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    Guinness World Record Holder for largest book signing ever, Orrin Woodward is a NY Times bestselling author of And Justice For All along with RESOLVED & coauthor of LeaderShift and Launching a Leadership Revolution. His books have sold over one million copies in the financial, leadership and liberty fields. RESOLVED: 13 Resolutions For LIFE made the Top 100 All-Time Best Leadership Books and the 13 Resolutions are the framework for the top selling Mental Fitness Challenge personal development program.

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Murray Rothbard: The Banking Cartel

Posted by Orrin Woodward on September 8, 2014

Murray Rothbard is my favorite economist to read for several reasons. First, his extensive knowledge in economics, history, and business help him see connections where few others would. Second, his style of writing drives home his points in an enjoyable fashion and, even the few times where I believe he goes too far, I still marvel at his ability to muster the facts in a logical fashion to argue his point. to

As Chairman of the Board for LIFE Leadership, I am constantly reading, writing, and speaking. Identifying the top thinkers to read in each field is a high-priority for me and why Murray Rothbard is one of my favorites. For his thinking and writing clear the fog of ignorance on my different subjects. As an example, here is Rothbard’s description of how and why America cartelized its corporations in the late 19th century.

The Five Laws of Decline are alive and well in America and a return to the Six Duties of Society is going to take an active group of people who know leadership, history, and economics.

Sincerely,

Orrin Woodward

Murray Rothbard

Murray Rothbard

By the late 19th century, the Morgans took the lead in trying to pressure the US government to cartelize industries they were interested in β€” first railroads and then manufacturing: to protect these industries from the winds of free competition, and to use the power of government to enable these industries to restrict production and raise prices.

In particular, the investment bankers acted as a ginger group to work for the cartelization of commercial banks. To some extent, commercial bankers lend out their own capital and money acquired by CDs. But most commercial banking is “deposit banking” based on a gigantic scam: the idea, which most depositors believe, that their money is down at the bank, ready to be redeemed in cash at any time. If Jim has a checking account of $1,000 at a local bank, Jim knows that this is a “demand deposit,” that is, that the bank pledges to pay him $1,000 in cash, on demand, anytime he wishes to “get his money out.” Naturally, the Jims of this world are convinced that their money is safely there, in the bank, for them to take out at any time. Hence, they think of their checking account as equivalent to a warehouse receipt. If they put a chair in a warehouse before going on a trip, they expect to get the chair back whenever they present the receipt. Unfortunately, while banks depend on the warehouse analogy, the depositors are systematically deluded. Their money ain’t there.

An honest warehouse makes sure that the goods entrusted to its care are there, in its storeroom or vault. But banks operate very differently, at least since the days of such deposit banks as the Banks of Amsterdam and Hamburg in the 17th century, which indeed acted as warehouses and backed all of their receipts fully by the assets deposited, e.g., gold and silver. This honest deposit or “giro” banking is called “100 percent reserve” banking. Ever since, banks have habitually created warehouse receipts (originally bank notes and now deposits) out of thin air. Essentially, they are counterfeiters of fake warehouse receipts to cash or standard money, which circulate as if they were genuine, fully backed notes or checking accounts. Banks make money by literally creating money out of thin air, nowadays exclusively deposits rather than bank notes. This sort of swindling or counterfeiting is dignified by the term “fractional reserve banking,” which means that bank deposits are backed by only a small fraction of the cash they promise to have at hand and redeem. (Right now, in the United States, this minimum fraction is fixed by the Federal Reserve System at 10 percent.)

Fractional Reserve Banking

Let’s see how the fractional-reserve process works, in the absence of a central bank. I set up a Rothbard Bank, and invest $1,000 of cash (whether gold or government paper does not matter here). Then I “lend out” $10,000 to someone, either for consumer spending or to invest in his business. How can I “lend out” far more than I have? Ahh, that’s the magic of the “fraction” in the fractional reserve. I simply open up a checking account of $10,000 which I am happy to lend to Mr. Jones. Why does Jones borrow from me? Well, for one thing, I can charge a lower rate of interest than savers would. I don’t have to save up the money myself, but can simply counterfeit it out of thin air. (In the 19th century, I would have been able to issue bank notes, but the Federal Reserve now monopolizes note issues.) Since demand deposits at the Rothbard Bank function as equivalent to cash, the nation’s money supply has just, by magic, increased by $10,000. The inflationary, counterfeiting process is under way.

“Unfortunately, while banks depend on the warehouse analogy, the depositors are systematically deluded. Their money ain’t there.”

The 19th-century English economist Thomas Tooke correctly stated that “free trade in banking is tantamount to free trade in swindling.” But under freedom, and without government support, there are some severe hitches in this counterfeiting process, or in what has been termed “free banking.”

First, why should anyone trust me? Why should anyone accept the checking deposits of the Rothbard Bank?

But second, even if I were trusted, and I were able to con my way into the trust of the gullible, there is another severe problem, caused by the fact that the banking system is competitive, with free entry into the field. After all, the Rothbard Bank is limited in its clientele. After Jones borrows checking deposits from me, he is going to spend that money. Why else pay for a loan? Sooner or later, the money he spends, whether for a vacation, or for expanding his business, will be spent on the goods or services of clients of some other bank, say the Rockwell Bank. The Rockwell Bank is not particularly interested in holding checking accounts on my bank; it wants reserves so that it can pyramid its own counterfeiting on top of cash reserves. And so if, to make the case simple, the Rockwell Bank gets a $10,000 check on the Rothbard Bank, it is going to demand cash so that it can do some inflationary counterfeit pyramiding of its own.

But, I, of course, can’t pay the $10,000, so I’m finished. Bankrupt. Found out. By rights, I should be in jail as an embezzler, but at least my phoney checking deposits and I are out of the game, and out of the money supply.

Hence, under free competition, and without government support and enforcement, there will only be limited scope for fractional-reserve counterfeiting. Banks could form cartels to prop each other up, but generally cartels on the market don’t work well without government enforcement, without the government cracking down on competitors who insist on busting the cartel, in this case, forcing competing banks to pay up.

17 Responses to “Murray Rothbard: The Banking Cartel”

  1. James Wilkinson said

    Good read with breakfast. This system would not likely end as long as we use banks without a large movement to change things. So where should people keep their money if not in banks? In assets constantly buying or building other assets?

  2. Jim Wilson said

    Good morning, Orrin,
    First thanks for your visit to Texas.
    Second, I’m not sure I understand this article. Is the reason that fractional reserve works is that the Fed prints the money to “loan” to banks so they can “loan” it out? Is this what negates true “free banking?”
    Jim Wilson

    • Orrin Woodward said

      Jim, actually you can do FRB without a central bank, but its highly volatile and will collapse; therefore, government, who like FRB because it like to borrow money, supports FRB by backing a central bank to loan money to the endangered bank system when people demand their deposits back from the unstable FRB system. In other words, FRB produces high profits through loaning money that doesn’t actually exist. But when the banks practice FRB, it is only a matter of time before it collapses. To protect against this the Big Government/Big Bank partnership creates a cartel centered around a government-backed Central Bank to run the fraudulent FRB system to benefit elites at the expenses of the masses within society. Murray Rothbard wrote a book called the Mystery of Banking that explains it really well. thanks, Orrin

  3. Orrin,
    This is a great post to remind us how important it is to educate ourselves about economics, history, and other liberal arts issues if we want to take into our own hands our freedom. It is said that economics are too important to leave them to economists, and above all to institutions, and politicians. We can say the same to history, philosophy, not to let them to historians, and philosophers. This is our metaphysical duty to study how the Five laws of Decline apply to our communities and what are our duties to turn them around in 180 degrees shift.
    I am stealing or using your Five Laws of Decline and Six Duties of Society in the Haitian Situation. This will be the “HaitiShift” which is a leadership call for Haitians to finally stand up to stop the Decline and start a 180 degrees turnaround to create wealth for the betterment of the people.
    I know it starts with me and my personal growth on the scoreborad of the Trilateral leadership ledger. And to to model this message to at least 10% of our community.
    God bless.
    Roosevelt
    Roosevely

  4. Chad Waters said

    Hi Orrin,

    Great topic on of which I never use to understand! Thanks to Life Leadership, yourself and many other selfless leaders will all get to learn!

    God Bless
    Chad

  5. John hatchell said

    Great read, scary to understand, but needed to truly realize the purpose of what a bank really is, one now can understand why our grandparents liked mattresses and mason jars with a shovel….thnx Orrin for real Truth in lending statement …

  6. Heidi said

    Hi Orrin! This was great reading that fit right into our home schooling history class this morning. We are using the FLD and SDS as a back drop for history this year. The kids are baffled that banks can get away with this, as they should be. Thanks for educating a nation at all ages. Heidi

  7. Dear Orrin,
    I join life leadership because of this very topic I have been trying to educate people on this very topic like others have for several years with only a limited effect not any longer now working with life leadership.
    This can be reversed with simple practices such as savers practicing private lending for family as it teaches savings and collaboration and accountability with good character.
    Thank you
    Recil

  8. David Nelson said

    Thank you for spending long hours reading and compiling this information so we can understand it.
    Thank you for giving us an option to live a greater life and getting us to realize the truth of what it takes to be a winner.
    It’s very difficult to change when you have been and are being pushed to conform to a certain way of doing things. Many facets of life from school to work to food to money to beliefs to electronic media; all seem to be pushing us down the slippery slope into places and things we know from the past can be deadly. This time it will work even though every time in the past it eventually failed. A certain part of the population can be easily and totally mislead proven by our government today. They throw a bone to the crowd and the crowd cheers never realizing they are on the conveyor belt to the furnace.

  9. Elaine Mallios said

    So the money doesn’t actually exist. I see lots of real estate deals and mortgage transactions. Its all just paper moving – I guess other than the 10%. Thanks for helping us have more insight.

    • Orrin Woodward said

      Exactly Elaine! It’s honestly shocked me the first time I understood this. I couldn’t believe they created something out of nothing. πŸ™‚

  10. Orrin,

    Thank you for your writings and teaching.

    I enjoyed the bank article very much.

    Sully

  11. Steve Meixner said

    Thanks Orrin, This is another book I will now be purchasing. I read the Mystery of Banking by Rothbard and it really opened my eyes, wow, what a Scam! It’s really amazing how much one can learn from reading, listening and associating with the Right People. The folks I used to hang out with have no idea that any of this is taking place,they are totally in the Dark! I am so glad I became involved with the LIFE Business.
    Steve

  12. JB Thompson said

    Great article Orrin. Thank you for bringing more of this information from all of your reading forward.

    It is interesting to think that another bank would put you out of business if you were not part of their club.

    Recently with the changes that have been made in the banking industry, particularly in the mortgage industry, it seems many smaller loan brokers went out of business and had to sell their debt to larger companies that could meet the guidelines of the capital to loan ratio. This killed a lot of the competition in the market by the government changing a rule. Could be a good or bad thing depending on who you were speaking with. To me it is just amazing what power the government has to destroy free market business. Intentional or not, it seems to happen.

    I am glad you chased your dream and looked up at the pictures you kept in front of you. If you wouldn’t have, where would I be.

    Appreciate you bringing this to light and having the courage to publish it. Great info with a vehicle, great concept.

  13. Don Eller said

    Thank you Orrin, Great Article Funny how rules are made to benefit a few at the expense of the many.Will be getting this book to read
    Always welcoming information on the systems of the world.

  14. Shaun Bushey said

    Great article Orrin!
    I wounder what the asset to lend ratio is now do to the advent of virtual banking and loaning is as easy as a mouse click. I could be wrong but I heard at the height of the housing bubble Freddie mac or Fannie may (maybe even both not sure) were lending at on-hand to loan amounts of 30:1. Now being virtual numbers on a computer screen they technically don’t need cash on hand just an account number on the screen that says it’s there.

  15. robert wilcox said

    What a great way to explain it!! Genius ….is the Art of taking something complex and making it simple! I absolutely love what you write about…it always helps to understand topics that I should know better…you create that Hunger. Thank you Orrin Woodward

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