Understanding Money Mechanics – The Gold Standard

Understanding Money Mechanics – The Gold Standard by Robert P. Murphy for Mises

The Understanding Money Mechanics series by Robert P. Murphy, is a comprehensive overview of the theory, history, and practice of money and banking, with a focus on the United States. Every two weeks a new chapter will be released online (though the release schedule will not necessarily follow the order of the Table of Contents). After the final chapter has been released online, the entire book will be published in physical, digital, and audio formats, with a tentative publication for late in 2020.


Chapter 1: Introduction

Lays out the scope and purpose of the booklet, and the schedule for release.


Chapter 2: The Theory and Brief History of Money and Banking

Explains Mises’s framework for handling money within subjective value theory, which covers his taxonomy (medium of exchange, money, money-substitutes, fiduciary media, commodity credit, circulation credit, etc.) as well as the regression theorem. Covers Menger’s theory of the origin of money, and briefly mentions the anthropological critique (David Graeber). Gives a standard history of the origin and development of modern banking, including some important court rulings. Mentions the history of private mints.

Chapter 3: A Brief History of the Gold Standard, with a Focus on the United States

Explains why gold is the market’s money of choice — and stresses the difference between the definition of money (“commonly accepted medium of exchange”) and the attributes that make something a convenient money (durability, homogeneity, etc.). Draws a connection with Menger’s theory, presented in the previous chapter, and shows why gold (and silver) have chosen, rather than (say) diamonds or platinum. Explains the operation of the classical gold standard and how it evolved during the World Wars, Bretton Woods, and, finally, the Nixon Shock. Also includes a discussion of Civil War inflation.

Chapter 4: The History and Structure of the Federal Reserve System

Explains the unusual circumstances of the Fed’s origin, and mentions “conspiracy theory” treatments. Explains how power was consolidated in DC and away from Reserve Banks under FDR, and how the Fed’s mandate again altered in 1977. Concludes with an overview of the modern organization of the Fed, including the number of member banks, how the Federal Open Market Committee (FOMC) is selected (length of terms, etc.), how the chairman is picked, etc.


Chapter 5: Standard Open Market Operations: How the Fed and Commercial Banks “Create Money”

Explains the “textbook” mechanics of the Fed buying assets to create new reserves, and then how commercial banks create new loans on top. Defines the various monetary aggregates (base, M1, M2, “Austrian true money supply,” etc.).

Chapter 6: Beyond the Fed: “Shadow Banking” and the Global Market for Dollars

Defines the concept of shadow banking and gives a brief history, plus some stats for context. Defines things like “eurodollar,” LIBOR, etc. Explains the Bank of International Settlements (BIS) and the Basel Accords. Explain the basics of the repo market and the difference between capital requirements and reserve requirements.

Chapter 7: Central Banking since the 2008 Financial Crisis

Explains the “emergency” measures that the Fed adopted (Term Auction Facility, QE rounds, interest on reserves) and negative interest rates abroad. Mentions the moves to suppress cash (tied up with negative interest rates, at least rhetorically). Discusses the “corridor/floor system” a la Selgin. Explains how Maiden Lane programs are arguably illegal.


Chapter 8: Ludwig von Mises’s “Circulation Credit” Theory of the Trade Cycle​

Lays out the basics of Austrian boom-bust theory. Explains that Mises developed it in The Theory of Money and Credit, in which he also said that fiat money was a theoretical possibility (!); this means that Mises clearly didn’t think that boom-bust was restricted to fiat money regimes. Using Mises’s analogy of a master builder running out of bricks, illustrates the difference between “overinvestment” and “malinvestment” theories, and also why continued pump-priming a bad idea.

Chapter 9: Monetary Inflation and Price Inflation

Starts with Friedman’s measures of money stock and (consumer price) inflation, and summarizes cases of hyperinflation (Civil War, Weimar Republic, Zimbabwe, Venezuela). Documents change in how the word “inflation” is used, and explains how “currency boards” are used by some countries to limit the ravages of inflation. Explains the famous equation of exchange (MV=PQ) and why Mises and Rothbard didn’t like it.

Chapter 10: The Inverted Yield Curve and Recession

Documents this surprisingly good forecasting tool, and then shows that it fits quite nicely within Austrian framework.

Chapter 11: The Fed and the Housing Bubble/Bust

Shows that the textbook Austrian story fits the empirical facts of the housing boom/bust.


Chapter 12: Does Textbook Explanation Get Money and Banking Backwards?

Is the “textbook” description (covered in Chapter 5 above) actually wrong? Deals with the (relatively) recent claims — coming not just from internet critics but also a major UK institution — that bank lending is not reserve constrained. Also addresses that idea that “lending creates deposits” rather than vice-versa, as the orthodox economists claim.

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