The Ethics of Money Production JÖRG GUIDO HÜLSMANN To the memory of Hans Sennholz The Ethics of Money Production JÖRG GUIDO HÜLSMANN Ludwig von Mises Institute Auburn, Alabama Copyright © 2008 by the Ludwig von Mises Institute Cover image: Detail from Sachsenspiegel manuscript, courtesy of the University of Heidelberg. All rights reserved. No part of this book may be reproduced in any manner whatsoever without written permission except in the case of reprints in the context of reviews. For information write the Ludwig von Mises Institute, 518 West Magnolia Avenue, Auburn, Alabama 36832. Mises.org. ISBN: 978-1-933550-09-1 Contents Preface . .ix Introduction . 1 1. Money Production and Justice . 1 2. Remarks about Relevant Literature . 7 Part 1: The Natural Production of Money. 19 1. Monies . 21 1. The Division of Labor without Money. 21 2. The Origin and Nature of Money . 22 3. Natural Monies . 24 4. Credit Money . 28 5. Paper Money and the Free Market . 29 6. Electronic Money . 33 2. Money Certificates. 35 1. Certificates Physically Integrated with Money. 35 2. Certificates Physically Disconnected from Money. 38 3. Money within the Market Process . 43 1. Money Production and Prices . 43 2. Scope and Limits of Money Production. 45 3. Distribution Effects . 46 4. The Ethics of Producing Money . 49 5. The Ethics of Using Money . 51 v The Ethics of Money Production 4. Utilitarian Considerations on the Production of Money . 55 1. The Sufficiency of Natural Money Production . 55 2. Economic Growth and the Money Supply . 60 3. Hoarding . 62 4. Fighting Deflation . 64 5. Sticky Prices . 68 6. The Economics of Cheap Money. 69 7. Monetary Stability . 72 8. The Costs of Commodity Money . 79 Part 2: Inflation . 83 5. General Considerations on Inflation. 85 1. The Origin and Nature of Inflation. 85 2. The Forms of Inflation . 88 6. Private Inflation: Counterfeiting Money Certificates . 89 1. Debasement . 89 2. Fractional-Reserve Certificates . 91 3. Three Origins of Fractional-Reserve Banking . 93 4. Indirect Benefits of Counterfeiting in a Free Society . 97 5. The Ethics of Counterfeiting . 98 7. Enters the State: Fiat Inflation through Legal Privileges. 103 1. Treacherous Clerks . 103 2. Fiat Money and Fiat Money Certificates . 106 3. Fiat Inflation and Fiat Deflation . 107 8. Legalized Falsifications. 109 1. Legalizing Debasement and Fractional Reserves . 109 2. The Ethics of Legalizing Falsifications . 112 vi Contents 9. Legal Monopolies. 115 1. Economic Monopolies versus Legal Monopolies . 115 2. Monopoly Bullion . 116 3. Monopoly Certificates. 118 4. The Ethics of Monetary Monopoly . 119 10. Legal-Tender Laws. 125 1. Fiat Equivalence and Gresham’s Law . 125 2. Bimetallism . 129 3. Legal-Tender Privileges for Money Certificates . 131 4. Legal-Tender Privileges for Credit Money . 138 5. Business Cycles . 139 6. Moral Hazard, Cartelization, and Central Banks . 142 7. Monopoly Legal Tender . 145 8. The Ethics of Legal Tender. 148 11. Legalized Suspensions of Payments . 153 1. The Social Function of Bankruptcy. 153 2. The Economics of Legalized Suspensions . 156 3. The Ethics of Legalized Suspensions . 157 12. Paper Money. 159 1. The Origins and Nature of Paper Money . 159 2. Reverse Transubstantiations . 162 3. The Limits of Paper Money . 164 4. Moral Hazard and Public Debts . 166 5. Moral Hazard, Hyperinflation, and Regulation . 168 6. The Ethics of Paper Money . 172 13. The Cultural and Spiritual Legacy of Fiat Inflation . 175 1. Inflation Habits . 175 2. Hyper-Centralized Government . 176 3. Fiat Inflation and War . 177 4. Inflation and Tyranny . 179 5. Race to the Bottom in Monetary Organization . 179 6. Business under Fiat Inflation . 179 7. The Debt Yoke . 182 vii The Ethics of Money Production 8. Some Spiritual Casualties of Fiat Inflation . 185 9. Suffocating the Flame . 188 Part 3: Monetary Order and Monetary Systems . 193 14. Monetary Order . 195 1. The Natural Order of Money Production . 195 2. Cartels of Credit-Money Producers . 197 15. Fiat Monetary Systems in the Realm of the Nation-State . 199 1. Toward National Paper-Money Producers: European Experiences. 199 2. Toward National Paper-Money Producers: American Experiences. 203 3. The Problem of the Foreign Exchanges . 206 16. International Banking Systems, 1871–1971 . 209 1. The Classical Gold Standard . 209 2. The Gold-Exchange Standard . 214 3. The System of Bretton Woods . 216 4. Appendix: IMF and World Bank after Bretton Woods . 219 17. International Paper-Money Systems, 1971– ? . 223 1. The Emergence of Paper-Money Standards . 223 2. Paper-Money Merger: The Case of the Euro . 228 3. The Dynamics of Multiple Paper-Money Standards . 230 4. Dead End of the World Paper-Money Union . 235 Conclusion . 237 1. Two Concepts of Capitalism . 237 2. Monetary Reform. 240 References . .243 Index of Names . .257 Index of Subjects . .273 viii Preface t has been a long-standing project of mine to give a concise exposition of monetary theory, with special emphasis on I the ethical and institutional aspects of money production. Money and banking have been covered more than any other subject in economics. Still there is reason to hope that the fol- lowing pages will not be superfluous, for they combine three elements that have not previously been integrated into a sin- gle work. First, this book applies the tradition of philosophical real- ism to the analysis of money and banking. The great pioneer of this approach was the fourteenth century mathematician, physicist, economist, and bishop, Nicholas Oresme, who wrote the first treatise ever on inflation and, in fact, the very first treatise on an economic problem. Oresme exclusively dealt with the debasement of coins, a form of inflation that is unimportant in our age. But the principles he brought to bear on his subject are still up to date and have by and large remained unsurpassed. In modern times, Oresme’s work has found its vindication in the writings of the Austrian School. The Austrian theory of banking and fiat money is the sec- ond element of our analysis. The Austrian School is justly famous as a standard-bearer of the realist tradition in econom- ics, and also as a champion of free-market policies. Seven gen- erations of Austrian economists have explained why private property rights provide a fundamental framework for social cooperation in a truly humane economy. They have stressed the counterproductive effects that result when property rights are violated by private individuals and governments. And they have granted no exception in the field of money and ix The Ethics of Money Production banking, demonstrating that without private initiative and its correlate—personal responsibility—the production of money is perverted into an instrument of exploitation. Only the free and responsible initiatives of private individuals, associations, and firms can create monetary institutions of the sort that truly benefit society and its members. The third element characterizing our approach is the analysis of the ethics of money and banking in line with the scholastic tradition of St. Thomas Aquinas and Nicholas Oresme. Scholasticism sought to integrate Aristotelian insights into the intellectual tradition of Christianity, under the convic- tion that science and ethics—and the projects of reason and faith generally—can be considered distinct branches of a uni- fied system of knowledge. Murray Rothbard credits Thomism with a critical development in the field of ethics, for it demonstrated that the laws of nature, including the nature of mankind, provided the means for man’s reason to dis- cover a rational ethics. To be sure, God created the natural laws of the universe, but the apprehension of these natural laws was possible whether or not one believed in God as creator. In this way, a rational ethic for man was provided on a truly scientific rather than on a supernatural foundation.1 It was this scholastic line of thought that gave rise to eco- nomics as a science. As Joseph Schumpeter wrote: It is within [the scholastics’] systems of moral theology and law that economics gained definite if not separate existence, and it is they who come nearer than does any other group to having been the “founders” of scientific economics.2 Thus the scholastic approach seems to be an appropriate starting point for an examination of the ethics of money 1Murray N. Rothbard, Economic Thought Before Adam Smith: An Austrian Perspective on the History of Economic Thought (Aldershot, England: Edward Elgar, 1995), p. 58. 2Joseph A. Schumpeter, History of Economic Analysis (New York: Oxford University Press, 1954), p. 97. x Preface production as well, both from the point of view of the history of ideas and for their contemporary application. The aforementioned three elements might at first.