The book Understanding Money Mechanics by Robert P. Murphy strives to present modern monetary economics in a way that is accessible to readers.
The latest book by American economist Robert P. Murphy, Understanding Money Mechanics, aims to explain modern monetary economics in an easily understandable manner. Originally published in 2021 by the Mises Institute, the book became available in late 2023 in Persian through Chalesh Publications, translated by Ehsan Mousavi.
Table of Contents
Robert Murphy, a renowned Austrian School economist, is a senior fellow at the Mises Institute (Alabama, USA) and the Fraser Institute (Vancouver, Canada). Born in May 1976, he earned his Ph.D. in economics from New York University in 2003. Active in media and public speaking, Murphy strives to contribute effectively to economic discourse. In September 2021, the Academic Influence website recognized him as an influential figure in economics.
In addition to publishing numerous scholarly articles in journals like Libertarian Papers, Independent Review, Quarterly Journal of Austrian Economics, and Journal of Private Enterprise, Robert Murphy has also written for prominent media outlets such as Forbes, The Washington Times, and The American Conservative.
About the Book
The economic instability in Iran, particularly issues like inflation, has always raised questions for the general public, including the nature and causes of this phenomenon. The search for answers to these questions leads individuals to other inquiries, such as the nature of money and how it functions in today’s world. Changes in the global economic landscape, especially after the COVID-19 crisis and the rise in inflation worldwide (for instance, reaching an inflation rate of about 9% in the United States in June 2022), have further heightened this demand for understanding.
Robert Murphy’s recent book, Understanding the Mechanics of Money, is an excellent starting point for learning about money and the world surrounding it. The book begins by explaining the origins of money and the emergence of the banking system, moves on to the modern mechanisms of money and the implementation of monetary policy, specifically within the U.S. Federal Reserve, and focuses on economic policies after 2008 and the COVID-19 crisis. It then provides a straightforward explanation of an innovation in the monetary field, Bitcoin, and concludes with an explanation and critique of Modern Monetary Theory (MMT). This book is a simple guide to monetary policy and theory, making the complex topics of this field more accessible.
Although Murphy’s book covers a variety of topics, the central question that the author seeks to answer throughout the book is this: What is this complex phenomenon called “money,” and how does it work?
Murphy explains that the origin of money does not lie with governments or central banks; rather, long before the introduction of modern currencies like the dollar, people engaged in barter, exchanging goods directly. For example, a shoemaker might give shoes in exchange for bread from a bakery. Of course, this system had insurmountable problems, which led to changes, and gradually, certain goods were accepted as money (i.e., a medium of exchange accepted by the public). Over time, the world became the gold standard, and gold became a global currency. However, the story of money doesn’t end there, and after much struggle, we enter the world of fiat currencies.
As a student or researcher of economics, a financial market participant, or even someone interested in monetary economics, it is essential to become familiar with its conventional terminology to understand this world. You have likely heard terms like “monetary base” and read arguments linking the monetary base to inflation. You may have heard that our banking system is a “fractional reserve banking” system or that commercial banks create money. If you are involved in financial markets, you have probably dealt with “repos,” “interest rates,” and similar terms. If you explore banking regulations, you’ve at least encountered the name “Basel Committee.”
All of these and related topics form the foundations of monetary economics. Understanding the strengths and weaknesses of arguments about the nature of inflation, how interest rates change, and their effects on financial markets and asset prices requires a solid understanding of these foundations. In this regard, after discussing historical perspectives, Murphy presents a conventional overview of monetary economics literature.
After that, one can delve into more specialized topics in monetary economics. How does inflation arise? How have many countries managed to control it, while others, such as Zimbabwe and Venezuela, have faced hyperinflation? What impact do different monetary policies and central banks’ control of the money supply have on this issue? What tools are available in monetary policy, and to what extent is it possible to control monetary variables?
These are some of the questions that Murphy explores in Understanding the Mechanics of Money. The world of monetary policy underwent fundamental changes after the 2008 crisis. One of the most important changes in this space following the 2008 crisis was the increased focus on the size (and composition) of asset purchases by the Federal Reserve, which led to the implementation of a policy known as “Quantitative Easing” (QE). This policy generated much debate both during and after its implementation and sparked numerous discussions.
Federal Reserve data shows that the implementation of such a policy led to an unprecedented increase in the assets held by this institution:
The key discussion around this was the concern about the potential for price inflation following the implementation of this policy, an issue that, contrary to expectations, did not occur.
Murphy provides a detailed explanation of the policies implemented by the Federal Reserve after the 2008 and COVID-19 crises, presenting and analyzing the various viewpoints that explain the absence of price inflation. For example, some believe the Fed’s policy of paying interest on reserves prevented this outcome. They argue that this policy led to a significant increase in banks’ excess reserves, to the point that by mid-2014, the total excess reserves of depository institutions had reached $2.7 trillion.
Understanding the Mechanics of Money examines these answers, presenting monetary data and assessing their strengths, weaknesses, and ambiguities. This analysis can provide deep insights into the nature of inflation and why it occurs, equipping us with the knowledge to distinguish between valid and invalid arguments in this field.
The Austrian Business Cycle Theory
One of the Austrian School’s most valuable contributions to economics is its discussion of the cause of business cycles. The central question is why economies experience periods of boom followed by recessions. The Austrian Business Cycle Theory (ABCT) originates from the works of Ludwig von Mises and Friedrich von Hayek (Nobel Prize winner in economics in 1974) and has been further elaborated by other Austrian School economists.
Interest rates play a key role in the Austrian Business Cycle Theory. This theory posits that the artificially lowering of interest rates creates a fictitious boom, and a downturn is inevitable.
Murphy’s explanation of this phenomenon starts with a necessary explanation of the economic structure and clarifies the importance of interest rates in this context. He elaborates on how this occurs and corrects a significant misunderstanding by demonstrating that our banking system doesn’t need to be based on a central system to establish this theory in the real world.
Furthermore, by presenting data and monetary statistics about the 2008 crisis, he shows the real-world applicability of this theory:
For example, in this chart, interest rates (30-year conventional mortgage rates; green line) plummeted significantly as the housing bubble (Housing Price Index, HPI; red line) accelerated.
Bitcoin and Monetary Theory
This book does not overlook the latest innovations in money and financial markets. Chapter sixteen of Understanding the Mechanics of Money is dedicated to the emerging phenomenon of Bitcoin. The author’s effort in this chapter is not to provide a technical and complex explanation of this phenomenon but rather to explain it in simple language so that readers, even those with no technical background in this field, can easily understand Bitcoin and how it works.
To achieve this, the author uses real-world examples and stories. He presents accounts of real-world transactions and shows how Bitcoin can play a role in this world and how it can ensure the security and protection of individual ownership.
However, this is not the end of the story. Based on a specific definition of money—“money is a medium of exchange that is widely accepted in a society”—the author addresses a fundamental question: Can Bitcoin truly serve as money? Once again, Murphy draws on the views and contributions of Ludwig von Mises. He references Mises’ famous book The Theory of Money and Credit and attempts to explain Bitcoin within a coherent theoretical framework.
The author starts the argument from the ground up: the theory of value! How does money acquire value in the market? What dead-end did Carl Menger’s (the Austrian economist) subjective theory of value reach, and how did Mises resolve it? To expand on his arguments, Murphy needs to provide an explanation of Mises’ “Regression Theory.” Finally, with this theoretical framework, he turns to Bitcoin.
Additionally, a group of economists from the Austrian School fundamentally disagree with Bitcoin. Murphy also explains these economists’ arguments to clarify the disputes surrounding this question and phenomenon for readers.
In this chapter, the author also introduces another interesting discussion; he tries to clarify the correct meaning of “fiat currency.” He explains that, according to the specific definition of fiat currencies. However, the Bitcoin network operates based on voluntary actions without governmental coercion; it should still be categorized as one of these currencies. However, he emphasizes that his use of the term “fiat” does not carry a purely negative connotation, contrary to a relatively common perception, labeling it as simply a term for low-quality money. Instead, the issue is the absence of a commodity or asset as a “backing” without judging whether this is inherently good or bad.
Modern Monetary Theory (MMT)
Murphy ultimately addresses a controversial theory. This movement has rapidly grown in recent years and even gained support from some members of Congress, such as Alexandria Ocasio-Cortez. Although many critics believe Modern Monetary Theory (MMT) is a failed theory that can never find a place in policymaking, Murphy is not certain.
Murphy also points out that it’s not enough to dismiss this viewpoint with a simple label of “inflationism,” assuming that the claims of this theory have been adequately addressed, and now one can rest easy seeing its declining popularity. Stephanie Kelton, a prominent advocate, does not naively ignore inflation. In her book The Deficit Myth, Kelton repeatedly emphasizes that printing money is not an unlimited source of real wealth, and MMT is not a “free lunch.”
For this reason, critics of this theory must act with caution. They need to examine the theory and carefully provide a detailed critique. Therefore, the seventeenth chapter of Murphy’s book introduces The Deficit Myth and Modern Monetary Theory, critically addressing various aspects of the theory. In this chapter, he challenges the MMT supporters’ argument that “government budget deficits are a source of financial wealth for the private sector,” critiques their understanding of money, and highlights their views on taxation.
The path that Murphy’s book leads us down helps us gain a good understanding of the literature on monetary economics and its heated debates. However, this book is just the beginning of our journey. It is written in simple, accessible language, without the complexities often found in most specialized texts on the subject, teaching us the issues at hand. Additionally, there are appendices with further clues and explanations that are very useful for those continuing along this path or anyone interested in it.
