Money, Bank Credit, and Economic Cycles

Money, Bank Credit, and Economic Cycles

by Jesús Huerta de Soto

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.

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.

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.

Huerta de Sotos 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.

  • Category: Economics
  • Rating: 4.38
  • Pages: 875
  • Publish Date: March 16th 2006 by Ludwig von Mises Institute
  • Isbn10: 0945466390
  • Isbn13: 9780945466390

What People Think about "Money, Bank Credit, and Economic Cycles"

The book first details the differing legal and economic nature of demand deposits and time deposits.

Huerta de Soto argues that The fungible nature of the deposit does not allow the depository to use the good (the money) in any way because the ownership of the good is not transferred. On the one hand, GNP figures hide the existence of different stages in the production process. In fact, it rests on a narrow accounting criterion of added value which is foreign to the fundamental truths of the economy; it only adds the value of consumer goods and services and of the final capital goods completed during the year. Hence gross national product figures only include a small percentage of the total of capital goods. However it in no way includes the value of circulating capital goods, intermediate non-durable products, nor of capital goods which are not yet finished or if so, pass from one stage to another during the process of production. In contrast, our gross output figure from Table V-2 incorporates the gross production of all capital goods, whether completed or not, fixed, durable or circulating, as well as all consumer goods and services produced during the financial year. --In short the Gross National Product is an aggregate figure representing added values, and it excludes intermediate goods. Yet from the standpoint of macroeconomic theory, this argument rests on a narrow accounting concept applicable to individual companies and is very dangerous, as it excludes from the computation the enormous volume of entrepreneurial effort which each year is dedicated to the production of intermediate capital goods, the bulk of economic activity but not all worth evaluating, according to GNP figures. (The author later states that the use of GNP almost inevitably implies that production is instantaneous and requires no time, i.e., that there are no intermediate stages in the production process and that time preference is irrelevant with respect to determining the interest rate.) (pp. The credit market is of secondary importance and plays a subsidiary role in relation to the more general market in which present goods are exchanged for future goods through self-financing or capitalists direct reinvestment of present goods in their productive stages (the first and second procedures of saving-investment mentioned above). 314) --Expansions of the production structure in an economy without fractional-reserve banking ---Savings lead to a lengthened/deepened production structure. When demand for final goods (gross income) drops from 100 to 75 (savings increase by 25), the final stage of production would make a loss (costs of 90; gross income of 75). all increases in saving cause considerable relative losses to or decreases in the accounting profits of the companies which operate closest to final consumption. 321) ---The stages closest to consumption suffer the highest losses when savings increase. Therefore, capitalists seek to invest into stages further from consumption after savings increase. ---The increase in prices of the capital goods also increases stock prices (except those stocks that represent equity close to consumption) ---The Ricardo effect is explained: Savings increase -> Consumption decreases -> Prices of consumer good decrease -> Real wages increase -> Labor is replaced by capital -> Lengthening and widening of productive structure ---Naturally, savings decrease the output of consumer goods in the short run. --Expansions of the production structure in an economy with fractional-reserve banking ---Entrepreneurs that receive financing act as if there were enough savings to finance their investment projects. Huerta de Soto explains that this intertemporal discoordination between investments and savings/consumption leads to initial optimism. ---Increases in the price of consumer goods: ----Original means of production are taken away from the stages closest to consumption, causing consumer prices to rise due to lower output of final goods. ----All in all, the inflationary effects on consumer good prices exceed the positive income effects that owners of original means of production enjoy. ---The increases in the prices of consumer goods cause the stages closest to consumption to become relatively more profitable again. ---Ricardo effect: The over-proportional increase of consumer good prices decreases the real prices of original means of production (esp. This causes a drop in demand for capital goods, decreasing the accounting profits of the stages furthest from consumption. ----Entrepreneurs are willing to pay high interest rates to finish their projects (they want to pay capital goods that are complementary to the goods they purchased before) ---The factors above cause losses for the stages furthest from consumption. 526) --The above reflections on monetarism (its lack of capital theory and the adoption of a macroeconomic outlook which masks the issues of true importance) would not be complete without a criticism of the equation of exchange, MV=PT, on which monetarists have relied since Irving Fisher proposed it in his book, The Purchasing Power of Money. It modifies the structure of relative prices of goods and services because it is injected into the economy in a sequential manner and at various specific points (via public expenditure, credit expansion, or the discovery of new gold reserves in particular places).

I cannot recommend this book highly enough to anyone interested in banking, legal theory, economic theory, economic history, or modern macro issues.

Modern banking and fractional reserve must be treated as a multi disciplinary issue between the study of law and political economy.

This is the best book on ABCT period.

He is a professor in the Department of Applied Economics at King Juan Carlos University of Madrid, Spain and a Senior Fellow at the Ludwig von Mises Institute. Huerta de Soto is a Senior Fellow of the Ludwig von Mises Institute and is on the editorial board of its Quarterly Journal of Austrian Economics.