to monetary policy in the 1950s and 60s. So I want to finish up, just in a minute, left me with two works of historical importance. One came out in 1875 by a great British economist, William Stanley Jevons. And Jevons was really the one who developed first these requirements for a commodity to be money such as being a store of value that Walter was mentioning. And one point Jevons makes in the book, he's rather critical of fractional reserve. He says on minimum reserve requirements where he says the bank has to have a certain amount of money and then it can just expand.

21:11Well, this is like telling a spendthrift that you should keep a shilling in your pocket to make sure you don't overspend. Always keep a shilling in your pocket wouldn't be very good advice. And the last book I want to mention is one by Edwin Cannon called Money, came out in 1918. Cannon was one of the first ones to popularize the idea, which we take for granted now, you know that there's a the reason prices go up is that there's a government is the government expanded the money supply before can a lot of people thought well money supply increases just a response to price increase but cannon said no it's this if the money supply causes increasing prices if you don't want price to go up you shouldn't expand the money supply he was very critical of and British Policy in World War I for doing that.

22:06Well, I think, so those are the ten books. If you read those, I think you'll have at least a beginning of a good grasp on monetary theory. Thanks very much.