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Second Vatican Council. Gaudium et Spes (1965).

Pope John XXIII. Mater et Magistra (1961).

Pope Pius XI. Quadragesimo Anno (1931).

Pope Leo XIII. Rerum Novarum (1891).

Pope Leo XIII. Arcanum Divinae (1880).

Pope Innocent III. “Quanto.” Decretalium Gregorij Papae Noni Compilatio, Liber II, Titulus XXIII, Caput XVIII, col. 809–10 [1199].

Notes

Preface

¹ Murray N. Rothbard, Economic Thought Before Adam Smith: An Austrian Perspective on the History of Economic Thought (Aldershot, England: Edward Elgar, 1995), p. 58.

² Joseph A. Schumpeter, History of Economic Analysis (New York: Oxford University Press, 1954), p. 97.

Introduction

¹ See, for example, Jack Guynn, “Ethical Challenges in a Market Economy” (speech delivered at Bridgewater College, Bridgewater, Virginia, April 11, 2005). The author is the president and CEO of the Federal Reserve Bank of Atlanta.

² John Paul II, Centesimus Annus (1991), §§19, 48.

³ John XXIII, Mater et Magistra (1961), §129. There is also no entry on our subject in the recent official compilation of documents pertaining to Catholic social doctrine; see Pontifical Council for Justice and Peace, Compendium of the Social Doctrine of the Church (Vatican: Libreria Editrice Vaticana, 2004).

⁴ Few works in current literature stress this point. See Angela Redish, Bimetallism—An Economic and Historical Analysis (Cambridge: Cambridge University press, 2000); T.J. Sargent and F.R. Velde, The Big Problem of Small Change (Princeton, N.J.: Princeton University Press, 2002).

⁵ For an overview, see Rousas J. Rushdoony, “Hard Money and Society in the Bible,” in Hans Sennholz, ed., Gold Is Money (Westport, Conn.: Greenwood, 1975).

⁶ See Nicholas Oresme, “A Treatise on the Origin, Nature, Law, and Alterations of Money,” in Charles Johnson, ed., The De Moneta of Nicholas Oresme and English Mint Documents (London: Thomas Nelson and Sons, 1956).

⁷ The notion that economic considerations must be taken account of in moral deliberation is not foreign to Christian thought. For a discussion of the scholastic doctrine of “Common Good” and the related problem of scaling values, see Jacob Viner, “Religious Thought and Economic Society,” History of Political Economy 10, no. 1 (Spring 1978): 50–61. The ethical implications of social science—especially economics—have recently been discussed with much vigor in Leland B. Yeager, Ethics as Social Science: The Moral Philosophy of Social Cooperation (Cheltenham, U.K.: Edward Elgar, 2001). The existence of such implications is also recognized and emphasized in Catholic social doctrine. To put the matter in very simple terms: while the general mission of the Church (evangelization) stresses certain universal principles of faith and morals, the application of these principles to concrete problems (such as money production) must also rely on information provided by the social sciences. See Second Vatican Council, Gaudium et Spes, No. 36 (1965); Hervé Carrier, Nouveau regard sur la doctrine sociale de l’église (Vatican: Pontifical Council “Justice and Peace,” 1990), pp. 42–44, 200–02; Pontifical Council for Justice and Peace, Compendium of the Social Doctrine of the Church, §9, pp. 4–5.

⁸ The concept of social justice has been developed by Luigi Taparelli d’Azeglio, Saggio teoretico di diritto naturale appogiato sul fatto (5 vols., Palermo: Antonio Muratori, 1840–43). Pius XI adopted it for his exposition of Catholic social doctrine in Quadragesimo Anno. He said in particular:

The public institutions themselves, of peoples... ought to make all human society conform to the needs of the common good; that is, to the norm of social justice. If this is done, that most important division of social life, namely, economic activity, cannot fail likewise to return to right and sound order. (§110)

And the man who wrote the first draft of this encyclical emphasized that social justice was supposed to have an impact on economic institutions via the legal framework: “it shall bring about a legal social order that will result in the proper economic order.” Oswald von Nell-Breuning, Reorganization of Social Economy: The Social Encyclical Developed and Explained (Milwaukee: Bruce, 1936), p. 250. For an excellent discussion of social justice see Matthew Habiger, Papal Teaching on Private Property, 1891 to 1991 (Lanham, Md.: University Press of America, 1990), pp. 103–29.

⁹ Fractional-reserve banks do not keep all the money that their customers deposit with them, but lend a part of the deposit to other people; in most textbooks this is called “bank money creation.” The customer’s bank account is therefore only partially (fractionally) backed by corresponding money under direct control of the bank. Below we will deal with this type of business in more detail.

¹⁰ A good number of authors who have analyzed the modern problems of money production from a Christian point of view have arrived at very similar conclusions, and did not hold back these views out of any misconceived notion of temperance. Fr. Dennis Fahey started his book quoting from a letter to the Apostolic Delegate in Great Britain. The letter was from the pen of a group of mainly Catholic businessmen and scholars. The authors state that they had “studied the fundamental causes of the present world unrest” and “have long been forced to the conclusion that an essential first step... is the immediate resumption by the community in each nation of its prerogative over the issue of money including its modern credit substitutes.” Money Manipulation and Social Order (Dublin: Browne & Nolan, 1944). And Fr. Anthony Hulme concluded his exquisite study quite along the same lines:

The work was written to show that there is a problem, to show that the problem is chiefly one of creation of interest bearing debt which is permitted to be used as basis for money, to show the way in which this is permeated by the rights to a return on money lent. (Morals and Money [London: St. Paul Publications, 1957], p. 160)

¹¹ On Oresme see in particular Émile Bridrey, La théorie de la monnaie au XIVe siècle, Nicolas Oresme (Paris: Giard & Brière, 1906), Pierre Souffrin and Alain P. Segonds, eds., Nicolas Oresme, Tradition et innovation chez un intellectuel du XIVe siècle (Paris: Les Belles Lettres, 1988); Lucien Gillard, “Nicole Oresme, économiste,” Revue historique 279 (1988); Jeanne Quillet, ed., Autour de Nicole Oresme, Actes du Colloque Oresme organisé à l’Université de Paris XII (Paris: Bibliothèque de l’histoire de la philosophie, 1990); Bertram Schefold, ed., Vademecum zu einem Klassiker der mittelalterlichen Geldlehre (Düsseldorf: Wirtschaft & Finanzen, 1995). Recent surveys of the literature are in J.H.J. Schneider, “Oresme, Nicolas,” Biographisch-Bibliographisches Kirchenlexikon 6 (Nordhausen: Bautz, 1993); and in Hendrik Mäkeler, “Nicolas Oresme und Gabriel Biel: Zur Geldtheorie im späten Mittelalter,” Scripta Mercaturae 37, no. 1 (2003). A recent work stressing the political implications of Oresme’s “Treatise” is C.J. Nederman, “Community and the Rise of Commercial Society: Political Economy and Political Theory in Nicholas Oresme’s De Moneta,” History of Political Thought 21, no. 1 (2000).

¹² A very thorough study of Aquinas’s monetary thought and its sources of inspiration is in Fabian Wittreck, Geld als Instrument der Gerechtigkeit. Die Geldrechtslehre des Hl. Thomas von Aquin in ihrem interkulturellen Kontext (Paderborn: Schöningh, 2002). More generally on the “School of Paris” (to which Aquinas belonged) see Odd Langholm, Economics in the Medieval Schools: Wealth, Exchange, Value, Money and Usury According to the Paris Theological Tradition, 1200–1350 (Leiden: Brill, 1992).

¹³ In the original: “des idées très justes, plus justes que celles qui dominèrent longtemps après lui.” Victor Brants, L’économie politique au Moyen-Age: esquisse des théories économiques professées par les écrivains des XIIIe et XIVe siècles (reprint, New York: Franklin, [1895] 1970), p. 187, footnote 2; and p. 190.

¹⁴ See Huerta de Soto, “New Light on the Prehistory of the Theory of Banking and the School of Salamanca,” Review of Austrian Economics 9, no. 2 (1996). Modern translations of these writings are not readily available. However, thanks to the Acton Institute, two works of the School of Salamanca have recently been translated and published in English: Juan de Mariana, “A Treatise on the Alteration of Money,” Journal of Markets and Morality 5, no. 2 ([1609] 2002); and Martín de Azpilcueta, “Commentary on the Resolution of Money,” Journal of Markets and Morality 7, no. 1 ([1556] 2004). Since we cannot go into detail, let us merely remark that both works lack the lucidity and penetration that can be found in Oresme’s treatise. Moreover, Azpilcueta’s work does not really deal with money, but with exchange in general and in particular with the concept of just price. It considers monetary problems (such as the distinction between the monetary and nonmonetary use of coins) only to the extent that they affect this concept. To the present author it is a mystery why the original title “comentario resolutorio de cambios” has been rendered as “commentary on the resolution of money.” A literal translation would be “commentary settling problems of the theory of exchange.”

¹⁵ See Richard Cantillon, La nature du commerce en général (Paris: Institut national d’études démographiques, 1997); David Hume, Essays (Indianapolis: Liberty Fund, 1987); Étienne Condillac, Le commerce et le gouvernement, 2nd ed. (Paris: Letellier, 1795); John Wheatley, The Theory of Money and Principles of Commerce (London: Bulmer, 1807); David Ricardo, Works and Correspondence (Cambridge: Cambridge University Press, 1951–73), vol. 4; William Gouge, A Short History of Paper Money and Banking in the United States (New York: Kelley, 1968).

¹⁶ See Carl Menger, Grundsätze der Volkswirtschaftslehre (Vienna: Braumüller, 1871); idem, Untersuchungen über die Methode der Socialwis-senschaften und der politischen Oekonomie insbesondere (Leipzig: Duncker & Humblot, 1883), pp. 161–78; idem, “Geld” (1892); Ludwig von Mises, Theorie des Geldes und der Umlaufsmittel (Leipzig: Duncker & Humblot, 1912); Human Action (Auburn, Ala.: Ludwig von Mises Institute, [1949] 1998); Nurray N. Rothbard, Man, Economy, and State, 3rd ed. (Auburn, Ala.: Ludwig von Mises Institute, 1993); idem, What Has Government Done to Our Money?, 4th ed. (Auburn, Ala.: Ludwig von Mises Institute, 1990); idem, The Mystery of Banking (New York: Richardson & Snyder, 1983); idem, The Case Against the Fed (Auburn, Ala.: Ludwig von Mises Institute, 1994). See also F.A. Hayek, Free Choice in Currency (London: Institute of Economic Affairs, 1976); Henry Hazlitt, The Inflation Crisis and How to Resolve It (Irvington-on-Hudson, N.Y.: Foundation for Economic Education, [1978] 1995); Hans Sennholz, Age of Inflation (Belmont, Mass.: Western Islands, 1979); idem, Money and Freedom (Spring Mills, Penn.: Libertarian Press, 1985). Among the earlier noteworthy contributions to the Austrian theory of money and banking see in particular Fritz Machlup, Die Goldkernwährung (Halberstadt: Meyer, 1925); F.A. Hayek, Monetary Nationalism and International Stability (New York: Kelley, [1937] 1964).

¹⁷ See in particular Pascal Salin, La vérité sur la monnaie (Paris: Odile Jacob, 1990); George Reisman, Capitalism (Ottawa, Ill.: Jameson Books, 1996); Jesús Huerta de Soto, Money, Bank Credit, and Economic Cycles (Auburn, Ala.: Ludwig von Mises Institute, 2006). See also Mark Skousen, Economics of a Pure Gold Standard, 3rd ed. (Irvington-on-Hudson, N.Y.: Foundation for Economic Education, 1996); Walter Block, “Fractional Reserve Banking: An Interdisciplinary Perspective,” Walter Block and Llewellyn H. Rockwell, Jr., eds., Man, Economy, and Liberty (Auburn, Ala.: Ludwig von Mises Institute, 1988); Hans-Hermann Hoppe, The Economics and Ethics of Private Property (Boston: Kluwer, 1993), chap. 3; idem, “How Is Fiat Money Possible?—or, The Devolution of Money and Credit,” Review of Austrian Economics 7, no. 2 (1994); Hans-Hermann Hoppe, Jörg Guido Hülsmann, and Walter Block, “Against Fiduciary Media,” Quarterly Journal of Austrian Economics 1, no. 1 (1998): 19–50; Jörg Guido Hülsmann, Logik der Währungskonkurrenz (Essen: Management Akademie Verlag, 1996); special issue on “L’Or, fondement monétaire du commerce international” in Le point de rencontre—libéral et croyant, vol. 49 (October 1996); special issue on “Deflation and Monetary Policy” in Quarterly Journal of Austrian Economics 6, no. 4 (2003).

¹⁸ It is indeed more than a mere affinity. Rothbard and Huerta de Soto have explored the historical roots of Austrian economics in the economic writings of the late-scholastic School of Salamanca. See Murray Rothbard, “New Light on the Prehistory of the Austrian School,” Edwin Dolan, ed., The Foundations of Modern Austrian Economics (Kansas City: Sheed & Ward, 1976), pp. 52–74; idem, Economic Thought Before Adam Smith (Cheltenham, U.K.: Edward Elgar, 1995), chap. 4; Alejandro Chafuen, Faith and Liberty: The Economic Thought of the Late Scholastics, 2nd ed. (New York: Lexington Books, 2003); Jesús Huerta de Soto, “New Light on the Prehistory of the Theory of Banking and the School of Salamanca”; idem, “Juan de Mariana: The Influence of the Spanish Scholastics,” Randall Holcombe, ed., 15 Great Austrian Economists (Auburn, Ala.: Ludwig von Mises Institute, 1999). See also Jean-Michel Poughon, “Les fondements juridiques de l’économie politique,” Journal des Économistes et des Études Humaines 1, no. 4 (1990). On the School of Salamanca, see in particular Marjorie Grice-Hutchinson, The School of Salamanca (Oxford: Clarendon Press, 1952); Wilhelm Weber, Geld und Zins in der spanischen Spätscholastik (Münster: Aschendorff, 1962); Ramon Tortajada, “La renaissance de la scolastique, la Réforme et les théories du droit naturel,” A. Béraud and G. Faccarello, eds., Nouvelle histoire de la pensée économique (Paris: La Découverte, 1992), vol. 1, chap. 2.

¹⁹ Julius Kirshner, “Raymond de Roover on Scholastic Economic Thought,” introduction to R. de Roover, Business, Banking, and Economic Thought in Late Medieval and Early Modern Europe (Chicago: University of Chicago Press, 1974), p. 21. Kirshner’s teacher, de Roover, stated:

The great difference between scholastics and contemporary economics is one of scope and methodology: the Doctors approached economics from a legal point of view. They attached excessive importance to formalism, so that the study of economics nearly reduced itself to an investigation into the form and nature of contracts. (Ibid., p. 21)

At the end of the present work, the reader will be in a better position to judge the extent to which this approach is “excessive” or justifiable in the light of useful results.

²⁰ In a brilliant essay, the Lutheran theologian Wilhelm Kasch has argued that the present-day separation of monetary theory and theology has harmed both disciplines. It has driven theology toward a gnostic denial of the world; and it has turned monetary theory into a narrow auxiliary discipline of central-bank policy. Kasch points out that monetary theory, precisely because it is so narrowly conceived, is in the process of misunderstanding its subject matter and losing any scientific foundation, turning itself into a barren intellectual game. See Wilhelm Kasch, “Geld und Glaube. Problemaufriß einer defizitären Beziehung,” idem, ed., Geld und Glaube (Paderborn: Schöningh, 1979). This problem persists to the present day. The discussion of the theological and moral aspects of money production typically revolves around the—vague—central-bank objective of monetary stability. See for example H. Hesse and O. Issing (eds.), Geld und Moral (Munich: Vahlen, 1994).

²¹ Dempsey, Interest and Usury (Washington, D.C.: American Council of Public Affairs, 1943), p. 116; see also pp. 1–6. Based on this work, Fr. Dempsey received his Ph.D. in economics at Harvard under Schumpeter. On Dempsey’s economics see Stephen D. Long, “Bernard Dempsey’s Theological Economics: Usury, Profit, and Human Fulfillment,” Theological Studies 12, no. 1 (1996); idem, Divine Economy: Theology and the Market (London: Routledge, 2000), pp. 195–214; John T. Noonan, The Scholastic Analysis of Usury (Cambridge, Mass.: Harvard University Press, 1957), pp. 403–06.

²² See Friedrich Beutter, Zur sittlichen Beurteilung von Inflationen (Freiburg: Herder, 1965), pp. 173, 178–79.

²³ Hulme, Morals and Money, p. 71.

²⁴ The same characteristic set of ideas (acceptance of the basic case for inflation; therefore only rejection of “private” fractional-reserve banking, while endorsement of “public” fiat paper money) can be identified in all major Catholic authors until the early post-war period. See for example, Fathers Francis Drinkwater, Money and Social Justice (London: Burns, Oates & Washbourne, 1934); Charles Coughlin, Money! Questions and Answers (Royal Oak, Mich.: National Union for Social Justice, 1936); and Dennis Fahey, Money Manipulation and Social Order (1944); Oswald von Nell-Breuning and J. Heinz Müller, Vom Geld und vom Kapital (Freiburg: Herder, 1962). A critique of Coughlin and Fahey is in Thomas Woods, The Church and the Market (Lanham, Md.: Lexington Books, 2005), pp. 106–09. Hilaire Belloc and John Ryan maintained similar economic views as Coughlin and Fahey. For a present-day work of this orientation see Joseph Huber and James Robertson, Creating New Money (London: New Economics Foundation, 2000).

²⁵ This should not be taken as an all-out endorsement of North’s more general enterprise of developing a “Christian economics.” The present author does not believe that there is such a discipline, just as there is no Bolshevist mathematics or Muslim quantum physics.

²⁶ Among the better works of this group we might mention Howard Kershner’s God, Gold, and Government (Englewood Cliffs, N.J.: Prentice-Hall, 1957), R.J. Rushdoony’s Institutes of Biblical Law (Nutley, N.J.: Craig Press, 1973) and The Roots of Inflation (Vallecito, Calif.: Ross House Books, 1982), Ian Hodge’s Baptized Inflation (Tyler, Texas: Dominion Press, 1986), and Tom Rose’s God, Gold, and Civil Government (2002). See also Roland Baader, Geld, Gold und Gottspieler (Gräfelfing: Resch, 2004).

²⁷ See Lawrence H. White, “The Federal Reserve System’s Influence on Research in Monetary Economics,” Econ Journal Watch 2, no. 2 (2005): pp. 325–54. Significantly, the only recent successful campaign for monetary reform that was led by professional economists had to avoid the involvement of “experts” employed with monetary authorities. When Fritz Machlup, Milton Friedman, and others prepared the reform of the Bretton Woods system in the late 1960s, they studiously excluded any intellectuals employed by or affiliated with the IMF. Institutional backing came from outside the monetary establishment, namely, from the American Enterprise Institute. The movement eventually rallied in the town of Bürgenstock in Switzerland. See the eyewitness account of one of the members of the Bürgenstock Group in Wolfgang Kaspers, “The Liberal Idea and Populist Statism in Economic Policy: A Personal Perspective,” Hardy Bouillon, ed., Do Ideas Matter? Essays in Honour of Gerard Radnitzky (Brussels: Centre for the New Europe, 2001), p. 118.

1. Monies

¹ David Ricardo first formulated this law as a law of comparative cost within the context of the theory of foreign trade. Later economists such as Pareto, Edgeworth, Seligman, and Mises argued that it was in fact a general law of exchange. Mises coined the expression “law of association.” See David Ricardo, Principles of Political Economy and Taxation (London: Penguin, 1980), chap. 7, footnote; Ludwig von Mises, Socialism (Indianapolis, Ind.: Liberty Fund, 1981), pp. 256–61; idem, Nationalökonomie (Geneva: Union, 1940), pp. 126ff.; idem, Human Action (Auburn, Ala.: Ludwig von Mises Institute [1949] 1998), pp. 158–63.

² A thing that is fungible and primarily used in consumption. See Oswald von Nell-Breuning, “Geld,” Lexikon für Theologie und Kirche, 2nd ed. (Freiburg: Herder, 1960), vol. 4, p. 633. This insight was anticipated in Aristotle’s Politics, book 1, chap. 9, who placed great emphasis on the fact that people make money out of a thing that is one of the most useful things anyway, and which can be most conveniently handled. The same point was later a staple of economic thought. See in particular, John Law, Money and Trade Considered etc. (Edinburgh: Anderson, 1705), chap. 1; Adam Smith, Wealth of Nations (New York: Modern Library, 1994), bk. 1, chap. 4, pp. 24–25; Carl Menger, Grundsätze der Volkswirtschaftslehre (Vienna: Braumüller, 1871), chap. 8, p. 253; Ludwig von Mises, Theory of Money and Credit (Indianapolis: Liberty Fund, 1980), chap. 1, p. 44.

³ The concept of natural money is not much used in the contemporary literature, but it has a venerable tradition in economics. See for example William Gouge, A Short History of Paper Money and Banking (reprint, New York: Augustus M. Kelley, [1833] 1968), pp. 7–17, where the author speaks of “real money”; Frédéric Bastiat, “Maudit Argent,” Journal des économistes (April 1849); appeared in translation in Quarterly Journal of Austrian Economics 5, no. 3 (2002); idem, Harmonies économiques, 2nd ed. (Paris: Guillaumin, 1851), chap. 1 on natural and artificial organization; and Angel Rugina, Geldtypen und Geldordnungen (Stuttgart: Kohlhammer, 1949), pp. 46–47. See also Carlo Lottieri, Denaro e comunità (Naples: Alfredo Guida, 2000), pp. 72ff.

⁴ See Mises, Human Action, chaps. 8 and 15; Murray N. Rothbard, The Ethics of Liberty, 2nd ed. (New York: New York University Press, 1998); Hans-Hermann Hoppe, A Theory of Socialism and Capitalism (Boston: Kluwer, 1989); idem, The Economics and Ethics of Private Property (Boston: Kluwer, 1993); idem, Democracy—The God That Failed (New Brunswick, N.J.: Transaction, 2001).

⁵ Pope Leo XIII wrote: “The first and most fundamental principle, therefore, if one would undertake to alleviate the condition of the masses, must be the inviolability of private property” (Rerum Novarum, §§11, 15). His successors have similarly emphasized the moral character of private property. For example, John XXIII stated that “private ownership must be considered as a guarantee of the essential freedom of the individual, and at the same time an indispensable element in a true social order” (Mater et Magistra, §111).

⁶ See on this distinction Thomas Aquinas, Summa theologica, IIa–IIae, q. lxvi, art. 2, answer; Leo XIII, Rerum Novarum, §22.

⁷ Pius XI, Quadragesimo Anno, §47. He is quoting Leo XIII’s encyclical Rerum Novarum. Generally speaking, the Catholic attitude toward property has two characteristic features. First, each property owner is morally commanded to use his property as though it were the property of all. Middle-class Christians should use their property with “liberality” and rich Christians should use it with “magnificence.” See Summa theologica, II–II, q. 66, a. 2, ad 3, and II–II, q. 134, a. 2 and a. 3. Second, private property rights are derived from a “fundamental property right”—the fact that God destined the earth to serve all of mankind. See Rerum Novarum, §§7 and 8; Gaudium et Spes, §69. Austrian economists have placed great emphasis on the fact that private property in the means of production has much more beneficial social effects than coerced communal ownership. See in particular Mises, Socialism, pp. 27–32. In other words, the destination of the means of production to serve the broad masses is an built-in feature of a free economy. On property rights in Christian dogma, see John Paul II, Centesimus Annus, §§30–43; see also Matthew Habiger, Papal Teaching on Private Property, 1891 to 1991 (New York: University Press of America, 1990); Pontifical Council for Justice and Peace, Compendium of the Social Doctrine of the Church §171–84, pp. 96–104.

⁸ John Paul II, Centesimus Annus, §42.

⁹ See Rupert J. Ederer, The Evolution of Money (Washington, D.C.: Public Affairs Press, 1964), pp. 92–93; Elgin Groseclose, Money and Man: A Survey of Monetary Experience (New York: Frederick Ungar, 1961), p. 119.

¹⁰ Paper money must not be confused with credit money made out of paper, or with money certificates made out of paper. The latter can be redeemed into commodity money; the former cannot. Note that economists have used the expression “paper money” both in the narrow sense in which we use it here and in a larger sense, which covers paper money in the narrow sense as well as credit money and paper certificates for money.

¹¹ A good overview is in John E. Chown, A History of Money (London: Routledge, 1994), part 3. See also George Selgin, “On Ensuring the Acceptability of a New Fiat Money,” Journal of Money, Credit, and Banking 26 (1994); Kevin Dowd, “The Emergence of Fiat Money: A Reconsideration,” Cato Journal 20, no. 3 (2001). Note again that paper money must not be confused with credit money.

¹² Note that the Bank of England was established in 1694, a few years after the creation of the Bank of Sweden. Probably it was the French philosopher Montesquieu who first held that a pure “sign money,” or, as he called it, “ideal money” was possible. See Charles de Montesquieu, De l’esprit des lois (Paris: Gallimard/Pléiade, 1951), book 22, chap. 3, p. 653. However, he thought that anything but “real money” (commodity money) would invite abuses, an opinion shared by many later illustrious economists such as David Ricardo and Ludwig von Mises. An exception was James Steuart, who actually endorsed a pure “money of account.” See James Steuart, An Inquiry Into the Principles of Political Economy (London: Millar & Cadell, 1767), book 3, chap. 1.

¹³ It is still useful to read contemporary analyses of these events. See for example William Gouge, A Short History of Paper Money and Banking in the United States, part 2; Adolph Wagner, Die russische Papierwährung (Riga: Kymmel, 1868), chap. 8, pp. 116–80; Karl Heinrich Rau, Grundsätze der Volkswirtschaftslehre, 7th ed. (Leipzig & Heidelberg: Winter, 1863), §310–17, pp. 391–415; William Graham Sumner, History of Banking in the United States (New York: Augustus M. Kelley, [1896] 1971).

¹⁴ See Jonathan Williams et al., Money: A History (London: Palgrave Macmillan, 1998), chap. 6.

¹⁵ See Hülsmann, Logik der Währungskonkurrenz (Essen: Management Akademie Verlag, 1996), pp. 260–74, 307.

¹⁶ See Benjamin Anderson, The Value of Money (reprint, Grove City, Penn.: Libertarian Press, [1917]), chap. 7 “Dodo-Bones,” p. 125.

¹⁷ Georg Holzbauer argued that the value of paper money was ultimately rooted in the fact that the government forces its citizens to use those paper slips to pay taxes. It thus had a “tax foundation.” See Georg Holzbauer, Barzahlung und Zahlungsmittelversorgung in militärisch besetzten Gebieten (Jena: Fischer, 1939), pp. 85–87. For a similar argument see Yuri Kuznetsov, “Fiat Money as an Administrative Good,” Review of Austrian Economics 10, no. 2 (1997): 111–14.

¹⁸ Below we will examine whether fiat paper money is viable in the long run, and how it stands up to moral standards.

2. Money Certificates

¹ See Aristotle, Politics, bk. 1, chap. 9.

² An early writer who stressed this fact was Nicholas Copernicus. See Copernicus, “Traité de la monnaie,” in L. Wolowski, ed., Traité de la première invention des monnoies, de Nicole Oresme... et Traité de la monnoie, de Copernic (Paris: Guillaumin, 1864), pp. 52–53. “L’empreinte de garantie ajoute quelque valeur à la matière elle-même” (p. 53).

³ Most historical coins have been fabricated in government mints. This has misled many people into believing that the superior value of coins as compared to bullion demonstrates that the legal sanctioning of a coin is the source of its superior value as compared to bullion. For example, the ancient Greeks called money “noumisma” (from “nomos”—the law); and at the beginning of the twentieth century, the German professor Knapp popularized what he called the “state theory of money.” The idea that government fiat was a source of value has inspired many extravagant theories and political schemes. As we shall see, the truth is that government-enforced legislation can provide a few privileged coin makers with a monopoly rent. But this has nothing to do with coinage per se. Even without any legal sanction, trustworthy coins are more valuable than bullion. This value difference springs, as we have seen, from the service of certification. Historically, private coinage came first and only later did governments take over. See Arthur Burns, Money and Monetary Policy in Early Times (New York: Augustus M. Kelley, [1927] 1965), pp. 75–77, 442–44.

⁴ Nicholas Oresme, “A Treatise on the Origin, Nature, Law, and Alterations of Money,” in Charles Johnson, ed., The De Moneta of Nicholas Oresme and English Mint Documents (London: Thomas Nelson and Sons, 1956), p. 16.

⁵ It is not necessary for us to dwell here on the nuances of early “bank money.” The most accessible presentation is in Adam Smith, Wealth of Nations, bk. 4, chap. 3, part 1, appendix.

⁶ For most of the problems we will discuss in the present work, these common features are more important than the differences. For brevity’s sake, we will therefore mostly address the case of banknotes. In certain important respects banknotes differ from other money substitutes. We will discuss these differences at the appropriate place in Part Two.

⁷ One also needs to keep in mind that objects like banknotes can have very different economic natures. Today virtually all banknotes are government-enforced paper monies. But in former times, they were usually certificates for gold or silver. U.S. Federal Reserve notes had been gold certificates until August 1971 (under the 1944 Bretton Woods system, foreign central banks could redeem them until 1971, when the system collapsed). Since then, they have been paper money. Thus although on the level of their physical appearance they remained unchanged, dollar notes did change their economic nature. Similarly, a token coin bears more physical resemblances to a gold coin than to a paper certificate. But from an economic point of view, paper certificates and token coins are in one class of phenomena: they are both substitutes that are physically disconnected from money. The coin form per se is here irrelevant. In particular, notice that tokens also need to be distinguished from coins that contain a more or less large amount of precious metal in alloy. In the latter case, the certificate is still physically connected with the money material. In short, the physical aspects of things are often irrelevant from an economic point of view. The point has been stressed for example in Oswald von Nell-Breuning, “Geldwesen und Währung im Streite der Zeit,” Stimmen der Zeit 63, no. 10 (July 1933). We will discuss this important phenomenon in more detail in Part Two.

⁸ David Ricardo, “Proposals for an Economical and Secure Currency,” Works and Correspondence, Piero Sraffa, ed. (Cambridge: Cambridge University Press, 1951–73), vol. 4, p. 65. In Ricardo’s eyes, free choice in money could not be permitted because consumer preference for gold and silver coins would mean that, “to endulge a mere caprice, a most expensive medium would be substituted for one of little value.” Ibid. We will deal with the costs of commodity money in a subsequent section.

3. Money within the Market Process

¹ In contemporary monetary analysis, these effects are commonly called “Cantillon effects” after Richard Cantillon, the first economist to stress that increases of the money supply do not affect all prices and monetary incomes at the same time and to the same extent. See Richard Cantillon, La nature du commerce en général (Paris: Institute national d’études démographiques, 1997), part 2, chap. 7.

² See Nicholas Oresme, “A Treatise on the Origin, Nature, Law, and Alterations of Money,” in Charles Johnson, ed., The De Moneta of Nicholas Oresme and English Mint Documents (London: Thomas Nelson and Sons, 1956), chaps. 2, 3, and 13; and chap. 9, pp. 13–14.

³ Late scholastic Martín de Azpilcueta argued that price premiums were not per se usurious, but legitimate compensations for loss of value. See Martín de Azpilcueta, “Commentary on the Resolution of Money,” Journal of Markets and Morality 7, no. 1 (2004) §48–50, pp. 80–83.

⁴ See Aristotle, Politics, bk. 1, chap. 9. This was also the position of the Church Fathers and later Christians. For an overview see Christoph Strohm, “Götze oder Gabe Gottes? Bemerkungen zum Thema ‘Geld’ in der Kirchengeschichte,” Glaube und Lernen 14 (1999): 129–40.

⁵ This was a natural development of the distinction between the right to private property and the moral obligation to use one’s property in a Christian way. See above, section on natural monies.

⁶ Oresme, “Treatise,” chap. 13, insisted, for example, that coins containing alloys should have a different color.

⁷ Juan de Mariana and other medieval theologians have postulated that the value of coined metal should be made equal to the value of bullion. Many secular writers such as John Locke and Charles de Montesquieu have espoused the same point of view. And even first-rate economists such as Jean-Baptiste Say and Murray Rothbard came close to endorsing this position when they postulated that coins be named after their fine content of precious metal. But all these views are misguided because, as we have said, the value difference between coins and bullion of equal weight is not a perversion of human judgment that could be overcome with a moral postulate, but a fact that lies in the very nature of things.

⁸ This position was foreshadowed in Aristotle, Politics, bk. 1, chap. 9.

⁹ Nicholas Oresme distinguished three ways of gaining through money in unnatural ways: (1) the art of the money-changer: banking and exchange, (2) usury, and (3) the alteration of the coinage. “The first way is contemptible, the second bad and the third worse.” See Oresme, “Treatise,” chap. 17, p. 27.

¹⁰ For an overview see Eugen von Böhm-Bawerk, Capital and Interest (South Holland, Ill.: Libertarian Press, 1959), vol. 1, chaps. 2 and 3; John T. Noonan, The Scholastic Analysis of Usury (Cambridge, Mass.: Harvard University Press, 1957); Raymond de Roover, Business, Banking, and Economic Thought in Late Medieval and Early Modern Europe (Chicago: University of Chicago Press, 1974); and H. du Passage, “Usure,” Dictionnaire de Théologie Catholique 15 (Paris: Letouzey et Ane, 1909–1950). See also A. Vermeersh, “Interest,” Catholic Encyclopedia 8 (1910); idem, “Usury,” Catholic Encyclopedia 15 (1912); and Bernard Dempsey, Interest and Usury (Washington, D.C.: American Council of Public Affairs, 1943). A good discussion of “interesse” as compared to “usury” is in Victor Brants, L’économie politique au Moyen-Age (reprint, New York: Franklin, 1970), pp. 145–56. Further discussion of the history of this concept is in Ludwig von Mises, Socialism (Indianapolis: Liberty Fund, 1981), part 4, chap. 3 and 4; Murray N. Rothbard, Economic Thought Before Adam Smith (Cheltenham, U.K.: Edward Elgar, 1995), pp. 42–47, 79–81; Jesús Huerta de Soto, Money, Bank Credit, and Economic Cycles (Auburn, Ala.: Ludwig von Mises Institute, 2006), pp. 64–69.

¹¹ See Dempsey, Interest and Usury, p. 228.

4. Utilitarian Considerations on the Production of Money

¹ See Plato, The Laws, book 5, 741b–44a. He argued that the money most suitable for his totalitarian ideal city would be fiat money that had no value outside of the city walls.

² See Oresme, Nicholas Oresme, “A Treatise on the Origin, Nature, Law, and Alterations of Money,” in Charles Johnson, ed., The De Moneta of Nicholas Oresme and English Mint Documents (London: Thomas Nelson and Sons, 1956), chap. 11, p. 18.

³ John Locke famously argued that, in a closed economy, “any quantity of that Money... would serve to drive any proportion of Trade...” “Some Considerations of the Consequences of the Lowering of Interest and Raising the Value of Money” (1691), in P.H. Kelly, ed., Locke on Money (Oxford: Clarendon Press, 1991), vol. 1, p. 264. The caveat was that the money supply had to be constant, lest money would not be an unalterable measure of the value of things. We will discuss this problem below.

⁴ David Ricardo, emulating Locke’s argument, said about the consequences of an increase in the number of transactions: “There will be more commodities bought and sold, but at lower prices; so that the same money will still be adequate to the increased number of transactions, by passing in each transaction at a higher value.” The problem was, in Ricardo’s opinion, that the increased purchasing power of money would invite additional money production, and thus the standard of value would be modified. Moreover, this change would affect deferred payments. David Ricardo, “Proposals for an Economical and Secure Currency,” Works and Correspondence, Piero Sraffa, ed. (Cambridge: Cambridge University Press, 1951–1973), p. 56.

⁵ See John Wheatley, The Theory of Money and Principles of Commerce (London: Bulmer, 1807). On Wheatley see Thomas Humphrey, “John Wheatley’s Theory of International Monetary Adjustment,” Federal Reserve Bank of Richmond Economic Quarterly 80, no. 3 (1994); Wheatley’s treatise is still referenced today in Paul Lagasse et al. eds., Columbia Encyclopedia Britannica, 6th ed. (Gale Group, 2003), entry on “Money.”

⁶ Murray N. Rothbard, What Has Government Done to Our Money?, 4th ed. (Auburn, Ala.: Ludwig von Mises Institute, 1990), pp. 34f.

⁷ Oresme, “Treatise,” chap. 18, p. 29. He went on:

A clear sign of this is that such alterations are a modern invention, as it was mentioned in the last chapter. For such a thing was never done in [Christian] cities or kingdoms formerly or now well governed. ...If the Italians or Romans did in the end make such alterations, as appears from bad ancient money sometimes to be found in the country, this was probably the reason why their noble empire came to nothing. It appears therefore that these changes are so bad that they are essentially impermissible.

Compare this astounding historical judgment to Ludwig von Mises’s “Observations on the Causes of the Decline of Ancient Civilization,” in Human Action (Auburn, Ala.: Ludwig von Mises Institute, 1998), pp. 761–63.

⁸ For an overview of the most widely accepted present-day criticisms of natural money see James Kimball, “The Gold Standard in Contemporary Economic Principles Textbooks: A Survey,” Quarterly Journal of Austrian Economics 8, no. 3 (2005).

⁹ Often this belief is based on the “assignment theory of money” according to which each unit of money is some sort of a receipt. The receipt testifies that its owner has delivered a quantity of goods or services into the economy as into a large social warehouse; and by the same token the receipt assigns the owner the right to withdraw an equivalent quantity of goods or services from the economy as from a social warehouse. This assignment theory goes back to John Law in the early eighteenth century, was developed in the second half of the nineteenth century, and eventually inspired several champions of inflation such as Wieser and Schumpeter. Among Catholic authors subscribing to this doctrine see in particular Heinrich Pesch, Lehrbuch der Nationalökonomie (Freiburg i.Br.: Herder, 1923), vol. 5, p. 175, where the author discusses the factors determining the money supply “needed” in the economy, highlighting the “total value of all goods and services circulating in the economy.” Pesch overlooks that the market value of goods and services is not independent of the money supply. For example, a larger money supply entails higher prices and thus a higher “total value of all goods and services.” See also Étienne Perrot, Le chrétien et l’argent—Entre Dieu et Mammon (Paris: Assas éditions/Cahiers pour croire aujourd’hui, Supplement no. 13, 1994), p. 16 where the author defines the nature of money as being an IOU redeemable on demand. For a critique of the assignment theory of money, see Jean-Baptiste Say, Traité d’économie politique, 6th ed. (Paris: Guillaumin, 1841), chap. 27, pp. 278–87; Ludwig von Mises, Theory of Money and Credit (Indianapolis: Liberty Fund, 1980), appendix, pp. 512–24.

¹⁰ See Oresme, “Treatise,” chap. 13, pp. 20f.

¹¹ See Milton Friedman and Anna Schwartz, A Monetary History of the United States (Chicago: University of Chicago Press, 1963); Ulrich Nocken, “Die Große Deflation: Goldstandard, Geldmenge und Preise in den USA und Deutschland 1870–1896,” Eckart Schremmer, ed., Geld und Währung vom 16. Jahrhundert bis zur Gegenwart (Stuttgart: Franz Steiner, 1993), pp. 157–89.

¹² This is probably close to the scenario that most critics of hoarding have in mind. Thus we read in an influential contemporary book on Catholic social doctrine: “In early literature, a common symbol for economic evil was the miser, who through avarice hoarded his money. The miser was evil because, in a static world, with valuables in short supply, what one person hoarded was subtracted from the common store.” Michael Novak, The Spirit of Democratic Capitalism (New York: Simon & Schuster, 1982), p. 98; see also pp. 266–67. The author then goes on to point out that the social problem of hoarding has been resolved in modern times through what he believes is the dynamism of capitalism, which incites people to spend rather than hoard their money. We will have the occasion to deal with this “dynamism” in some more detail below. At this point, let us notice that hoarding is never, per se, a social problem in the first place.

¹³ The public speeches of the chiefs of monetary policy furnish ample evidence in support of this contention. Professor Bernanke, the present chairman of the Federal Reserve, is especially outspoken on this issue.

¹⁴ For an overview, see Federal Reserve Bank of Cleveland, Deflation—2002 Annual Report (May 9, 2003); R.C.K. Burdekin and P.L. Siklos, eds., Deflation: Current and Historical Perspectives (Cambridge: Cambridge University Press, 2004). On the latter volume, see Nikolay Gertchev’s excellent review essay in Quarterly Journal of Austrian Economics 9, no. 1 (2006): 89–96.

¹⁵ For recent Austrian analyses of deflation, see the special issue on “Deflation and Monetary Policy” in Quarterly Journal of Austrian Economics 6. no. 4 (2003). See also Murray N. Rothbard, America’s Great Depression, 5th ed. (Auburn, Ala.: Ludwig von Mises Institute, 2000), part 1; idem, Man, Economy, and State, 3rd ed. (Auburn, Ala.: Ludwig von Mises Institute, 1993), pp. 863–65.

¹⁶ See George Selgin, Less Than Zero (London: Institute for Economic Affairs, 1997); Michael D. Bordo and Angela Redish, “Is Deflation Depressing? Evidence from the Classical Gold Standard,” NBER Working Paper #9520 (Cambridge, Mass.: NBER, 2003); A. Atkeson and P.J. Kehoe, “Deflation and Depression: Is There an Empirical Link?” American Economic Review, Papers and Proceedings 94 (May 2004): 99–103.

¹⁷ One might argue that, even though deflation had no negative impact on production, the aforementioned redistribution is unacceptable from a moral point of view. We will discuss some aspects of this question in the second part of the present book, in the section dealing with the economics of legalized suspensions of payments.

¹⁸ See Joseph A. Schumpeter, Capitalism, Socialism, and Democracy (London: Allen & Unwin, 1944), chap. 7.

¹⁹ For full detail see Mises, Human Action, esp. chap. 20; Murray N. Rothbard, Man, Economy, and State (Auburn, Ala.: Ludwig von Mises Institute, 1993), chap. 11; Jesús Huerta de Soto, Money, Bank Credit, and Economic Cycles (Auburn, Ala.: Ludwig von Mises Institute, 2006), chaps. 4–6.

²⁰ The Old Testament is crystal clear on the importance of the physical integrity of coinage: “Varying weights, varying measures, are both an abomination to the LORD” (Proverbs 20:10). Innocent III emphasized the same point in the only authoritative papal pronouncement on medieval currency questions: in the bull Quanto (1199). Nicholas Oresme wrote an entire treatise that exposed the physical alteration of the coinage as a fraudulent and harmful practice. And the other great medieval authority on monetary questions, Ptolemy of Lucca, stressed the same point, arguing that the alteration of coinage “would work to the people’s detriment, since money should be the measure of things... but the more the money or coinage is changed the more the value or the weight changes.” Ptolemy of Lucca, On the Government of Rulers (Philadelphia: University of Pennsylvania Press, 1997), p. 134.

Notice that the authority of Ptolemy’s text for subsequent generations derived to a large extent from the fact that it was believed to be the work of Saint Thomas Aquinas. But according to the prevailing opinion in contemporary scholarship, Saint Thomas wrote only the first twenty chapters of this book; the rest (including the passage we cited above) was from the pen of Ptolemy. The chapters written by Saint Thomas have been republished in several modern editions under the title of the original manuscript: On Kingship, To the King of Cyprus. See in particular the 1949 edition from the Pontifical Institute of Mediaeval Studies in Toronto, which contains a very useful introduction.

²¹ Around the year 1500, the total stock of money in Europe was about 3,500 tons of gold and 37,500 tons of silver. Over the next 150 years, Spain imported some 181 tons of gold and some 16,886 tons of silver from its mines in South America (other producers were negligible as compared to these figures). A major part of these Spanish imports were re-exported to the Far East and to the Middle East. See Geoffrey Parker, “Die Entstehung des modernen Geld- und Finanzwesens in Europa 1500–1730,” C.M. Cipolla and K. Borchardt, Europäische Wirtschaftsgeschichte, vol. 2, Sechzehntes und siebzehntes Jahrhundert (Stuttgart: Gustav Fischer, 1983), pp. 335–36. The author quotes from F.P. Braudel und F. Spooner, “Prices in Europe from 1450 to 1750,” E.E. Rich and C.H. Wilson, eds., The Cambridge Economic History of Europe (Cambridge: Cambridge University Press, 1967), vol. 4.

²² See Friedrich-Wilhelm Henning, Handbuch der Wirtschafts- und Sozialgeschichte Deutschlands (Paderborn: Schöningh, 1991), vol. 1, pp. 546–48.

²³ Saint Thomas Aquinas, Commentary on the Nicomachean Ethics, vol. 1 (Chicago: Regnery, 1964), bk. 5, lect. 9, col. 987, pp. 427–28.

²⁴ Aristotle, Nicomachean Ethics, bk. 5, chap. 8

²⁵ See Marjorie Grice-Hutchinson, Economic Thought in Spain, L. Moss and C. Ryan, eds. (Aldershot, U.K.: Edward Elgar, 1993), pp. 84–85 and appendix. A contemporary historian of economic thought observed that, as far as money was concerned, realist and nominalist philosophers paradoxically switched roles. Oresme was the realist philosopher and Aquinas a nominalist. See André Lapidus, “Une introduction à la pensée économique médiévale,” A. Béraud and G. Faccarello, eds., Nouvelle histoire de la pensée économique (Paris: La Découverte, 1992), vol. 1, chap. 1, pp. 50–51; see also idem, “Metal, Money, and the Prince: John Buridan and Nicholas Oresme after Thomas Aquinas,” History of Political Economy 29 (1997).

²⁶ See, for example, Oswald von Nell-Breuning and J. Heinz Müller, Vom Geld und vom Kapital (Freiburg: Herder, 1962), p. 76; Karl Blessing, “Geldwertstabilität als gesellschaftspolitisches Problem,” K. Hoffman, W. Weber, and B. Zimmer eds., Kirche und Wirtschaftsgesellschaft (Cologne: Hanstein, 1974). In Centesimus Annus, Pope John Paul II stressed the importance of stable money, but did not define what he meant by this notion. He merely stated: “The economy... presupposes a stable currency” (§48).

²⁷ John XXIII, Mater et Magistra, §129.

²⁸ See Irving Fisher, Stabilized Money: A History of the Movement (London: George Allen and Unwin, 1935).

²⁹ For a detailed exposition see Rothbard, Man, Economy, and State, chap. 11. See also Gottfried von Haberler, Der Sinn der Indexzahlen (Tübingen: Mohr, 1927).

³⁰ Today, the position espoused by Ricardo is the dominant one, except for an important nuance: Ricardo held that gold was the most suitable money even though, in theory, paper money could have even greater PPM stability than gold. He held this position because paper money would open the floodgates for abuses through government. On balance, therefore, Ricardo opted for gold. The yellow metal was an imperfect standard of value, but it was better than any alternative was or promised to be. After Ricardo, however, concerns about tyranny seem to have dwindled in monetary discussion. Most present-day economists have come under the influence of Irving Fisher, who in a life-long campaign dismissed fears about managed paper monies.

³¹ See Mises, Theory of Money and Credit; idem, Geldwertstabilisierung und Konjunkturpolitik (Jena: Fischer, 1928); idem, Human Action, part 3.

³² The same thing holds true for deferred payments.

³³ See A. Wagner, Die russische Papierwährung—eine volkswirtschaftliche und finanzpolitische Studie nebst Vorschlägen zur Herstellung der Valuta (Riga: Kymmel, 1868), pp. 45–46. The author states that for this reason paper money is no suitable currency and categorically recommends a return to commodity money wherever paper has been introduced, such as in Imperial Russia of his time.

³⁴ See Milton Friedman, “The Resource Cost of Irredeemable Paper Money,” Journal of Political Economy 94, no. 3, part 1 (1986): 642–47. Compare Friedman’s paper with the statements contained in William Gouge, A Short History of Paper Money and Banking, pp. 66–67. See also Roger W. Garrison, “The Costs of a Gold Standard,” Llewellyn H. Rockwell, Jr., ed., The Gold Standard (Auburn, Ala.: Ludwig von Mises Institute, 1992), pp. 61–79. In 2004, the Federal Reserve System employed a staff of some 23,000. Similarly, the German Bundesbank employed some 11,400 civil servants (Stammpersonal) in 2007 and the Banque de France had some 11,800 civil servants (titulaires) in 2006.

5. General Considerations on Inflation

¹ This general understanding can be inferred from popular reference works such as the Funk and Wagnalls Standard College Dictionary (1941), which defined inflation as an “expansion or extension beyond natural or proper limits or so as to exceed normal or just value, specifically overissue of currency.” The same dictionary defined an inflationist as an “advocate or believer in the issuing of an abnormally large amount of currency especially of bank or treasury notes not convertible into coin.”

² Thomas Woods, The Church and the Market (Lanham, Md.: Lexington Books, 2005), p. 95. For the same reason, Beutter calls inflation a “great evil.” See Friedrich Beutter, “Geld im Verständnis der christlichen Soziallehre,” W.F. Kasch, ed., Geld und Glaube (Paderborn: Schöningh, 1979), p. 132.

³ For a discussion of fraud as a subclass of the crime of trespass, see Stephan Kinsella, “A Libertarian Theory of Contract,” Journal of Libertarian Studies 17, no. 2 (2003).

6. Private Inflation: Counterfeiting Money Certificates

¹ For an in-depth analysis of twelve major inflations from antiquity to the mid-twentieth century, see Richard Gaettens, Inflationen, 2nd ed. (Munich: Pflaum, 1955). The major debasements discussed in this book occurred in the Roman Empire (third century A.D.), Holy Roman Empire (fifteenth century), Spain (seventeenth century), and again the Holy Roman Empire (17th century). The other eight cases all concern inflation through fractional-reserve banks and paper money producers. More recently, Bernholz has reviewed the entire historical record of hyperinflation (very strong inflation entailing a collapse of the monetary system; we will discuss this below) and found that all known cases without exception have resulted from excessive paper money production. See Peter Bernholz, Monetary Regimes and Inflation (Cheltenham, U.K.: Edward Elgar, 2003).

² See John Wheatley, The Theory of Money and Principles of Commerce (London: Bulmer), p. 256. The last year in which a debasement took place was 1601 (p. 266). Wheatley notes that, starting in the mid-1500s, silver was imported from the Americas, where the mines of Potosi had been discovered in 1527. In the latter half of the 1600s, banking came into play.

³ M1 increased from $252 billion (January 1, 1973) to $1,226 billion (January 1, 2003). During the same period, the federal debt increased from $449 billion (December 29, 1972) to $6,228 billion (September 30, 2002). Sources: Federal Reserve Bank of Saint Louis; Bureau of the Public Debt.

⁴ The only realistic scenario for unintentional inflation is that of a note-issuing bank that is robbed without noticing the robbery. While the ignorance lasts, the quantity of its notes is larger than its reserves and thus there is inflation. As soon as the robbery is discovered and becomes publicly known, the owners of the bank will have to redeem the notes out of their own money, lest they go bankrupt. Either way, the inflation disappears.

⁵ For an analysis of historical issues of false certificates by fractional-reserve banks from antiquity to the eighteenth century, see Jesús Huerta de Soto, Money, Bank Credit, and Economic Cycles (Auburn, Ala.: Ludwig von Mises Institute, 2006), chap. 2. There is some evidence that the “money changers” mentioned in the New Testament (see Matthew 25:27 and Luke 19:23) were in fact fractional-reserve bankers. See Anthony Hulme, Morals and Money (London: St. Paul Publications, 1957), p. 29.

⁶ See Geoffrey Parker, “Die Entstehung des modernen Geld- und Finanzwesens in Europa 1500–1730,” C.M. Cipolla and K. Borchardt, eds. Europäische Wirtschaftsgeschichte, vol. 2, Sechzehntes und siebzehntes Jahrhundert (Stuttgart: Gustav Fischer, 1983), pp. 349–50. The classic narrative of these events is in Richard Ehrenberg, Das Zeitalter der Fugger: Geldkapital und Creditverkehr im 16. Jahrhundert (Jena: Fischer, 1896).

⁷ Monetary historian Norbert Olszak observes that the first banknotes issued by the Bank of England were certificates of deposit. Then the wording on the notes was changed and they became “promissory notes.” This process was completed by the middle of the eighteenth century. Olszak underlines its purpose: to get rid of “la stricte couverture métallique.” Norbert Olszak, Histoire des banques centrales (Paris: Presses Universitaires de France, 1998), p. 24.

⁸ If the customers were considered to be the owners of the money, the banker would be bankrupt in such a case. By contrast, if the banker were considered to be the owner of the money, he would stay in business and one would say that the customers have simply made a bad investment. Present-day legislation in the U.S. and the U.K. endorses the latter point of view. Few Americans know that the money they keep in their checking accounts is legally the property of the bankers, who have merely an obligation to “pay back” that money on demand.

⁹ We mention this possible origin of fractional-reserve banking only for the sake of completeness. The question of how this type of business can emerge, and how it has emerged historically, is of secondary importance for the argument in the present work. A detailed analysis of fractional-reserve banking as a possible perversion of credit banking is in Jörg Guido Hülsmann, “Has Fractional-Reserve Banking Really Passed the Market Test?” Independent Review 7, no. 3 (2003).

¹⁰ Jesús Huerta de Soto, “New Light on the Prehistory of the Theory of Banking and the School of Salamanca,” Review of Austrian Economics 9, no. 2 (1996): 60.

¹¹

Do not act dishonestly in using measures of length or weight or capacity. ...You shall have a true scale and true weights, an honest ephah and an honest hin. I, the LORD, am your God, who brought you out of the land of Egypt. (Leviticus 19: 35–36)

You shall not keep two differing weights in your bag, one large and the other small; nor shall you keep two different measures in your house, one large and the other small. But use a true and just weight, and a true and just measure, that you may have a long life on the land which the LORD, your God, is giving you. Everyone who is dishonest in any of these matters is an abomination to the LORD, your God. (Deuteronomy XXV: 13–16)

Varying weights, varying measures, are both an abomination to the LORD. [...] Varying weights are an abomination to the LORD, and false scales are not good. (Proverbs 20: 10, 23)

¹² Nicholas Oresme, “Treatise on the Origin, Nature, Law, and Alterations of Money,” in Charles Johnson, ed., The De Moneta of Nicholas Oresme and English Mint Documents (London: Thomas Nelson and Sons, 1956), chap. 12, p. 19. See also chaps. 5 and 11.

¹³ As we have seen, Ptolemy of Lucca made the much weaker point that the community would lose through alterations of the coinage because such alterations change a standard measure (On the Government of Rulers [Philadelphia: University of Pennsylvania Press, 1997], p. 134). This harm corresponds to the damage created by meddling with measures of length, temperature, etc. Oresme saw that more was at stake here. The alteration of the coinage involved a physical transfer of money from the community to the government.

¹⁴ Oresme, “Treatise,” chap. 15, p. 24. The text refers to Aristotle’s Politics, V, x, 10 (1310b40) and Nichomachean Ethics, ix (1160b2), as well as to Saint Paul’s Letter to the Romans 3:8. Oresme repeatedly made this point, stressing that the function of inflation is to enrich the government at the expense of other people (see for example chap. 12). Oresme argued that debasement could only be licit when two conditions were simultaneously given: (1) there would have to be a great emergency, and (2) the entire community, not just the government, would have to give its consent (chap. 22). Government should get its regular revenue elsewhere (chap. 24). Very similarly, Ludwig von Mises argued that inflation by its very nature contradicted the principle of popular sovereignty. The only way for the people to keep their government in check was to control the government’s resources. If the government needed more money, therefore, it should approach the citizens to pay higher taxes. Inflating the money supply provided it with more resources than the citizens were ready to contribute. See Ludwig von Mises, Theory of Money and Credit (Indianapolis: Liberty Fund, 1980), pp. 466–69.

¹⁵ Therefore there seem to be good grounds for arguing that inflation, independent of any attenuating circumstances, is an inherently bad action (intrinsece malum) in the sense of Catholic moral doctrine. See on this point John Paul II, Veritatis splendor, §80.

¹⁶ See Oresme, “Treatise,” chaps. 18–21, passim. Saint Thomas took it for granted that money forgers deserve death; see Summa Theologica, II–II, Q. 11, Art. 3.

7. Enters the State: Fiat Inflation through Legal Privileges

¹ See George Selgin and Lawrence White, “A Fiscal Theory of Government’s Role in Money,” Economic Inquiry 37 (1999). Selgin and White make exception only for fractional-reserve banking, which in their eyes is a market institution. See idem, “How Would the Invisible Hand Handle Money?” Journal of Economic Literature 32, no. 4 (1994). This latter opinion not only stands on weak theoretical ground, but also flies into the face of the entire historical record of fractional-reserve banks, which have been promoted either directly through government interventions, or indirectly through banks and other monetary institutions that had special legal protection and support from tax money. See the detailed discussion in Jesús Huerta de Soto, Money, Bank Credit, and Economic Cycles (Auburn, Ala.: Ludwig von Mises Institute, 2006), chap. 8, sect. 4, pp. 675–714.

² Oresme, “Treatise,” Nicholas Oresme, “Treatise on the Origin, Nature, Law, and Alterations of Money,” in Charles Johnson, ed., The De Moneta of Nicholas Oresme and English Mint Documents (London: Thomas Nelson and Sons, 1956), chap. 15, p. 24. See also Juan de Mariana, (1609)“A Treatise on the Alteration of Money,” Markets and Morality, vol. 5, no. 2 (2002), chap. 13. Is it necessary to point out that profiting from the community’s loss involves necessarily a flagrant violation of distributive justice, which justice is based on the sanctity of private property? See on this Leo XIII, Rerum Novarum, §33, 46.

³ Contemporary textbooks and research articles of a non-Austrian inspiration argue that monetary policy (according to our definition: inflation) is beneficial or at least can be beneficial if properly handled. The arguments brought forth in these works are in most cases variants of the theories that we discussed in chapter 4. See for example Frederic S. Mishkin, The Economics of Money, Banking, and Financial Markets, 7th ed. (New York: Addison Wesley, 2003); Manfred Borchert, Geld und Kredit (Munich: Oldenbourg, 2001); Christian Ottavj, Monnaie et financement de l’économie, 2nd ed. (Paris: Hachette, 1999). For Austrian critiques of the idea that inflation can be beneficial, see the works by Mises, Rothbard, Sennholz, Reisman, Salin, and Huerta de Soto that we quoted in the introduction.

⁴ At the beginning, there was no talk about ever redeeming the greenbacks into gold or silver, and thus they were paper money during the early period. Later they become credit money, when the government announced its intention to redeem them at some point in the near future. When redemption started in 1879, the greenbacks became fractional-reserve money certificates.

8. Legalized Falsifications

¹ There is of course no such thing as a “false certificate” or an “ambiguous certificate” once the premise is accepted that words have no objective meaning. For the sake of our readers, who on the preceding pages have discerned meaning where others might just see strings of letters, or black points on white paper, we will nevertheless continue to speak of false certificates and ambiguous meanings.

² Nicholas Oresme, “Treatise on the Origin, Nature, Law, and Alterations of Money,” in Charles Johnson, ed., The De Moneta of Nicholas Oresme and English Mint Documents (London: Thomas Nelson and Sons, 1956), p. 31.

³ Buridan argued that the word “prince” is to be understood in such context, not in the sense of a single ruler, but as referring to all those who have the power to govern. See John Buridan, “Extrait des ‘Questions sur la Politique d’Aristote’,” book 1, question 11 in Claude Dupuy, ed., Traité des monnaies et autres écrits monétaires du XIVe siècle (Lyon: La manufacture, 1989), p. 138.

⁴ Oresme, “Treatise,” p. 32.

⁵ Ibid., p. 30.

⁶ See ibid., chaps. 14, 15, and 24. On the essentially identical position of the late-scholastic authors Tomás de Mercado and Juan de Mariana, see Alejandro Chafuen, A., Faith and Liberty: The Economic Thought of the Late Scholastics, 2nd ed. (New York: Lexington Books, 2003), pp. 65–68.

9. Legal Monopolies

¹ See especially Murray Rothbard, Man, Economy, and State, 3rd ed. (Auburn, Ala.: Ludwig von Mises Institute, 1993), chap. 10. See also Pascal Salin, La concurrence (Paris: Presses Universitaires de France, 1991).

² The same effect can be brought about through legal tender laws, when they apply only to one metal. We will deal with this case in the next chapter.

³ See the classic exposition of the argument in Jean Bodin, Les six livres de la République (Paris: Jacques du Puys, 1576), bk. 1, chap. 11. See also Arnold Luschin von Ebengreuth, Allgemeine Münzkunde und Geldgeschichte, reprint of the 2nd ed. (Darmstadt: Wissenschaftliche Buchgesellschaft, [1926] 1976), pp. 235–44.

⁴ Nicholas Oresme, “Treatise on the Origin, Nature, Law, and Alterations of Money,” in Charles Johnson, ed., The De Moneta of Nicholas Oresme and English Mint Documents (London: Thomas Nelson and Sons, 1956), p. 31.

⁵ What we see here is that any advocacy of monopoly contradicts one of the most cherished principles of Catholic social doctrine, namely, the principle of freedom of association. It is true that twentieth century popes and the Second Vatican Council have defended this principle mainly in the context of the legitimacy of labor associations. But the principle itself extends far beyond that realm. Pope John Paul II made this crystal clear in a passage of Centesimus Annus (§7) in which he discussed Leo XIII’s Rerum Novarum, where the same point had been made:

In close connection with the right to private property, Pope Leo XIII’s Encyclical also affirms other rights as inalienable and proper to the human person. Prominent among these, because of the space which the Pope devotes to it and the importance which he attaches to it, is the “natural human right” to form private associations. This means above all the right to establish professional associations of employers and workers, or of workers alone. Here we find the reason for the Church’s defence and approval of the establishment of what are commonly called trade unions: certainly not because of ideological prejudices or in order to surrender to a class mentality, but because the right of association is a natural right of the human being, which therefore precedes his or her incorporation into political society. Indeed, the formation of unions “cannot... be prohibited by the State,” because “the State is bound to protect natural rights, not to destroy them; and if it forbids its citizens to form associations, it contradicts the very principle of its own existence.”

As Leo XIII had pointed out, this right is so primordial that it may only be qualified in the case of associations that are “evidently bad, unlawful, or dangerous to the State.” (Leo XIII, Rerum Novarum, §52.) But the State has no right whatever to prevent or dissolve any legitimate association. It follows that there is no moral basis, at any rate from a Catholic point of view, to prevent or dissolve associations of persons who wish to produce and use a specific kind of money.

⁶ See for example, Adam Smith, The Wealth of Nations (New York: Modern Library, [1776] 1994, pp. 680–82, 700, 814; Etienne de Condillac, Le commerce et le gouvernement, 2nd ed. (Paris: Letellier, 1795), part 2, chap. 7, pp. 273–76.

⁷ Julius Kirshner, “Raymond de Roover on Scholastic Economic Thought,” introduction to R. de Roover, Business, Banking, and Economic Thought in Late Medieval and Early Modern Europe (Chicago: University of Chicago Press, 1974), p. 19. Before Raymond de Roover, this point had been stressed by Armando Sapori, Albert Sandoz, Josef Höffner, and Joseph Schumpeter. For a recent restatement see Cardinal Josef Höffner, Christliche Gesellschaftslehre (Kevelaer: Butzon & Bercker, 1997), pp. 246–47.

⁸ See in detail Gary North, Honest Money (Ft. Worth, Texas: Dominion Press, 1986), chap. 6.

⁹ Oresme, “Treatise,” p. 16.

10. Legal-Tender Laws

¹ There is a continuum of possible scopes of legal tender laws. Historically, legal tender privileges have often been limited to certain denominations such as £1 or £2 coins, to special types of payments such as taxes or clearing between commercial banks, or to certain amounts of payment. They have been applied both to debt and spot payments. In our present discussion we will neglect most of these particular forms of legal tender laws and focus on the broad categories. A slightly different version of this chapter has been published under the title “Legal Tender Laws and Fractional-Reserve Banking,” Journal of Libertarian Studies 18, no. 3 (2004). Besides the literature quoted in this article, see also John Zube, Stop the Legal Tender Crime (Berrima, Australia: Research Centre for Monetary and Financial Freedom, n.d.).

² After Thomas Gresham, a sixteenth century financial agent of the English Crown in the city of Antwerp. Gresham’s Law had however been described long before its namesake, for example, in Aristophanes’s poem “The Frogs” and in Nicholas Oresme, “Treatise on the Origin, Nature, Law, and Alterations of Money,” in Charles Johnson, ed., The De Moneta of Nicholas Oresme and English Mint Documents (London: Thomas Nelson and Sons, 1956), p. 32. Oresme also noticed the deflationary impact.

³ See Oresme, “Treatise,” pp. 15–16.

⁴ Bimetallism needs to be distinguished from the case in which coins made out of an inferior metal such as copper are used as tokens for gold or silver. Tokens per se have nothing to do with legal tender laws.

⁵ The market rate was about 1 guinea = 20¹/₂ shillings; King George I decreed the rate to be 1 guinea = 21 shillings.

⁶ We will for now assume that the law grants legal-tender status to all money certificates. Below, we will deal with the more important case of a monopoly legal tender.

⁷ The fall of the Roman Empire during the fifth and sixth centuries went hand in hand with the disappearance in western Europe of the Roman fiat money system, which had combined gold, silver, and copper coins. The first western ruler to arrogate to himself the monopoly of coinage was the eighh century Carolingian king, Pippin the Short. When the dynasty started to decline in the ninth century, his successors eventually sold monopoly coinage licenses (ius cudendae monetae) to a great number of local rulers, such as town governments, abbots, and bishops. Many of these people were in turn no more scrupulous about keeping money sound than the kings. Western European coinage thus continued to deteriorate under the decentralized coin production of the High Middle Ages. See Arthur Suhle, Deutsche Münz- und Geldgeschichte von den Anfängen bis zum 15. Jahrhundert, 8th ed. (Berlin: Deutscher Verlag der Wissenschaften, 1975). This highlights the crucial point that the simple multiplication of coin producers is no substitute for true competition. In a way, the decentralized license system was even worse than the old centralized monopoly, because it created constant conflicts between the different coin issuing authorities.

⁸ As we have pointed out above, this holds true, strictly speaking, only in case when debasement has not been anticipated. But in practice this is very often the case.

⁹ Oresme, “Treatise,” p. 33.

¹⁰ Ibid., p. 33. He also pointed out that debasement encourages the practice known as money changing.

¹¹ In 1458, Emperor Friedrich III granted coinage licenses to several of his creditors. It took only one year to run the currency to the bottom and reach total monetary disintegration. See Richard Gaettens, Inflationen: Das Drama der Geldentwertungen vom Altertum bis zur Gegenwart, 2nd ed. (Munich: Pflaum, 1955), chap. 2.

¹² Much of what we say below is also applicable to demand deposits. The differences between banknotes and demand deposits will not be dealt with in the present work. Interested readers should consult the economic literature mentioned in the introduction.

¹³ Fractional-reserve banknotes are therefore inherently superior to debased coins. It follows that, if legal-tender privileges are granted to both debasers and fractional-reserve bankers, Gresham’s Law will operate to drive the banknotes out of the market. They will be used only in foreign countries, where they circulate without legal-tender protection, whereas the debased coins will be the only currency of the domestic market.

¹⁴ “The market is a democracy where every penny gives a right of vote.” Frank Fetter, The Principles of Economics (New York: The Century Co., 1905), p. 395. A few pages later he states: “So each is measuring the services of all others, and all are valuing each. It is the democracy of valuation” (p. 410).

¹⁵ The following hypothetical example gives an idea of the orders of magnitude that are possible under favorable (for the banks) conditions: “A banker starts with $25,000. He issues credit of $250,000. He can take the notes of his customers... to the Federal Reserve Bank for discount. He will get something like $245,000 (the balance being the charge for discounting) in Federal Reserve Credit. This he can use as a reserve for further loans. He can extend credit to ten times that amount. That is, $2,450,000. ‘Yes, he collects a mere 6 percent, $147,000 in interest’ annually. That on a capital of $25,000.” Michel Virgil, ed., The Social Problem, vol. 2, Economics and Finance (Collegeville, Minn.: St. John’s Abbey, n.d.), pp. 92–93; quoted from Anthony Hulme, Morals and Money (London: St. Paul Publications, 1957), pp. 154–55. Hulme raises the obvious question: “What, we ask, is the justification for this interest?”

¹⁶ The foregoing scenario was first analyzed by Ludwig von Mises in his Theory of Money and Credit (Indianapolis: Liberty Fund, 1980), chap. 19. See also our discussion in chap. 4, section 6, above. Oresme sensed these things even though his experience was limited to the case of debasement. He observed that inflation of a legal tender was harmful because the money users did not perceive that they lost wealth:

... the prince could thus draw to himself almost all the money of the community and unduly impoverish his subjects. And as some chronic sicknesses are more dangerous than others because they are less perceptible, so such an exaction is the more dangerous the less obvious it is, because its oppression is less quickly felt by the people than it would be in any other form of contribution. And yet no tallage can be heavier, more general or more severe. (Oresme, “Treatise,” p. 32)

¹⁷ One striking historic example: when in the summer of 1839 the Bank of England suffered a liquidity crisis, it received credits from the Banque de France (£2,000,000) and from the Hamburger Bank (£900,000); see Ralph Hawtrey, A Century of Bank Rate, 2nd ed. (New York: Kelley, 1962), p. 19. For an analysis of cooperation among fractional-reserve banks (central banks and commercial banks) in the era of the classical gold standard, see Giulio Gallarotti, The Anatomy of an International Monetary Regime: the Classical Gold Standard, 1880–1914 (Oxford: Oxford University Press, 1995), pp. 78–85. In our day, the cooperation between fractional-reserve banks is enshrined into banking legislation such as the French banking law of 1984, presumably to overcome free-rider problems. The law stipulates a solidarité de place among French financial institutions.

¹⁸ For an Austrian perspective on the theory of moral hazard, see Jörg Guido Hülsmann, “The Political Economy of Moral Hazard,” Politická ekonomie (February 2006).

¹⁹ See Pascal Salin, La vérité sur la monnaie (Paris: Odile Jacob, 1990).

²⁰ See Jesús Huerta de Soto, Money, Bank Credit, and Economic Cycles (Auburn, Ala.: Ludwig von Mises Institute, 2006), pp. 636–39; Lawrence H. White, The Theory of Monetary Institutions (Oxford: Blackwell, 1999), pp. 70–80.

²¹ For the case of the U.S. see Murray N. Rothbard, A History of Money and Banking in the United States (Auburn, Ala.: Ludwig von Mises Institute, 2002). As a matter of fact, legal cartelization and regulation was the next to unexceptional rule. The only known voluntary banking cartel that operated for any significant period of time was the Suffolk system, named after the Boston-based Suffolk Bank, which organized a clearing system involving a network of New England banks. The Suffolk system went out of business when a competing cartel, led by the Bank for Mutual Redemption started offering much less stringent regulation terms (see ibid., pp. 115–22). This episode seems to highlight a basic problem of any voluntary cartel trying to curb the expansionary power of fractional-reserve banks.

²² The only significant historical instance was the nineteenth century Italian banking system, which for more than three decades after the unification of Italy featured five different banks issuing legal-tender notes. See M. Fratianni and F. Spinelli, A Monetary History of Italy (Cambridge: Cambridge University Press, 1997), chap. 3.

²³ Oresme, “Treatise,” chap. 16.

²⁴ Ibid., chap. 17, p. 28.

²⁵ Ibid., chap. 15, pp. 24f.

11. Legalized Suspensions of Payments

¹ On the legal implications of this contradiction see Stephan Kinsella, “Punishment and Proportionality: The Estoppel Approach,” Journal of Libertarian Studies 12, no. 1 (1996).

12. Paper Money

¹ One of the few weaknesses in Ludwig von Mises’s theory of money concerns this point. Mises states: “It can hardly be contested that fiat money in the strict sense of the word is theoretically conceivable. The theory of value proves the possibility of its existence” (Theory of Money and Credit, [Indianapolis: Liberty Fund, 1980], p. 75, see also p. 125). Notice that the expression “fiat money” in Mises’s book is a translation of the original expression “Zeichengeld” which translates literally as “sign money.” In fact, the essence of fiat money according to Mises is special legal earmarking to facilitate evaluation by money users. It has nothing to do with the invasion of the property rights of these money users. Fiat money “comprises things with a special legal qualification” (ibid., p. 74). All that the government does here is “to single out certain pieces of metal or paper from all the other things of the same kind so that they can be subjected to a process of valuation independent of that of the rest” (ibid.). In the light of the fact that Mises was wrong on this issue, it is certainly excusable that other writers have let themselves be drawn into certain excesses that derive from that same error. A case in point is Michael Novak, who celebrates the nonmaterial character of modern paper monies in his Spirit of Democratic Capitalism (New York: Simon & Schuster, 1982), pp. 348–49. But to really make this point, one would have to prove (1) that the use of gold and silver coins inherently precludes moral and spiritual virtues, and (2) that the lack of a “material” dimension in paper money is inherently praiseworthy from a moral and spiritual point of view. No such proof has been delivered, and it is safe to predict that it will never be delivered. As we have argued, the case is exactly the reverse of what Novak and others assume. The very materiality of gold, silver, and other precious metals makes them especially suitable as money in free society; whereas it is the very nonmateriality of paper money that requires constant coercion to keep them in circulation.

² The point has apparently been stressed already in the nineteenth century by the German legal scholar Thöl. See Karl Heinrich Rau, Grundsätze der Volkswirtschaftslehre, 7th ed. (Leipzig & Heidelberg, 1863), §295, annotation (d), p. 373.

³ See in particular Murray N. Rothbard, The Mystery of Banking (New York: Richardson & Snyder, 1983), pp. 51–52 and passim; Gary North, Honest Money (Ft. Worth, Texas: Dominion Press, 1986), chap. 9; Thomas Woods, The Church and the Market (Lanham, Md.: Lexington Books, 2005), p. 97; Friedrich Beutter, Zur sittlichen Beurteilung von Inflationen (Freiburg: Herder, 1965), pp. 157, 173. Beutter also qualifies inflation as theft; see ibid., 91, 154.

⁴ 1 ounce of gold was defined as 3 pounds, 17 shillings, 10.5 pence, or £3.89.

⁵ I owe the expression “reverse transubstantiation” to Professor Jeffrey Herbener. For a number of years, I have used in classroom the expression “economic transubstantiation.” But this is a euphemism.

⁶ The imprints on coins and banknotes no longer certify ownership of a certain amount of precious metal. Rather, they certify the legitimate origin of these coins and banknotes. Also, present-day coins are no longer certificates; they are not even token money as they were in previous times.

⁷ More precisely, we would have to say that the nature of present-day “banknotes” is different from the nature of pre-suspension banknotes; and that the nature of present-day central banks is different from the nature these institutions had before the suspension.

⁸ A few years ago, the present chairman of the U.S. central bank emphasized this possibility, and the willingness of the authorities to make use of it, if need be, to dispel deflation fears. He said:

Like gold, U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation. (Ben Bernanke, “Deflation: Making Sure ‘It’ Doesn’t Happen Here” [Remarks before the National Economists Club, Washington, D.C., 21 November 2002])

⁹ Notice again that all historical hyperinflations have been inflations of paper money. See Peter Bernholz, Monetary Regimes and Inflation (Cheltenham, U.K.: Edward Elgar, 2003).

¹⁰ We can neglect at this point all considerations about the intertemporal misallocation of resources that such mass speculation might entail. See Jörg Guido Hülsmann, “Toward a General Theory of Error Cycles,” Quarterly Journal of Austrian Economics 1, no. 4 (1998).

¹¹ According to the Federal Reserve Board, between 1995 and 2005 the Fed increased its note issues at an annual pace of 6.6 percent (compare: under a gold standard, annual production has hardly ever added more than 2 percent to the existing gold stock). The Board estimates that between one-half and two-thirds of all U.S. dollar notes are held abroad. See http://www.federalreserve.gov/paymentsystems/coin/default.htm (update of March 14, 2006).

¹² The same thing holds true for financial markets and labor markets. Other markets that are also strongly affected by moral hazard springing from paper money have so far escaped heavy regulation. Notable cases in point are real estate markets.

13. The Cultural and Spiritual Legacy of Fiat Inflation

¹ See Alexis de Tocqueville, L’Ancien régime et la Révolution (Paris: Michel Lévy frères, 1856); Bertrand de Jouvenel, Du pouvoir (Geneva: Bourquin, 1945); Hans-Hermann Hoppe, Democracy—The God That Failed (New Brunswick, N.J.: Transaction, 2001).

² On LePlay see Charles Gide and Charles Rist, Histoire des doctrines économiques, 6th ed. (Paris: Dalloz, 2000), bk. 5, chap. 2, pp. 582–90. On the principle of subsidiarity in Catholic social doctrine, see Pontifical Council for Justice and Peace, Compendium of the Social Doctrine of the Church, §185–88.

³ According to Kant, world peace presupposed that public debt not be used to finance war since this would unduly facilitate the waging of war. See Immanuel Kant, “Zum Ewigen Frieden—ein philosophischer Entwurf,” Werkausgabe 11 (Frankfurt: Suhrkamp, 1991), pp. 198–99. However, the prohibition of a particular use of public debt is unlikely to be effective in practice because it is impossible to tie up a particular type of revenue with a particular type of expenditure. (The government can always claim that it pays for military expenditure with revenue from taxes, whereas the public debt is used for non-military purposes.) It is therefore more effective to attack the problem at its root and to abolish the legal dispositions that impose fractional-reserve banking and paper money. The reduction of the public debt would be a logical consequence.

⁴ The intimate connection between such recklessness and the prevailing monetary system is usually overlooked, even in penetrating studies of the subject. See for example A. de Salins and F. Villeroy de Galhau, Le développement moderne des activités financiers au regard des exigencies éthiques du Christianisme (Vatican: Libreria Editrice Vaticana, 1994), in particular pp. 23–34 where the authors discuss the impact of the “financial sphere” on the economy without even mentioning the problems of moral hazard and of the lender-of-last-resort concept.

⁵ See Joseph A. Schumpeter, Theorie der wirtschaftlichen Entwicklung, 4th ed. (Berlin: Duncker & Humblot, [1934] 1993), chap. 3.

⁶ Bernard Dempsey, Interest and Usury (Washington, D.C.: American Council of Public Affairs, 1943), p. 207. Dempsey analyzes this phenomenon by distinguishing two forms of “emergent loss” (one of the extrinsic grounds on which interest is licit): “antecedent” and “consequent” emergent loss. See also, pp. 200ff.

⁷ Pius XI, Quadragesimo Anno (1931), §105, 106. See also Deuteronomy 28: 12, 43–44.

⁸ Thomas Woods, “Money and Morality: The Christian Moral Tradition and the Best Monetary Regime,” Religion & Liberty 13, no. 5 (September/October 2003). The author quotes Ludwig von Mises. See also William Gouge, A Short History of Paper Money and Banking in the United States, to which is prefixed an Inquiry into the Principles of the System (Reprint, New York: Augustus M. Kelley, [1833] 1968), pp. 94–101.

⁹ The relationship between fiat inflation on the one hand, and misperceptions and misrepresentations of reality on the other hand has been brilliantly discussed in Paul Cantor’s case study on “Hyperinflation and Hyperreality: Thomas Mann in Light of Austrian Economics,” Review of Austrian Economics 7, no. 1 (1994).

¹⁰ In many countries it is today possible for families to deduct expenses for private care and private education from the annual tax bill. But ironically (or maybe not quite so ironically) this trend has reinforced the erosion of the family. For example, recent provisions of the U.S. tax code allow family budgets to increase through such deductions—but only if the deductible services are not provided by family members, but bought from other people.

¹¹ John Paul II, Centesimus Annus, §48.

¹² Our study seems to suggest that there is definitely something diabolical in fiat inflation. But we feel incompetent to deal with this question and leave its analysis for another time, or for other scholars. It is certainly significant that a great poet such as Goethe would portray paper money as a creation of the devil. See Faust, part II, Lustgartenszene.

14. Monetary Order

¹ Again, we must leave it to the historians to decide whether any such system has already existed. Some historians think that the Suffolk Bank system that existed in the first half of the nineteenth century in the United States was such a system.

15. Fiat Monetary Systems in the Realm of the Nation-State

¹ For an overview see Vera Smith, The Rationale of Central Banking (Indianapolis: Liberty Fund, 1990), chaps. 1 to 6; Norbert Olszak, Histoire des banques centrales (Paris: Presses Universitaires de France, 1998).

² On the history of the Bank of England see John H. Clapham, The Bank of England: A History, 1694–1914 (Cambridge: Cambridge University Press, [1944] 1970).

³ Other note-issuing banks that already existed in 1844 were allowed to continue their business within their statutory limitations. Most of them eventually decided to switch the business model and became checking banks.

⁴ Wheatley, The Theory of Money and Principles of Commerce (London: Bulmer, 1807), pp. 279–80. Wheatley’s statement on the “intercourse of the world” concerns especially international wholesale trade. Things were often quite different in daily retail transactions. On the case of the German lands, see Bernd Sprenger, Das Geld der Deutschen, 2nd ed. (Paderborn: Schöningh, 1995), pp. 153–54.

⁵ Wheatley, The Theory of Money and Principles of Commerce, p. 287.

⁶ On the history of American money and banking until the early twentieth century see William Gouge, A Short History of Paper Money and Banking in the United States (reprint, New York: Augustus M. Kelley, [1833] 1968), part II; William G. Sumner, History of Banking in the United States (New York: Augustus M. Kelley, [1896] 1971); Barton Hepburn, History of Coinage and Currency in the United States and the Perennial Contest for Sound Money (London: Macmillan, 1903); Bray Hammond, Banks and Politics in America (Princeton, N.J.: Princeton University Press, 1957); Donald Kemmerer and Clyde Jones, American Economic History (New York: McGraw-Hill, 1959); Murray N. Rothbard, A History of Money and Banking in the United States (Auburn, Ala.: Ludwig von Mises Institute, 2002).

⁷ At this point, the U.S. Supreme Court had first ruled against the legality of legal-tender privileges for paper (1870) and then revised its decision in subsequent cases (1871 and 1874). See Donald Kemmerer and C. Clyde Jones, American Economic History (New York: McGraw-Hill, 1959), p. 356.

16. International Banking Systems, 1871–1971

¹ See Herbert Rittmann, Deutsche Geldgeschichte seit 1914 (Munich: Klinkhardt & Biermann, 1986), chap. 1; Bernd Sprenger, Das Geld der Deutschen (Paderborn: Schöningh, 1995), chap. 10.

² The Latin Currency Union had been created in 1865 by the governments of France, Italy, Switzerland, and Belgium. Later members included Greece and Romania. The idea of the Union was to establish a common coin system for all member countries. It lasted, nominally, until 1926. In fact, it was abandoned in 1914 with the near-universal suspension of payments.

³ See Leland B. Yeager, International Monetary Relations (New York: Harper & Row, 1966), pp. 252–58; Barry Eichengreen, Globalizing Capital, 2nd ed. (Princeton, N.J.: Princeton University Press, 1998), chap. 2, especially the section on the introduction of the international gold standard.

⁴ The only exception was India, which adopted the gold standard in 1898. Russia made the step in 1897. China alone among the major countries remained on a silver standard.

⁵ We have emphasized in the present work that there is nothing wrong with falling prices per se, and the period under consideration is in fact the best illustration of this claim. Growth rates were very substantial in the countries struck by the deflation. The point is that the fiat deflation brought forced hardship for those who would have fared better under a competitive regime that tolerated other types of specie than gold.

⁶ See Guilo Gallarotti, The Anatomy of an International Monetary Regime: the Classical Gold Standard, 1880–1914 (Oxford: Oxford University Press, 1995), pp. 78–85.

⁷ See for example Yeager, International Monetary Relations, pp. 260–65; Henry Hazlitt, The Inflation Crisis, and How to Resolve It (Irvington-on-Hudson, N.Y.: Foundation for Economic Education, [1978] 1995), pp. 173f.; Rothbard, A History of Money and Banking in the United States (Auburn, Ala.: Ludwig von Mises Institute, 2002), pp. 159–69. See also the references in Barry Eichengreen, Globalizing Capital (Princeton, N.J.: Princeton University Press), chap. 2.

⁸ On the gold-exchange standard see Yeager, International Monetary Relations, pp. 277–90; Murray N. Rothbard, “The Gold-Exchange Standard in the Interwar Years,” Kevin Dowd and Richard H. Timberlak, eds., Money and the Nation State (New Brunswick, N.J.: Transaction, 1998), pp. 105–65.

⁹ This practice was widespread even before the notes of the Bank of England became legal tender in 1833, mainly due to the introduction of a monopoly status for gold after 1821.

¹⁰ See the overview in Eichengreen, Globalizing Capital, chap. 2, section on phases of the gold standard.

¹¹ Governments agreed on this principle at the Genoa Conference, held from April 10 to May 19, 1922. See Rothbard, “The Gold-Exchange Standard in the Interwar Years,” p. 130; Carole Fink, The Genoa Conference: European Diplomacy, 1921–1922 (Chapel Hill: University of North Carolina Press, 1984).

¹² One of the few countries that abstained from participation in this system was France. The main motivation was to avoid political dependency on the Anglo-Saxon countries. The Banque de France had herself for a long time pursued the policy of dependence-creation vis-à-vis foreign banks.

¹³ On the Bretton Woods system see in particular Jacques Rueff, The Monetary Sin of the West (New York: Macmillan, 1972); Henry Hazlitt, From Bretton Woods to World Inflation (Chicago: Regnery, 1984); Eichengreen, Globalizing Capital, chap. 4; Leland Yeager, “From Gold to the Ecu: The International Monetary System in Retrospect,” Kevin Dowd and Richard H. Timberlake, eds., Money and the Nation State (New Brunswick, N.J.: Transaction, 1998), pp. 88–92.

¹⁴ This was one of the reasons why the government of the United Kingdom—under the leadership of Lord Keynes—pushed for a radically different postwar constitution at the Bretton Woods conference. Rather than pushing for more fractional-reserve banking, it proposed the establishment of a fiat paper money for the entire world. It expected to have greater influence on the allocation of the world paper money than it could hope to have on the allocation of U.S. dollars.

¹⁵ See Roland Vaubel, “The Political Economy of the International Monetary Fund,” R. Vaubel and T.D. Willets, eds., The Political Economy of International Organizations: A Public Choice Approach (Boulder, Colo.: Westview Press, 1991), pp. 204–44; Alan Walters, Do We Need the IMF and the World Bank? (London: Institute of Economic Affairs, 1994); Jörg Guido Hülsmann, “Pourquoi le FMI nuit-il aux Africains?” Labyrinthe 16 (Autumn 2003).

¹⁶ See George Ayittey, Africa in Chaos (New York: St. Martin’s Press, 1998), pp. 270ff., where the author discusses the cases of Zambia, Rwanda, Somalia, Algeria, and Mozambique.

¹⁷ See in particular the Second Vatican Council on Gaudium et Spes (1965); John Paul II, Sollicitudo Rei Socialis (1988); idem, Centesimus Annus (1991). Paul VI’s Populorum Progression (1967), which dealt with development economics, focused on the more problematic aspects of international trade.

17. International Paper-Money Systems, 1971–?

¹ However, they have been overlooked for many years. The standard explanation of this phenomenon is indeed untenable. In this account, the different countries of the post-1971 world economy are compared to the participants of a barter economy. The point of an international paper-money standard is then to allow for a greater volume of exchanges as compared with the initial barter situation. But these hypothetical additional exchanges are conceivable only if international money already exists—and the point is to explain how this happens in the first place.

² Many observers have been deluded about this point because in the period between 1948 and 1989 huge amounts of western credit have been given to corrupt governments in the Third World without any financial safeguards whatever. But these were political loans. Their purpose was not to earn monetary interest, but to buy the support of these governments during the Cold War.

³ Dollarization is the most complete way for a government to renounce its control over the production of money. By contrast, the creation of a currency board still leaves open the possibility of a quick return to a national paper money. See Nikolay Gertchev, “The Case against Currency Boards,” Quarterly Journal of Austrian Economics 5, no. 4 (2002).

⁴ We have analyzed the development of the European Monetary System and the emergence of the euro in more detail in Jörg Guido Hülsmann, “Schöne neue Zeichengeldwelt,” epilogue to Murray Rothbard, Das Schein-Geld-System (Gräfelfing: Resch, 2000), pp. 111–54.

⁵ For an insider view of the conflicts and struggles behind European monetary integration see Bernard Connolly, The Rotten Heart of Europe (London: Faber and Faber, 1995).

⁶ In each country the banking industry is regulated to curb some of the excesses of fractional-reserve banking. The strength of these regulations varies from one country to another, and the banks operating from the least regulated countries have therefore a competitive advantage over the other banks. Yet the risks of their enhanced activities are experienced even in the more regulated countries, because international business ties create spill-over effects. More recently, therefore, a number of governments have tried to set up international standards for the regulation of the banking industry. In particular, they seek to impose on fractional-reserve banks a minimum capital-reserve requirement on their loans; and to make this capital-reserve also dependent on the risk of each individual credit, as evaluated according to formulas developed by an international committee. The activities of the regulators are coordinated by the Bank for International Settlements (BIS) in Basel, Switzerland. They have recently published a detailed proposal known as the “Basel II Agreement” (June 2004). Let us emphasize again that, in light of our analysis, it would be more commensurate to simply abolish the legal privileges of the banking industry, rather than to layer additional international regulations atop the manifold national regulations.

⁷ The same thing would happen on a national scale if there were competing central banks. In times of strain on the reserves, the commercial banks could then threaten to switch from one central bank to another, dooming in the process the system they leave. This is one of the reasons why no bank has ever assumed the responsibilities of a central bank (lender of last resort) without being compensated through a legal monopoly that prevented such switching. The Bank of England is a case in point.

⁸ See Stephen F. Frowen, “The Functions of Money and Financial Credit: Their Objectives, Structure and Inbuilt Deficiencies,” Journal of the Association of Christian Economists 14 (February 1993).

Conclusion

¹ Pius XI, Quadragesimo Anno, §§101, 103.

² John Paul II, Centesimus Annus, §42.

³ We do not of course claim that every single government betrayed the public faith; only that several of them in the past three hundred years did this. Their decisions gave us our present-day monetary institutions. The alliance with the banking industry resulted merely from the technical superiority of banknotes and paper money as vehicles of that illicit increase of revenue.

⁴ Pius XI, Quadragesimo Anno, §107; emphasis added.

⁵ Concrete reform schemes are discussed, for example, in Ludwig von Mises, Theory of Money and Credit (Indianapolis: Liberty Fund, 1980), pt. 4; Murray N. Rothbard, The Case Against the Fed (Auburn, Ala.: Ludwig von Mises Institute, 1994); Hans Sennholz, Age of Inflation (Belmont, Mass.: Western Islands, 1979), chap. 6; idem, Money and Freedom (Spring Mills, Penn.: Libertarian Press, 1985), chap. 8; idem., ed., The Lustre of Gold (Westport, Conn.: Greenwood Press, 1975), pt. 4; Jesús Huerta de Soto, Money, Bank Credit, and Economic Cycles (Auburn, Ala.: Ludwig von Mises Institute, 2006), chap. 9; Gary North, Honest Money (Ft. Worth, Texas: Dominion Press, 1986), chaps. 11–13; Edwin Vieira, Pieces of Eight, 2nd ed. (Fredericksburg, Va.: Sheridan, 2002); and Pierre Leconte, La tragédie monétaire, 2nd ed. (Paris: François-Xavier de Guibert, 2003).