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Books

◆Douglas French: “Early Speculative Bubbles and Increases in the Supply of Money”

(also available in free PDF format at the Mises Institute website)

Doug French describes in detail the circumstances surrounding three of history’s first asset bubbles: Amsterdam’s Tulipmania, the French Mississippi Bubble, and England’s South Sea Bubble. All three were accompanied by rapid increases in the money supply.

Perversely, Amsterdam’s monetary inflation was the result of sound banking and coinage laws in a sea of inflationary neighbors thus attracting a rapid inflow of specie. However France and England’s monetary inflation–occurring within only a few years of one another–were spawned by government policies: France’s by John Law’s economic plan of monetary stimulus and England’s by a scheme to restructure the government’s massive debt burden through money creation.

In any case, the pattern of speculative bubbles and financial crises is clear: the cause is expansion of the money supply and not Keynes’ “animal spirits.” The pattern carries over into the 20th and 21st centuries where the roaring 20′s asset bubble, late 1960′s stock market bubble, 1980′s Japanese superbubble, 1990′s NASDAQ tech bubble, and 2000′s housing bubble were all accompanied by credit inflation–produced by the central bank and multiplied by fractional reserve banking.

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◆Janet Gleeson: “Millionaire: The Philanderer, Gambler, and Duelist Who Invented Modern Finance”

 

Although Janet Gleeson paints John Law as a misunderstood figure whose system of inflating fractional paper money could have worked better if only it had been implemented more thoughtfully, discerning readers can easily see the parallels between the Mississippi Bubble and the recent dot-com bubble. Simply replacing the words “Mississippi Company” with “dot-coms,” and “Banque Royale” with “Federal Reserve” would yield an accurate historical account of the late 1990′s. Millionaire is a cautionary tale of the dangers of an inflationary model that sowed the seeds for bubble, crash, and ruin in 1720 France, and which has continued to do so ever since.

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◆F.A. Hayek “Prices and Production”

(also available in free PDF format at the Mises Institute website)

Written in 1931, this collection of lectures and F.A. Hayek’s associated work ultimately led to his acceptance of the Nobel Prize over forty years later. Building on Ludwig von Mises’ thesis of artificial credit expansion and its ensuing general business malinvestment, Hayek introduced the additional variable of time. Using his now-famous “Hayekian triangle,” he argued that artificially lowered interest rates stimulate the longest-term production processes (which are most sensitive to interest rates) and thereby “lengthen” the capital structure. Production of goods of the “higher order” (furthest from the end consumer such as mining of natural resources or refining) are stimulated since low long-term interest rates signal economic resources to fulfill the entire production process to the end consumer have been set aside by long-term voluntary saving. But all throughout consumers have not really saved through the provident abstention of consumption, but rather the central bank has created the illusion via expansion of credit through the printing press. So an investment boom has ensued that must ultimately end in a bust when it is revealed that the real capital resources behind the printed funds are insufficient or even nonexistent to meet the lengthened production processes.

Hayek’s theory of artificial booms and inevitable busts gained a following in the early 1930’s as an explanation for the bubble of the late 1920’s that led to the 1929 bust and Great Depression. However, the publication of John Maynard Keynes’ General Theory of Employment, Interest, and Money created an overnight revolution that swept Hayek’s work into virtual obscurity (minus a few loyal Austrian followers). It was only when Keynesianism broke down with the inexplicable era of stagflation—unemployment and recession accompanied by inflation—that the economics profession began to reconsider Hayek’s view, leading to the Nobel Prize in 1974.

Warning: This is not easy reading–not only because of its technical subject matter. Many find Hayek’s writing and speaking styles to be cumbersome, dispassionate, and longwinded. He did not enjoy the same command of language that Hazlitt, Rothbard, Mises, and even Keynes possessed. Yet this is where Austrian Business Cycle Theory took its full form—ultimately leading to recognition by the Nobel Committee that gave it and Austrian economics worldwide attention and mainstream acknowledgement.

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◆Henry Hazlitt: “Economics in One Lesson”

(also available in free PDF format at the Mises Institute website)

Henry Hazlitt’s bestselling classic does not address artificial credit expansion and its effects on the business cycle. However Hazlitt does correct over a dozen popular economics fallacies such as the blessing of the “broken window” (which economists extend to “economic miracles” of natural disasters and wars), and the myth of the benefits of protectionism, industry bailouts, price “stabilization,” price floors and price ceilings, minimum wage laws (another form of price floor), and much more. The 1978 edition included a new chapter on rent control—another form of government price controls—which is not included in the Mises website version. Yet the rent control piece is one of the most interesting, so here is a separate link to that chapter.

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◆Henry Hazlitt: “What You Should Know About Inflation”

(also available in free PDF format at the Mises Institute website)

Henry Hazlitt’s classic sets the record straight on inflation once and for all–its roots, symptoms, and damaging effects. Particularly enlightening is Hazlitt’s debunking of inflationary cause myths–including “cost push,” “”wage-price spirals,” an “overheating economy,” speculation, corporate greed, labor unions, “excessive profits,” dollar velocity, and a list of other excuses politicians and their pet economists have used for decades to obfuscate and hide the real source: money creation by the government-connected central bank.

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◆Hunter Lewis: “Where Keynes Went Wrong: And Why Governments Keep Creating Inflation, Bubbles, and Busts”

Keynesians may not like it, but Where Keynes Went Wrong lays out what Keynes really said—in his own words—and does so in a highly readable form for general audiences. Hunter Lewis presents Keynes’ theoretical economic rationales for:

-Permanently lowering interest rates to zero

-Central bank monetary inflation that is “just as genuine as any other savings”

-A world central bank to manage the global money supply and interest rates

-Abolishing slumps forever with printed money to keep us “permanently in a quasi-boom”

-Lowering savings and raising the “propensity to consume”

-The “euthansia of the rentier”

-Abolishing deflation of any kind, even “benign” deflation

-More government borrowing, spending, and consumption to lead us to prosperity

-An increased role for government directing economic investment, paid for with…

-Higher taxes on the wealthy and/or capital borrowed from the wealthy to “soak up” excess savings

-War or natural disaster as a wealth-building stimulus

-The “semi-socialization” of companies and an economy “better left to the experts” to run and more…

And he does it using Keynes’ own words. Lewis provides clear passages directly from Keynes’ personal letters, speeches, and books including The Economic Consequences of the Peace, A Treatise on Money, Essays in Persuasion, and of course The General Theory of Employment, Interest, and Money to present Keynes’ own case.

And he then proceeds to demystify Keynes’ opaque writings to expose the fallacies within his theories that have led repeatedly to inflation, bubbles, depressions, or all of the above. Lewis also unearths a myriad of contradictions, errors, and obfuscations in Keynes’ writings, using both his own criticisms as well as those from Keynes contemporaries: Hayek, Hazlitt, von Mises, Schumpeter, Benjamin Anderson, Frank Knight, Etienne Mantoux, Wilhelm Ropke, and even Franco Modigliani and Paul Samuelson (Keynesians themselves).

An effortless read for the layman and economist alike, Where Keynes Went Wrong is an excellent presentation of the ideas that unfortunately still hold potent influence over government policymakers worldwide—almost 70 years after Keynes’ death—and serves as an excellent introduction to Keynes the man, his ideas, and his critics.

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◆Ludwig von Mises: “The Causes of the Economic Crisis”

(also available in free PDF format at the Mises Institute website)

A collection of essays from the 1920′s, 30′s, and 40′s on money and business cycles. The fifth and last essay, “The Trade Cycle and Credit Expansion: The Economic Consequences of Cheap Money” is perhaps the best short explanation of the business cycle I have found. At only 11 pages, it lays out for the reader the consequences of artificially lowered interest rates and cheap money creation by the central bank: businesses are misled into making unsustainable investments that will ultimately fail due to inadequate real capital resources.

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◆Murray Rothbard: “America’s Great Depression”

(also available in free PDF format at the Mises Institute website)

The definitive real history of the Great Depression you were never taught in school. Rothbard’s exhaustive 350 page study covers the period from the 1920′s up to FDR’s inauguration in 1933. Although FDR’s New Deal is not included, there’s more than enough here for the reader to understand what got the United States to the terrible economy it experienced by Hoover’s departure.

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◆Murray Rothbard: “A History of Money and Banking in the United States”

(also available in free PDF format at the Mises Institute website)

Published in 1963, Rothbard’s rigorous 500 page history of American money and banking spans the period from 1690 colonial fiat currency inflation to the post-WWII Bretton Woods agreement.

Rothbard dedicates nearly a hundred pages to the founding of the Federal Reserve. While the detailed account of Progressive Era conferences, politicians, academics, and businessmen was close to overkill for me, Federal Reserve conspiracy enthusiasts will find it a virtual treasure chest of information. More interesting I found were America’s pre-Federal Reserve history in Chapter One (130 pages) and the decade leading up to the Great Depression in Chapter Four (80 pages).

Chapter One spans 200+ years of monetary history including accounts of:

-The American colonies’ pernicious fix for their mounting debts: the Western World’s first unbacked government paper currency, and its resulting inflation and boom-bust economic cycles

-Revolutionary War finance and the ill-fated Continental currency

-Robert Morris’ Bank of North America, and the First and Second Banks of the United States

-Bimetallic coinage and Gresham’s law

-The War of 1812, suspension of specie redemption, and the resulting Panic of 1819

-Andrew Jackson and Nicolas Biddle’s war over the Second Bank of the United States

-The Suffolk Bank, a “free market” central bank whose clearinghouse function disciplined overexpansion of credit by commercial banks and made it deeply unpopular with banking interests

-The routinely misnamed “Free Banking Era” of 1836-1862, during which time many states forced banks to purchase state bonds and employ them as an unstable base for loan and credit expansion

-The Lincoln-era National Banking system

Rothbard’s detailed description of the National Banking System is particularly important, as it introduces the reader to a coerced banking syndicate (non-participating banks were taxed out of existence) designed to produce uniform monetary inflation upon an unstable base of government bonds and fiat “greenback” Treasury banknotes–as well as traditional gold and silver. The subsequent (and frequent) nationwide booms and financial panics are still routinely blamed on a non-existent “free market” in banking, and still used as justification for the founding of the Federal Reserve, when in fact the National Banking System of 1862-1913 was a near half-century failed experiment in government central planning in money and banking to begin with.

Rothbard also provides a fascinating description of England’s self-imposed deflation of 1925 that led to cooperative efforts between the Federal Reserve and Bank of England to use American inflation to stabilize British balance of payments. The origins of the collaboration lied with England’s failed gold-bullion-exchange standard (a sham that resembled a true gold standard in name only) and J.P. Morgan Sr.’s lifelong anglophilia–compelling heir J.P Morgan Jr. to urge New York Fed Governor Benjamin Strong (former Vice President of Morgan-controlled Banker’s Trust and personal auditor of J.P. Morgan Sr.) to “save” England from the recession of its own creation. The Fed’s deliberate credit inflation created the late 1920’s stock market and real estate bubbles, and ultimately the stock market crash of October 1929. Rothbard goes where few economic historians will, quoting Strong himself boasting in 1927 that he was about to give “a little coup de whiskey to the stock market.”

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◆Murray Rothbard: “The Mystery of Banking”

(also available in free PDF format at the Mises Institute website)

Murray Rothbard’s classic on the workings of commercial banks and the central bank cartelization device. Rothbard starts with the basics of division of labor, barter, and ancient currencies to deposit banking, and loan banking. He quickly ramps up to the the problematic practice of fractional reserve banking and the central bank that attempts to stabilize the inherently unstable fractional reserve system, and frequently creates larger, more widespread collapses of the banking system a result.

Particularly helpful is Rothbard’s multiple ledger examples using double-entry bookkeeping. It allows the reader to see step by step how the fractional reserve lending process works and how the central bank attempts to prop up its inherently bankrupt members.