02 Aug 2010

How Privatized Banking Really Works

All Posts, Insurance 17 Comments

The wait is over! Here is the pdf of my new book with Carlos Lara, How Privatized Banking Really Works. Learn it, live it, love it.

If you want to purchase a hard copy, please visit Carlos’ site. (The book is also available on Amazon through our bulk distributor, but it helps us more if you buy from our site. The price is the same.)

17 Responses to “How Privatized Banking Really Works”

  1. Anon73 says:

    If privatized banking means Bob Murphy can put his name on little pieces of paper and have us all trade eggs, chicken, and industrial machinery for it, then I’m all in favor!

  2. senyoreconomist says:

    I am not really interested in an investment book, but am very interested in a book that will thoroughly explain how fractional reserve banking works and that explains in detail how the fed can increase the money supply. I am very interested in the Austrian Theory of the Buisiness Cycle. In light of the sentiments expressed in the preceding two sentences, would this be a book I should get? Thank you very muich and good luck!

    • bobmurphy says:

      Yes we think our book may be the easiest introduction to FRB. But you can see for yourself (by clicking on the PDF).

  3. Robert says:


    I am a pretty experienced student of Austrian Economics and have read most of the introductory texts on banking, like Murray Rothbard’s Mystery of Banking and What Has Government Done to our Money? Do you think this book offers new material and is a worthwhile purchase? Thanks and keep up the great work, I thought the econlib article was phenomenal!


    • bobmurphy says:

      Well I’m biased–of course I think our book has new material! 🙂 In all seriousness, I do think we explain it with just a bit more clarity than even Rothbard, if for no other reason than we spend more time on the subject and walk through it from a few different angles.

      But by all means browse through the PDF to see if you’re interested.

      The other thing that is fairly novel is the discussion of insurance. To my knowledge no other Austrian work has such an exhaustive treatment.

  4. scarson says:

    I just finished both this book and Nash’s book, “Becoming Your Own Banker”. I started my education in Austrian Eco about a year ago and I think your book finally made everything fall together. I’ve recommended it to several people who have expressed an interest in starting their education.

    The information on how to use insurance as a banking system is almost overwhelming! Already made an appointment to talk to someone about it. So, thanks for the insight!!

    I do have one question. I understand that credit unions are owned by their members (like mutual insurance companies). Could not a credit union’s membership decide to function as a 100% reserved bank? Or could one be started that way?

    • bobmurphy says:

      Hi Susan,

      Thanks for the note. Regarding your question about a 100% reserve credit union, I’m not certain. But at Mises U someone asked about whether a bank could advertise as 100% reserve to attract customers, and someone pointed out that the government might say this was illegal because it would give the public the idea that FRB was unsound. (And it’s illegal to spread rumors about a bank being insolvent.)

      • david says:


        Congratulations on your new book. I must say that your enthusiasm and ability for combining the pursuit of liberty, the study of economics and your consulting business is a source of inspiratiion.

        Regarding Susan’s point, I could see the FTC weighing in and determining that advertising claims to the effect that 100% reserve banking was safer was misleading (due to FDIC etc). One imagines that conventional banks ensuring that the issue is brought before the FTC or banking regulators.

        • scarson says:

          Would you have to advertise it as “being safer”? Wouldn’t it be enough to just say it was 100% reserves. Are the amount of reserves required by the bank regulations a minimum or set amount?

          Wouldn’t it be a real thorn in the FRB’s and FDIC’s side to have a bank as a member of their system and operating at 100% reserves?

          • david says:

            “Would you have to advertise it as “being safer”? Wouldn’t it be enough to just say it was 100% reserves.”

            I am not sure (see below).

            “Are the amount of reserves required by the bank regulations a minimum or set amount?” In the US, it’s a minimum. Interestingly, in Canada, and I believe other countries, there is no minimum reserve requirement. Canada’s banks are considered amongst the safest.

            “Wouldn’t it be a real thorn in the FRB’s and FDIC’s side to have a bank as a member of their system and operating at 100% reserves?”

            Maybe but possibly not. If a higher reserve ratio was a competitive advantage, there is nothing now that would stop banks from maintaining reserves at higher than mandated levels (in fact, commercial banks collectively have very high excess reserves at the moment. I don’t where it is at the moment but I believe in the last year or so, reserves overall were close to the 100% level).

            What would concern FRB commercial banks most would be competition for deposits. There are two critical points here. First, 100% RR banks would be unlikely to offer interest on deposits covered by 100% reserves. Second, if you define “safety” as a guarantee return of your deposits without currency debasement, then 100% RR banks couldn”t offer more safety as long as a) most banks are FRB, and b) FDIC is implicitly ultimately backed by Fed money-printing. In a major financial crisis, an small number of 100%RR banks wouldn’t materially reduce the money printing and, in any case, the funds deposited in 100%RR banks would be subject to the same amount of debasement as funds deposited in FDIC FRB banks.

  5. scarson says:

    I understand that the debasement of the money would still be present and I’ll agree that is the real problem. I’m probably looking at this as a “teaching moment” for the general public as to some of the problems with our system. Thanks for the response… it helps increase the learning curve!!!

  6. Silas Barta says:

    Congrats on the publishing, and major props for putting up the PDF! I’ve already read to p. 350 in it without skipping any chapters (though I did skip passages once I “got its point”.)

    That said, I’m predictably here to criticize: it didn’t show IBC to have quite the benefits I thought it would. When I read the chapter about it, you’re basically saying that the benefits mainly accrue to people who have or take on lots of debt and have trouble genuinely saving and are only capable of thinking in terms of the monthly payment.

    For people like me who are already responsible, effectively debt free, and don’t need this psychological incentive, that doesn’t offer anything — I don’t need IBC to save in advance for purchases, and then pay interest on loans from my own savings! And the responses to the hyperinflation concerns didn’t seem like enough, especially given that I’m putting all my money in long-term, fixed income investments — so I have to buy my inflation hedges separately anyway.

    That said, whole life policies certainly offer a much better RoR than any other liquid way of saving your money.

    • bobmurphy says:

      Thanks for the feedback. Well, you have to understand that we want this book to appeal to a wide spectrum of people. And in the grand scheme, I think one of the most important features of IBC is the “psychology” behind it. I think there are a lot of people who will bust their butts in order to “pay themselves back,” whereas they wouldn’t skimp as much in order to save a higher fraction of their income.

      But if we reassured you that whole life policies are a smart place to put “safe” money, then that is a huge accomplishment. “Everybody knows” that whole life policies are for idiots, right? (Except of course, for all the rich people who buy whole life policies…)

      • Silas Barta says:

        Okay, fair point. I’m not taking into account the purpose and audience of the book, and with respect to that, it does very well. Getting people away from the “think monthly payment” mentality would be quite an accomplishment by itself!

        • Thane says:

          “For people like me who are already responsible, effectively debt free, and don’t need this psychological incentive”
          Silas–I would recommend reading Nelson Nash’s “Becoming Your Own Banker” or Pamela Yellen’s “Bank on Yourself” for a more in depth look at specifically why IBC is better than using your savings. Like you, I have no debt and habitually accumulate money, yet especially in this financial environment I consider my discovery of IBC a huge blessing!
          I think it’s too often overlooked that IBC allows you to do something you can’t do with any other financial instrument: spend money while continuing to earn (tax free) interest/growth on that same money. Nash’s book also shows many details of the long-range benefits (think longer than your life), such as the ability to draw more passive/retirement income from your policy (currently tax free) than you ever paid into it and still be able to pass a very sizable death benefit to the next generation.
          In short, as the authors discuss in this book, there are many more personal benefits than they have the space to discuss and so they recommend reading further. The beauty of this book is that it shows how this great personal financial strategy also contributes to the greater good of our economy!

  7. bobmurphy says:

    NOTE: Someone had complained about the shipping, but that was because of a glitch in the software. (It’s a long story.) But we have switched to a new “shopping cart” software, and now the shipping charges should be tailored to the size of your order, where you live, etc. So I removed the comment.

  8. David B. says:

    Well, I have been independently studying Austrian economics for about two years. 2009, I started online classes at a university for my bachelors in business economics just so I have a piece of paper to add to my list of accomplishments. I started on the introduction above and you have me excited. Just wanted to say thanks for posting Mr. Murphy. I enjoy the general clarity of thought in your work. Others get credit too for contributions but this is your blog so its about you here.