Key ideas: Published in 2007. “Ultimately, we need to take control over the money supply out of the hands of our governments and make the production of money again subject to the principle of free association. The first step to endorsing and promoting this strategy is to realize that governments do not—indeed cannot—fulfill any positive role whatever through the control of our money.” (Guido Hulsmann)
Seven generations 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...
Within the Catholic Church, the popes emphasized that private property must be held inviolable, not out of any juridical dogmatism in favor of the well-to-do, but because they perceived such inviolability to be the first condition to improve the living standards of the masses...
In short, the popes championed the distinction between justice and morals—between the right to own property and the moral obligation to make good use of this property. A violation of one’s moral obligation could not possibly justify the slightest infringement of property rights. Private property is sacred even if it is abused or not used...
In the case of a society in which private property is inviolable, we may speak of a “completely free society” and its economic aspect may then be called a “free market” or a “free economy.”
Now if we turn to the empirical record, we confront the stark factcthat, in no period of human history, has paper money spontaneously emerged on the free market. No Western writer before the eighteenth century seems to have even considered that the existence of paper money was possible. The idea arose only when paper certificates for gold and silver gained a larger circulation, especially in theccontext of large-scale government finance.
The experience of other cultures and times tells the same story. Papercmoney had been introduced in China in the twelfth century, equally through compulsion and coercion by the rulers.
In all historical cases, paper money has come into existence through government-sponsored breach of contract and other violations of private-property rights. It has never been a creature of the free market.
By its very nature, paper money provides only monetary services, whereas commodity money provides two kinds of services: monetary and commodity services.
It follows that the prices paid for paper money can shrink to zero, whereas the price of commodity money, will always be positive as long as it attracts a nonmonetary demand.
If the prices paid for a paper money fall to zero, then this money can never be re-monetized again, because short of an already-existing price system the market participants could not evaluate the money unit. Thus the use of paper money carries the risk of total and permanent value annihilation. This risk does not exist in the case of commodity money, which always carries a positive price and which can therefore always be re-monetized.
In a truly free market, paper money could not withstand the competition of commodity monies. The more farsighted and prudentmarket participants would get rid of their paper money first, and the others would follow in due course. At the end of this process, which could be consummated in but a few seconds, but which could conceivably also last a few years, the paper currency would be completely eradicated.
Paper money is not a market phenomenon.
An economic good that is defined entirely in terms of bits and bytes is unlikely ever to be produced spontaneously on a free market, for the very same reasons that we just discussed in the case of paper money. And despite the dedicated efforts of various individuals and associations, no such money has in fact ever been produced since the creation of the Internet made electronic payments possible. At present, only government money has been produced in electronic form; and as in the case of paper money, governments could do this only because they have the possibility to suppress competition.
On the free market, the new information technologies have been unable to create any new monies. They have been able to develop various new instruments to access and transfer money. These new electronic techniques of dealing with money are very efficient and beneficial, but they must not be confused with the creation of electronic money.
A trustworthy 1-ounce silver coin is more valuable than 1 ounce of silver bullion. People therefore pay higher prices for coins than for bullion, and the miner lives off this price margin...
Economic science has put us in a position to understand that competitive coinage is an even better way of preserving the trustworthiness of coins. There is no economic reason not to allow every private citizen to enter the minting business and to offer his own coins.
It is true that a private minter too might abuse the trust his customers put in him and his coins. But punishment is immediate: he will lose all these customers.
Now the use of all means of action is conditioned by the law of diminishing marginal value.
According to this law, the relative importance of any unit of an economic good for its owner—or, as economists say, the marginal value of any unit—diminishes as we come to control a greater overall supply of this good, and vice versa.
The reason is that each additional unit enables us to pursue new objectives that we would not otherwise have chosen to pursue. Therefore, these objectives are necessarily less important for the acting person than the objectives that he would have pursued with the smaller supply...
It follows that the production of any additional unit of money makes money less valuable for the owner of this additional unit than it would otherwise have been. In particular, it becomes less valuable for him as compared to all other goods and services.
As a consequence, he will now tend, as a buyer of goods and services, to pay more money in exchange for these other goods and services; and as a seller of goods and services, he will now tend to ask for higher money payment.
In short, money production entails a tendency for money prices to increase. This tendency will at first show itself in the prices paid by the money producer himself. But then it will spread throughout the rest of the economy because those individuals who sold their goods and services to the money producer now also have larger cash balances than they otherwise would have had.
Money production therefore redistributes real income from later to earlier owners of the new money.
Whenever and wherever it [paper money] came into being, it existed only because the courts and the police suppressed the natural alternatives.
In other words, to have a paper money means:
- to allow the government to significantly curtail the personal liberties of its citizens. - It means to curtail the freedom of association and the freedom of contract in a way that affects the citizens on a daily basis and on a massive scale. - It means send in the police and to use the courts to combat human cooperation involving "natural monies" such as gold and silver, monies in use since biblical times.
Then the classical economists stated very clearly that, in principle, any quantity of money would do; even though they qualified this proposition in the light of various false doctrines they had inherited from their mercantilist predecessors.
Oresme clearly saw that increases of the nominal money supply would enrich the princes at the expense of the community.
The truth is often deceptively simple. It is the errors that are manifold and complicated. So it is at any rate in the case of money.
The simple truth is that there is no need for political intervention to impose monies different from the ones that the market participants would have chosen anyway. But many doctrines have been concocted to justify precisely such intervention.
The most widespread monetary fallacy is probably the naïve belief that economic growth is possible only to the extent that it is accompanied by a corresponding growth of the money supply.
Suppose the economy growths at an annual rate of 5 percent. Then according to that fallacy it is necessary to increase the money supply also by 5 percent because otherwise the additional goods and services could not be sold.
This argument is wrong because any quantity of goods and services can be exchanged with virtually any money supply. Suppose the money supply in our example does not change. If 5 percent more goods and services are offered on the market, then all that happens is that the money prices of these goods and services will decrease. The same mechanism would allow economic growth even when the quantity of money shrinks. Any rate of growth can therefore be accommodated by virtually any supply of natural monies such as gold and silver.
This is not a mere theoretical possibility but the normal state of affairs in periods of a stable or falling price level. For example, in the last three decades of the nineteenth century, both Germany and the U.S. experienced high growth rates at stable and declining consumer-price levels. The same thing is observed more recently in the market for computers and information technology, the most vibrant market since the 1980s, which has combined rapid growth with constantly falling product prices.
The foregoing considerations also apply to the phenomenon of hoarding. It is impossible to use money without holding a certain amount of it; thus every participant in a monetary economy hoards money. The reason why the pejorative term "hoarding" is sometimes used in lieu of the more neutral "holding" is that, in the mind of the commentator, the amounts of money held by this or that person are excessive. The crucial question is of course: by which standard?
For centuries, holding large numbers of gold and silver coins was an important way for people to save their own private pension funds, and in many times and places it was the only way to provide for old age and emergency situations.
Similarly, in times of stock market and real-estate booms, it is generally prudent to keep a large amount of one's wealth in cash.
As we have stated above, the absolute money supply of an economy is virtually irrelevant. The economy can work, and work well, with virtually any quantity of money. Hoarding merely entails a reduction of money prices; hoarding on a mass scale merely entails a large reduction of money prices.
At any point of time, the available supplies of factors of production put a limit on the number of investment projects that can be successfully completed.
What the artificial decrease of the real interest rate does is to increase the number of projects that are launched. But the total volume of investments that can be completed has not thereby increased the productive resources that are objectively available during the time needed for completion...
This fundamental fact is emphasized by Jesus as quoted by St. Luke:
Which of you wishing to construct a tower does not first sit down and calculate the cost to see if there is enough for its completion? Otherwise, after laying the foundation and finding himself unable to finish the work the onlookers should laugh at him and say, "This one began to build but did not have the resources to finish." (Luke 14: 28--30)
As long as the citizens are free to choose their money, they can avoid exposure to any violent fluctuations of the PPM by simply switching to other monies.
Throughout the entire twentieth century, in all countries, the purchasing power of money managed by public authorities declined and oscillated as never before in the entire history of monetary institutions...
Businessmen and others use money prices in their economic calculations, and to make these calculations as accurate as possible it is necessary to have a stable standard of value.
... it appears that older writers such as Oresme were right all along to neglect the stable PPM criterion, and to keep their attention focused on monetary stability in the sense of the physical integrity of coinage.
Now we must turn to deal with the vitally important phenomenon of inflation.
We can define it as an extension of the nominal quantity of any medium of exchange beyond the quantity that would have been produced on the free market.
Why do people inflate the money supply in the first place? As we have seen, each new money unit benefits the first recipients; for example, under a silver standard, the miners and minters of silver... But we must not ignore that the benefits that accrue to the first recipient also present a constant temptation to forcibly increase the money supply.
The history of monetary institutions is very much the history of how people - governments and private citizens alike, but mostly governments - have given to this temptation.
People inflate the money supply because they stand to profit from it.
Governments at nearly all times and places have been the main beneficiaries of inflation. Rather than protecting society from it, therefore, all of them have sooner or later given in to the temptation of using inflation for their own purposes...
Governments inflate the money supply because they gain revenue from inflation.
Nicholas Oresme argued that this fact was at the root of the monetary interventions of the princes:
I am of the opinion that the main and final cause why the prince pretends to the power of altering the coinage is the profit or gain which he can get from it; it would otherwise be vain to make so many and so great changes... Besides, the amount of the prince's profit is necessarily that of the community's loss.
The times have changed and the techniques of inflation have changed with them. But governments still intervene in the production of money and money certificates in order to obtain additional income.
The difference between our time and the age of Oresme is that present-day governments have received absolution from the scientific authorities of our day.
Many princes blushed when they were caught debasing the currency of the country. But modern presidents, prime ministers, and chancellors can keep a straight face and justify inflation with the alleged need to stabilize the price level and to finance growth. All the recognized experts say so. And it betrays a lack of courtesy to point out that "recognition" of an expert means that he is on the government's payroll.
Only the government has the power to make inflation a widespread, large-scale, and permanent phenomenon, because only the government has the power to systematically prevent the citizens from spontaneously adopting the best possible monies and money certificates.
A legal tender is money or a money certificate that may be used to make payments against the will of one of the exchange partners. Thus the law overrides private contract and provides that the legal tender shall be accepted as payment, rather than the money (or money certificate) promised to the seller or creditor.
Notice first of all that a good moral case against paper money can be made on the mere ground of its illegitimate origins.
And as we have seen, there are good reasons to believe that paper money by its very nature involves the violation of property rights through monopoly and legal-tender privileges.
But at any rate it is a matter of fact that, at present, all paper monies of the world continue to be protected through such legal privileges in their countries of origin. We have argued that these privileges cannot be justified, certainly not in the case of money, because there is no need for fiat inflation. It follows that our present-day paper monies, which thrive on these privileges, are morally inadmissible.
To appreciate the disruptive nature of inflation in its full extent we must keep in mind that it springs from a violation of the fundamental rules of society.
Inflation is what happens when people increase the money supply by fraud, imposition, and breach of contract. Invariably it produces three characteristic consequences:
(1) it benefits the perpetrators at the expense of all other money users; (2) it allows the accumulation of debt beyond the level debts could reach on the free market; and (3) it reduces the PPM below the level it would have reached on the free market.
While these three consequences are bad enough, things get much worse once inflation is encouraged and promoted by the state. The government's fiat makes inflation perennial, and as a result we observe the formation of inflation-specific institutions and habits.
Thus fiat inflation leaves a characteristic cultural and spiritual stain on human society. In the present chapter, we will take a closer look at some aspects of this legacy.
The net effect of the recent surge in household debt is therefore to throw entire populations into financial dependency. The moral implications are clear. Towering debts are incompatible with financial self-reliance and thus they tend to weaken self-reliance also in all other spheres.
The debt-ridden individual eventually adopts the habit of turning to others for help, rather than maturing into an economic and moral anchor of his family, and of his wider community. Wishful thinking and submissiveness replace soberness and independent judgment. And what about the many cases in which families can no longer shoulder the debt load? Then the result is either despair or, alternatively, scorn for all standards of financial sanity.
Inflation makes society materialistic