A Primer on Money, Banking, and Gold

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5 Responses to 'A Primer on Money, Banking, and Gold'

1. The Dilettante - May 23rd, 2010 at 8:52 pm

   Prospective readers should note that this is not a new book. Rather, it’s a repackaged reprint of one of Bernstein’s earliest books (circa 1965). Fed Chairman Emeritus Paul Volcker has written a shiny new introduction and Bernstein himself takes a few pages at the beginning to place his old ideas in historical context, but frankly the meat of the book is totally outdated. There is perhaps no area in economics that has seen more change over the past 40 years than monetary policy. Bernstein wrote this book before the demise of the gold standard, before stagflation, before the modern consensus on monetary policy. If you want to read Bernstein on gold, a much more contemporary treatment is presented in The Power of Gold: The History of an Obsession (A caveat: I have not read that book yet, but include it only so the reader can be aware that there is an alternative.)
   Rating: 3 / 5

2. Rolf Dobelli - May 23rd, 2010 at 10:26 pm

   Peter L. Bernstein’s classic, originally published in the mid-1960s, provides a learned, generally accessible explanation of the workings of the American monetary system. Of course, some of the information is quite out-of-date, but you’ll understand that as you read. For example, the author speaks extensively about the importance of gold in international finance – yet gold has not really mattered since 1971. Moreover, the book came out before history taught the lessons of the 1970s, 1980s and 1990s, not to mention the financial crisis that began in 2008. Former Fed Chair Paul Volcker’s foreword and Bernstein’s new introduction acknowledge these time lags. The last quarter of the 20th century saw a very extensive reshaping of the financial system, including the creation of new financial entities and even new forms of money, so this primer is less useful and informative than it may have been when new. Nonetheless, getAbstract finds that Bernstein’s explanation of the fundamental workings of the Federal Reserve and of the role of commercial banks in the monetary system remains lucid and well worth reading.
   Rating: 5 / 5

3. Gaetan Lion - May 23rd, 2010 at 10:27 pm

   I was in the midst of studying monetary policy and the related Federal Reserve balance sheet when a good friend of mine suggested I read this book to further my understanding on the subject. Given that I really liked another book written by the author: Against the Gods: The Remarkable Story of Risk, I was very receptive to my friend’s recommendation. The book did not disappoint. I was amazed how insightful this book is given it was written over 40 years ago. Obviously, many of the new monetary policy tools Bernanke created over the past year (credit facilities and related quantitative easing) did not exist at the time Bernstein wrote this book. But, it does not matter. Much of the interactions between the Federal Reserve and commercial banks has not changed that much.

   Reading the Appendix first is a great way to start this book as it gives you a quick technical education on the workings of the Fed vs commercial banks. But, the remainder of the book is instrumental in fleshing out this initial understanding and giving it historical context from the 1930s to the 1960s.

   Bernstein who spent two years as a researcher at the Fed has a rare insider knowledge of how that system works. Many of his insights are counterintuitive. He explains effortlessly how the Federal Reserve and commercial banking system interact. Thanks to him I now understand that the relationship between the Federal Reserve and banks is very similar to the one between banks and consumers. We have deposit accounts at banks that give us the necessary credits to withdraw cash from ATMs. Banks hold reserve deposits (credits) at the Fed that give them the right to withdraw currency. In the same manner that our cash withdrawals directly reduce our deposits by the same amount; banks currency withdrawals reduce their reserves at the Fed by the same amount. But, we are the ones who really drive bank currency withdrawals from the Fed. Banks withdraw cash from the Fed to meet the volume of our own ATM withdrawals. Bernstein explains how the Government has little control on how much cash we keep on hand and how much we deposit in banks. This is the main leak (customers holding cash) of the deposit-loan money creation system.

   Whatever one would think is outdated within this book is very interesting from an historical standpoint. In Chapters 13 through 15 where he covers the economic history of the U.S. from 1938 to 1966 and the role of the Fed is really fascinating stuff. This book is a testimony of economic history just like A Monetary History of the United States, 1867-1960 by Milton Friedman.
   Rating: 5 / 5

4. D. Kumar - May 24th, 2010 at 12:11 am

   I took a couple of economics courses, but was never sure that I got the basics of monetary policies right. This book did what all those intersecting IS-LM lines and pages of mathematical calculations did not – it explained me what money is, how it is ‘created’, how gold-bond-currency are all interlinked in a larger monetary system, how banks play a role in mapping the course of economic growth and inflation. The book is an easy read, with lots of simple and historical examples. Now I think I can make more sense of the WSJ articles and CNBC commentaries. Highly recommend it if you want a solid primer on money and banking systems.
   Rating: 5 / 5

5. Mariusz Skonieczny - May 24th, 2010 at 3:09 am

   I decided to read this book because I really enjoyed the author’s other book The Price of Prosperity. This book did not disappoint. Even though some of the information is outdated, the basic structure of banking is still the same. In this book, the author explains the Federal Reserve, banks, customers and how they all interact with each other. The deposits that we put in the bank are used to make loans to other customers and businesses, but a certain portion must be deposited with the Fed. The Fed is the bank for the banks. I found this book a great read especially now when banks are facing tough times.

   - Mariusz Skonieczny, author of Why Are We So Clueless about the Stock Market? Learn how to invest your money, how to pick stocks, and how to make money in the stock market
   Rating: 5 / 5

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