Time for a holiday

It's time to give the Wiki a break. Change is needed: while you can learn a lot with all the research, it is very dry and exhausting. While at it...

I declare the Austrian Economics Wiki version 1.0 to be complete. It is the time, and it is pretty much all I wanted for a first version. 60+ pages, some initial points on the ABCT, could be always better, but there is already a huge amount of stuff inside. More work is to be done. Of course I have big plans for the Wiki, but they can wait till next year. Some recommending etc. may still happen, but the holidays will be devoted to other things.

See you around next time!

The Stuff Business Cycle Theory

(This is a simplification of the ABCT, created to emphasize an aspect, that sometimes seems overlooked. Let me know how it brings the point across.)

People produce stuff. There are many different types of stuff, which are not freely interchangeable, but let's keep it simple, and call it stuff.

So what is this stuff for? Why do we make it?

First off, we want to consume some of the stuff. We have to eat something, we have to live somewhere and we want that life to be good. To that effect, we need a lot of stuff, from food to computers to read articles on the Internet - to cover all the essential needs.

But to make all this stuff, you need to expend quite a lot effort - and a lot more stuff. The people making the stuff also need to be taken care of. To build those complicated things, you need parts and raw materials, you need factories and mines and all the infrastructure around, and you need shops and a lot more to get the stuff to the consumers. To maintain a certain structure of consumption, you need a massive structure of production - the difference between the visible part of the iceberg and what lies below. It needs to be built and then kept in shape. (I, Pencil is but one illustration of it.)

All this effort and stuff needs to be expended just to stay in one place, without changing anything.

But we don't like to stay in one place, we want to have a better life, make the world a better place, achieve more - or simply change our taste now and then.

To do this, to change the structure of production, requires more effort and more stuff. It has to come from somewhere. And no matter how you turn it (using your own stuff, somebody lending you theirs, or giving you a gift), some people have to sacrifice part of their lifestyles, and effort and stuff have to be invested. We may be better off tomorrow - and we hope so - but today we will have to do with less.

Assuming those investments work out, the production structure will be upgraded and produce more (better, different) stuff. That means you can enjoy it more in consumption, invest it to produce more, or do some of both. This is that famed "natural growth". And it takes time.


If it comes to the business cycle, people mostly look at the bust - businesses crashing, unemployment, an overall slump in production and standards of living. The Austrian Business Cycle Theory explains this with the practice of Fractional Reserve Banking and the expansion of credit, the lowering of interest rates, which misinforms entrepreneurs into wrong investments lines. In the boom, we waste a lot of stuff on things we can't really afford yet.

Some critics(1)(2) argue, that this cannot be the case, because if people are investing too much, shouldn't they also be forced to limit their consumption? A boom is characterized by an increase in investment AND consumption, after all.

So what is wrong about the boom? What can be wrong about having more stuff?

To produce more and different and better stuff, people need to consume less first. If they all of sudden invest more and produce more while consuming more, they
a) miraculously have more stuff from somewhere, or
b) they forgot something

What is often overlooked, is the existing structure of production the boom is supposed to run on. If it was a house, it would be like starting to build an additional story or five on it, moving more people to live inside and perhaps building a factory on the top of it... ignoring any structural supports and foundations. Since there isn't really more stuff around, the new projects can't be finished, or run effectively - at least not without affecting the existing functions of the house. And since much of the construction material is torn out of the existing structure, the house might just collapse one day and bury all those enthusiastic builders.

A lot of stuff will be wasted. Worse yet, you will need more stuff and effort just to rebuild the original structure.

And that is what happens in the bust.

Quietly rising

Been on holiday, but did some decent work on the wiki, so didn't have much time to post here. The wiki does grow nicely, from the basic historical posts to more theoretical affairs, which is good.

Speaking of growth... I keep an eye out on my Google rankings over time, and there is indeed a slow rise noticeable over the few months I have been working with the wiki. Despite minimal outside links and attention, it seems the constant updates are appreciated by some of Google's mysterious internal workings. And irony is never far. These days, if one searches for "Austrian economics", the wiki is on place 46, and the venerable Mises Economics Blog of THE Mises.org is on the lousy position of 57.

And thus novelty prevails over experience and content! Woohoo!

Obama fun

There's countless jokes on Obama, but you've gotta give it to Onion making this:

White House Reveals Obama Is Bipolar, Has Entered Depressive Phase

Rhymes with the economical Depression quite nicely.

Done with Ethics

At last, the posting of material from the Ethics of Money Production (pdf) into the wiki is over!

That is not to say that more won't follow, but at least the sequential processing is done. A big thanks belongs to Jörg Guido Hülsmann, his book, while concentrating on a very specific topic contained much information of general interest. While probably unintended, for some it might even serve as an introduction to (Austrian) economics and a quick guide to the relevant parts of history.

Woohoo!

The new Gold Standard

This was just lovably cruel:

Good News/Bad News from the Daily Show.

In the last few days, the results of a research made the news: 9 out of 10 dollar banknotes are tainted with cocaine.(source)

And then it is all summarized in this sentence, for all fans of gold:
"We're not on the Gold Standard, people, we're on the Columbian Gold Standard!"

The Ethics of Money Production, Conclusion

1. If capitalism is to be judged, then it should be pointed out, that there are two conceptions to consider. One is the free market model of respect to private property rights. Here, says Hülsmann, is the Catholic church positively inclined to capitalism. And here is also a link to Austrian economists, that have for long held, that as an economical system it provides the best chances for the full development of man and society.

Then there is the other, 'actual' capitalism of the West, that markedly differs from the ideal. Both groups are again in accord, that many of its aspects are worthy of critique - not the least in the production of money. There is no justification for the current system of paper money and fractional reserve banking, be it economical, legal, moral, or spiritual. They affect the lives of millions, and cause excesses for which is capitalism too often blamed.

These institutions were made not out of necessity, but because they gave politicians and bankers an easy income source, tapping the wealth of others. This is not a matter of conspiracy, but of a relentless drive to gain more money for the states - and paper money with fractional reserve banking merely turned out to be very efficient ways to do so.

2. A reform of our monetary institutions is badly needed and this book tried to present one alternative. Despite all the possible objections, the return of sound money is in the end a matter of will. It has been done before and can be achieved again.

Let us hope we won't have to wait too long.

The Ethics of Money Production, Chapter 17

17. International paper money systems 1971-?

1. With the Fed's suspension of payments was created a large number of paper currencies, their exchange rates fluctuated wildly and every country could set its monetary policies as it desired. But very soon, international paper currencies have dominated the scene.

International businesses can of course profit from using a widespread currency, but how does a currency become widespread and how can it avoid overt fluctuations?

The reason is not hard to find. States have always need for more income. But for most states is living off their citizens insufficient. They can try to attract investments from foreigners, or try to make their own citizenry wealthier. But to accumulate wealth takes a lot of time and little interference, and few governments are willing to wait, denying themselves tax income. It is better for if foreign capital comes in. Since investors don't like to throw away their money, they must be persuaded, that the money won't be simply printed, letting the exchange rates fall and ruin their investments. There are several institutional precautions.

First, the states can produce bonds in a different currency than their own; many float bonds in Euro or the U.S. dollar.

Second, they can give public or implicit guarantees that the exchange rate will be maintained. They can inflate at will and dispossess their own people as well as the foreigners. It is assumed, says Hülsmann, that the Fed gave such guarantees to several countries in the 90s. When it was finally abolished, financial crises in the debtor countries followed (Mexico 1994, Asia 1997). This tactic was not attempted again.

Third, the debtor states have created currency boards, issuing notes backed by foreign paper money. Their own currency becomes a mere substitute for another paper money. It is used by e.g. Hong Kong, Bulgaria, Estonia, Lithuania, Bosnia and Brunei.

Fourth, they can abandon their national currency completely and use the currency of their lenders. This is called "dollarization" (does not have to be U.S. dollars). Recent examples include Ecuador, El Salvador, Kosovo and Montenegro.

International paper money is brought about by governments seeking more income sources. Preferred will be the currencies, that are legal tender in the largest capital markets. Thus have the Yen, Dollar and newly the Euro risen to the top.

2. After the fall of the Bretton Woods system began the governments of Western Europe to amass public debt to grow their welfare states. But it was soon recognized their wildly fluctuating currencies hindered international trade and could so undermine their income.

The first attempt to stabilize their currencies was the European Monetary System (EMS, founded 1978). It was a cartel of paper money producers, who agreed to stabilize the exchange rates between their currencies at certain levels, or parities. In practice, those inflating the least would determine the inflation rates of all others. If someone were to inflate more, they would have to persuade others to do the same, or risk a change of parity.

As it happened, the German Bundesbank was the most conservative of the central banks, so the pressing issue for other governments was to push the German Mark towards more inflation, to keep up with their own financial demands. It was only the rejoining of East and West Germany, that changed this. The price for the agreement of other western states, says Hülsmann, was the German Mark.

Within a few years were the paper money producers united in the European Central Bank (ECB, started operation in 1999). The Euro, lauded as a great boon for the citizens of European states, was just another means to control the money supply and secure the unlimited source of income, that paper money represents.

3. The current international monetary order is shaped by several competing currency systems, each based on a standard paper currency and a number of secondary and tertiary currencies. The most important are the U.S. dollar, euro and yen.

The relationship between these currencies are similar to those between a central bank and commercial banks. But there is no commodity money, that would limit inflation, and more importantly, there are no legal means to force them to cooperation. National sovereignty rules and the secondary and tertiary producers can inflate at will. This is compounded by the fact, that the primary producers will likely bail them out, in yet another manifestation of moral hazard.

Bailing out others by printing money means of course the all of rates and rising prices, and both currencies will be less attractive for investors.

But not bailing out is risky too: a country in a crisis could threaten to switch to another standard, which could damage the standing of the primary currency. If countries started to avoid it, it would eventually travel back to where it has legal tender privileges, raising prices and potentially even create a hyperinflation. Since all countries are free to switch to a different currency, the more money is in foreign countries, the more likely is the primary producer to accept this blackmail.

The American central bank is aware of the risk and pays some of the foreign countries for their cooperation. But that is not enough. Cooperation between the producers of standard money may be required to stabilize currencies in times of crisis.

Why would the competitors help each other out? For once, those, who would blackmail their peers, could also blackmail them. And second, profiting from a currency crisis of someone else could easily backfire, once their competitor's crises is over.

Paper money producers have the same motivation as on the national level to increase their production, because their competitors are likely to bail them out. With such a moral hazard, inflation on a large scale is inevitable.

One way to escape this mess could be to completely avoid international trade - probably an even more destructive option. But what if all the paper money producers fused into one (possibly with a worldwide regulation of banking and capital markets)?

4. As was shown, there is a strong tendency to form currency blocks around paper monies used in the largest capital markets. States with a small income (or too small for their taste) have to turn to these standard currencies as well.

Even competitors are motivated to cooperate and eventually fuse. One currency for the whole world would be the logical continuation; and it was already called for, by Lord Keynes in Bretton Woods in 1944.

But even if all political hurdles were overcome, and "the humanity" was united, even if the secondary destructive effects were curtailed and all politicians became noble paragons of virtue and defenders of liberty... even then would the monetary union fail to bring the promised stability.

A global paper currency cannot escape the fate of the national ones - it must either collapse in hyperinflation, or force the state to regulate everything, and subject all economical resources to a total control. Or both.

But there is still hope, closes Hülsmann. We can still return to natural production of money, to the only defensible monetary system.

The Ethics of Money Production: Chapter 16

Chapter 16: International Banking Systems, 1871 - 1971

Gold was legal tender in Great Britain since 1821 and the de facto currency in the US since 1834 (the Coinage Act). Australia and Canada followed 20 years later. The breakthrough for gold and the era of the classic gold standard began after the war between France and Germany (1870-1871). The German government received war damages of 5 billion francs in gold and made it fiat currency instead of silver, that was losing popularity at the time. The Prussian Bank ('Preusische Bank') was turned into a central bank ('Reichsbank'). Its notes became legal tender in 1909 - all a copy of the British system.

Why was it gold? For once, Great Britain, with the largest capital market in the world was using it. Several major lands using silver (Russia, Austria) have suspended payments by the time. Finally, silver has less purchasing power than gold, making its weight for large transfers rather problematic.

Practically all western lands and their many colonies have followed suit. In the heyday of free trade, when monopolies were frowned upon as never before, a unified monetary system seemed like a great idea; it was another massive state intervention, this time unopposed.

The classical gold standard has eliminated the fluctuations between gold and silver (though they were less than between today's paper currencies, it is a positive point). It also caused a significant forced deflation, with all its effects.

But the gold standard was still coupled with the practice of fractional reserve banking, and hence unstable. The coming of World War I. finished it off before it could collapse.

2. In the "classical" gold standard was a central bank of each country expected to hold enough gold in its reserves, while the commercial banks would rely mainly on its banknotes (another English practice, that spread out). The advantage were greater possibilities of inflation for them and more power for the central bank.

The 'Gold Exchange Standard' enhanced the already existing international cooperation between banks by a manifold. The American Fed and the Bank of England were to be the central banks for the whole world (with a few exceptions, notably France). Inflating slowly, others would rely on the pound and the dollar for backing, and could inflate much more. This unstable system lasted only from 1925 to 1931, the Great Depression of 1929 caused a rise of protectionist policies and foreign exchange controls, that choked the international currency trade. The Bank of England could not renew its gold reserves and suspended its payments, followed by other banks. From then on currencies fluctuated freely, which lasted until the end of World War II.

3. A new system was designed in 1944 in Bretton Woods (New Hampshire US), to make the production of banknotes even more 'flexible'. The gold reserves of the whole world should be concentrated in a single pool, the Fed would redeem its notes while all others would keep the US dollar as reserve. It was a logical choice, as the United States have attracted much gold and after WWII became Fort Knox the largest storage in the world. (England, represented by Lord Keynes, tried to push for a pure paper money, but it didn't come to be.)

To reduce the resulting dependency on the Fed, and to make it politically acceptable, two organizations were created: the International Monetary Fund (IMF) and the World Bank, both to influence the distribution of new banknotes. They would supply short-term (IMF) and long-term (WB) credit to member states in trouble, primarily the board members.

The growth of inflation, the main purpose of the Bretton Woods, was so successful, that the Fed eventually ran out of gold and had to suspend its payments in 1971. That was the end of the so-called gold standard and its versions.

4. The IMF and the World Bank did not die with the Bretton Woods system and started to supply credit to third world countries, transferring the income of western taxpayers. Since responsible states can get credit easily, it is often given to those not paying their debts, those nationalizing foreign investments or regulating overly their own countries. Thus arises a tendency to support dictators and violent regimes, often in exchange for other concessions. Their rule tends to be prolonged and the declared goal of fighting against poverty becomes more than a little dubious.

(Aside: back in Introduction I remarked on the light, friendly tone of the book and it stayed so for the most part. But this chapter seemed to have so far the sharpest tone of all. Interesting.)

Healthcare plans in the US

A fascinating reading, just breeze through it if you don't have time for the whole ten pages:

A summary of the "best" points of the Obama Administration’s Health Care Plan currently under consideration.

Read the points, it is instructive even from behind the pond. Would love to see more laws being analyzed in detail with the cherries picked for general consumption.


"The tax imposed under this section shall not be treated as tax." There's more. (Hat tip to C4L.)

The message of nope

Sometimes it just hits you, an expression or lucky choice of words, that you have to consider or just laugh about. And this is one:

Bushbama and the continuing message of nope, by Idle Worship.

I heard some versions of it before ("the message of dope") and countless versions of "Yes we can" and "Change you can't believe in". But the simple wording of 'the message of nope' brought me immediately great pleasure. The picture blending Bush and Obama into one person is just the icing on the cake.

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The reason I found the blog in the first place, is that I am considering to rename this blog, just note its subtitle. 'Slightly Political' doesn't seem that great, now that I'm posting here with some regularity.

Comments and ideas are welcome.

The Ethics of Money Production: Chapter 15

Chapter 15: Fiat Monetary Systems in the Realm of the Nation-State

1. Paper money, as we know it today, originates from the European fractional reserve banks of the 17th century, while the search for more money by governments was the main driving force.

The Bank of England, a notable example, was founded to provide the English crown a massive loan, in exchange for special privileges. It made use of the 'suspension of payments' only two years after its founding, but was quite reliable afterwards (in peacetime at least). It grew through the growing business with the state and supplied it with more and more loans. Its notes became legal tender, it became a monopoly, until it stopped redeeming its notes permanently in 1914.

Other significant banks developed in similar ways, often faster and more recklessly. Fractional reserve banknotes have been widespread by the end of 18th century and the trend continued. They have turned into paper money in most countries by the beginning of World War I.

2. In the British colonies of North America, the local governments pushed for paper notes with legal tender privileges. The merchants forced to accept this rapidly depreciating money complained to the British Parliament, and it forbade the emission of further notes in all colonies. This, notes Hülsmann ironically, might have been one of the roots of the American revolution.

But the revolution moved away from the inflationist tendencies and those against inflation were for a long time successful. The principles for hard money based on gold and silver were even put down in the constitution.

Two central banks were set up, but their charters were not extended. The civil war brought paper money and a group of privileged "national banks". The money did not last, but the banking system was centralized. Finally, in 1913 was founded the central bank, that lasts until today. The pro-inflation movement has won.

3. On the national level was the cartelization of banks guided by laws, but it wasn't so on the international level. There have been purely voluntary cartels, which will be discussed in the next two chapters. What the future brings, we will see.

The Ethics of Money Production: Chapter 14

Chapter 14: Monetary Order

1. Until now was the book analyzing economical theory, with historical examples used merely for demonstration. That being done, it is time to look at actual history through the theory available.

The analysis of the free market (or "natural") production of money, however theoretical, allows to analyze the many breaches of property rights and their effects. It also shows, points out Hülsmann, that a natural production of money is "unrealistic" only because of a lack of political will. There are no technical hindrances to its introduction, and it is superior in every way to the present system. It is a viable system. And free competition would allow it to spread.

2. A minor note on credit money: it is compatible with a free market. It probably won't see widespread use, but there is no reason to not let it compete along with other monies.

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This was another short chapter, so let me talk a bit about the blogging process itself. Turns out, for 'liveblogging' is this a pretty extended activity, but it can be called blogging at least. :)

The book divided into chapters and smaller sections and most are not too long. When processing a chapter, I read the whole chapter first. Then I read the first section; and then I start making notes on the section itself, book in hand. That done, I go over to the next section and so on. Sometimes can be the text condensed nicely, some parts need to be repeated almost word for word.

Meanwhile, I am posting the chapters as I have time, stabilized at around once a week. Typing it up, more changes in text are sure to come in, but its mostly just cosmetic issues and wording. It is fun and useful to have a feeling for what is coming, while posting the current chapter. It also helps when points from the current chapter are posted into the wiki.

From this follows, that the note-taking and blogging can diverge quite a bit. The note-taking takes mostly less than a week, but I got delayed on several long chapters, so it matches up. At this moment though, there are notes up to Chapter 17, the last numbered chapter (there is one more short 'afterword' chapter), so the end is finally drawing near! It is quite taxing to do it all, but it is worth it... I can only recommend, if you have the time.

The Ethics of Money Production: Chapter 13

Chapter 13: The Cultural and Spiritual Legacy of Fiat Inflation

1. It is widely known, that inflation is dangerous, but the amount of damage it causes is usually underestimated. Forced inflation breaks the rules of society. It has always at least the three following consequences:
- it benefits its creator at the expense of all users of money
- it allows a greater proliferation of debts
- it lowers the purchasing power of money

But there is more.

2. The inflation benefits the state on the expense of its population, but also to the detriment of lower levels of government. In 17th and 18th century, the European kings have suppressed important centers of of intermediary and alternative power. The democratic nation states have completed the centralization. Inflation was its economic driving force; thus, as Hülsmann says, aided at least indirectly nationalist movements and their worship of the state.

Inflation supports the growth of the centralized state, and allows it monopolize more functions than under a natural production of money. This increases the influence on its citizens and weakens other groups, like families. But moral principles like subsidiarity (that problems should be solved on the lowest level possible) are hard to combine with such a powerful (and hidden) phenomenon.

3. Paper money makes it possible to prolong war. People grow eventually tired of war and will try to resist further expenses of the state of it. The state can simply print the money and ignore the will of its citizens. This was reported to be the case in both World Wars, prolonged by months, if not years.

If everything is allowed in war (and e.g. the just war theory says otherwise), one should note there are others, less dangerous means to gather funds available as well.

Some might say, that a state is better informed about the war than the citizens. But isn't exactly that the role of political leaders, to inspire and inform the citizenry?

4. The printing of money allows the state to act without support from the population, or against their will. A government taking the property of its citizens arbitrarily is called a tyranny.

5. Forced inflation inflation is inherently unstable because it turns moral hazard and irresponsibility into an institution. The slow decline creates a certain "race to the bottom" in financial institutions and leads to repeated economical crises.

6. Forced inflation makes credit cheaper, than it would be in a free market. With it, businesses can finance projects with credit to a larger degree instead of paying it out of their own money or not starting them at all.

Banks would be mere financial middlemen, lending out money of its savers (pooling resources, so to speak). They couldn't lend money under conditions much different from those given to their own lenders. For a bank to stay profitable in a free market, it would have to stay within narrow boundaries, determined by savers.

But Fractional Reserve Banks can do better. They can easily produce more money substitutes and give credit at better rates. The same is true with paper money, their producer can lend money at zero or even negative rates (like the Bank of Japan in recent years).

Few businesses can afford to resist such offers due to competition and mere survival instinct. They become more dependent on banks. Banks become de facto owners of many businesses and there are fewer true entrepreneurs.

Because credit produced by forced inflation is easily gained, it leads the economical decision makers to irresponsibility, a risk especially for large concerns with easy access to capital markets. While sometimes confused for innovativeness, real innovations have a tendency to upset the banks' investments, notes Hülsmann, and they will tend to resist them or want to make sure the companies they are invested in get the innovations as well. Thus are businesses made more conservative - and the existing ones protected from newcomers.

(One needs not to point out, that there is also innovation stemming from this carelessness, as evidenced by many innovative 'financial instruments' of recent years. These days, they are known as toxic assets.)

7. But people get cheap credit, too. It is not only easier to get into debts, the constantly rising prices make them downright attractive. To hoard cash, like it was safe to do in the old times, is counterproductive. It can be more rational to take on debt and buy something that will see its value rise with inflation. Beyond that, everybody has to invest their money into financial markets, to avoid its constantly sinking of value. Banks, stockbrokers, bond dealers and others profit nicely from the situation. They are not directly guilts of usury, points out Hülsmann, since it is institutionalized.

And in this way, people are driven into debt by the monetary policy of their own states. This is not compatible with financial independence and it undermines independence in other areas as well. To quote:

The debt-ridden individual eventually adopts the habit of turning to others for help, rather than maturing into an economic and moral anchor of his family, and of his wider community. Wishful thinking and submissiveness replace soberness and independent judgment. And what about the many cases in which families can no longer shoulder the debt load? Then the result is either despair or, alternatively, scorn for all standards of financial sanity.

Inflation is sometimes defended as the means to "jumpstart the economy" and give businesses the means to invest. But hoarding does not endanger anyone's investments (see Chapter 4.). Inflation doesn't create new resources, it merely shifts existing resources from businesses financed by own money, to those running on credit.

8. To protect their savings, people need solid financial understanding, time and luck. Lucking any of those, losing a large part of their property is very likely. The old might lose their life's savings and despair. The young will throw many of the old principles completely away.

Inflation forces people to think more about money and let it influence their decisions more, to earn more money, but often on the cost of their personal happiness. It makes society more materialistic, if you will. The temptation of money increases even more.

The constantly rising prices lowers the quality of products and services in some sectors of economy. With the principal lie of fractional reserve banking, the habit of lying seems to spread throughout society.

9. Forced inflation enabled the growth of a welfare state, and grow it did. A welfare state weakens the institution of the family and the moral principles it imparts.

It crowds out the services supplied by a family and charitable institutions, not by virtue of providing them in a better way, but by being financed by tax money and inflation, thus taking away resources applicable to other uses. It is inefficient economically and unable to provide emotional and spiritual support (Hülsmann quotes the pope John Paul II to the effect).

A welfare state allows a greater proliferation of 'alternative lifestyles', and socializes the costs of careless behavior, making it easier to live without moral guidelines.

To Hülsmann, a welfare state is not evil per se. But the forced inflation allows its uncontrolled growth and the mentioned destructive tendencies.

The Ethics of Money Production: Chapter 12

Chapter 12: Paper Money

Paper money never arised on the free market, it was always the preferred child of the state, protected by laws. The state creates a monopoly for one precious metal, either by forbidding others (Germany, France) or through bimetallism (England, USA). Then it grants the privilege of legal tender to the banknotes of a specific fractional reserve bank. Once are all other monies pushed off the market, this bank is allowed to refuse to redeem its banknotes. These become paper money; and such is the history of banking in the West. The first World War was financed in this way. Gold was used less and less, until it was completely abandoneded in 1971 in the US.

Paper money was always instituted through massive breaches of contract and of private property rights. It is kept in existence through legal privilege only.

However, producing paper money is not counterfeiting per se. It is not claimed, that it pretends to stand for something else, it stands for itself. Its promise is to give another banknote in exchange. Talk about a recursive definition.

2. The moment a central bank issues not only legal tender, but is freed from the obligation to make its payments, its banknotes turn into paper money. But the bank also changes: it is now a producer of money, even if it's paper money. The banknotes and the bank turn into something very different, without any outward change. This confuses many students of monetary politics, so it has to be emphasized.

(Hülsmann actually writes, that the bank changes into something completely different and shouldn't be called a bank anymore. To me, it still provides banking services for its customers, it is still a bank in a way. That its nature has deeply changed, is undeniable.

He also mentions something about "reverse transsubtsantiation". That was probably the first part, that was completely lost to me. Oh well.)

3. Banks of this kind cannot really go bankrupt. They can print any amount of paper money (which they freely admit, if the freely admit, if the terrible dangers of deflation are mentioned). Producers of commodity money don't have that privilege.

Instead, their greatest risk lies in hyperinflation. The constantly rising prices can lead to the complete abandoning of a currency ("flight from money") and the collapse of the economy. All hyperinflations were based on the inflation of paper money. But this hard limit seems to be a rather low risk: many have inflated in massive amounts, a few lesser currencies have collapsed in a hyperinflation, all the major ones persist.

4. Possibly the most visible consequences of paper money inflation is the explosion of public debt. For private debtors, how much can be borrowed depends on the value of their property and expected income. The limits stay, even if the availability of credit is growing with inflation.

A state cannot go bankrupt, as long as its central bank supports it. No wonder, despite is claims about independence are central banks created by laws and its top management appointed by their governments. And even if they don't directly throw money at the state, there are ample ways of making sure its demands are met. The result is growth of public debt far above the increase of money supply. (There are some more details here and example cases US and Germany. I'd wish to see more of the exact workings of the current banking system, but that is out of scope here.)

5. There are claims, that paper money could be more stable than commodity monies, if it would compete on the free market. But this is not only contrary to all historical experience, but runs into theoretical issues as well. A stable purchasing power is an illusion (see Chapter 4) and paper would have a hard time to survive competition anyway (Chapter 1).

The production of commodity money (like gold and silver) has definite limits and is unlikely to jump up quickly. With paper money, the possibility is well known and many speculate on its growth. This leads to the wasting of resources and potentially to larger problems. A few speculators, that lose their money, can be saved by printing more (or left to go bankrupt). But what if many speculate and get into trouble? Saving them means a high inflation; letting them fall to mass bankruptcies. The political pressures will make the second option rather hand to follow.

The very existence of a producer of paper money creates a moral hazard. A high inflation is in the end hard to avoid.

The signs of moral hazard are evident in the "bubbles" plaguing this financial system. In the dot-com boom and the housing bubble, market participants have been speculating with assets without regard to the price/earnings ratio and expecting, that someone in the future will buy it for even more. Whatever happens, things will always go up. In the US, the money supply is growing, but much of the new money is exported into other countries. Should they slow down their buying of US dollars, a large inflation (and potentially hyperinflation) will loom on the horizon.

States have attempted to curb these excesses through regulation, to cure the symptoms while letting the cause untouched. The result is merely driving the moral hazard into new areas. One could of course regulate everything likely to fall to it, that is everything. With paper money, you can choose between a hyperinflation and a centrally planned and a centrally planned economy. You might even get both.

6. From an ethical point of view, there is not much to say. Paper money was always created and continues to be kept in place by force. As there is no necessity for forced inflation, it is morally not acceptable.

The Ethics of Money Production: Chapter 11

Chapter 11: Legalized Suspension of Payments

1. Bankruptcies, which fractional reserve banks are so apt at falling to, are often seen as a a purely negative event. But they have a larger social importance in maintaining the capital goods available. Three basic cases are observed.

In case of a fraud, the business does not intend to produce real income. Damage is caused to the investors, but also to society at large due to capital consumption and waste. Fraudulent fractional reserve banks are a typical example.

An insolvent business consumes more resources than it creates. It can make some people better off, but can only survive by consuming someone's capital, usually that of owners or lenders. When they stop supporting the company, it goes bankrupt and its employees and capital are freed for more productive uses.

An illiquid business does not suffer from too large costs and too small profits. It has merely a case of temporary mismanagement - it can't meet the demands of its creditors at the moment. (A typical case is a legalized fractional reserve bank in a bank run.) If they'd just wait for a while, the necessary money can be raised. This privilege is often given to the banks by law: they don't have to pay their creditors, but the banks can still collect their debts. They don't fulfill their most basic promise - to instantly redeem their notes on demand. A bankruptcy would force them out of business.

2. Banks with this privilege alone don't have much of an advantage. They can't reduce their reserves overly and suspending payments makes them untrustworthy partners so they'll loose their market position. Historically, they have survived only if the state was their main customer. The Bank of England, for example, went bankrupt after only two years of operation and survived thanks to the English Crown, with more legal privileges against competition.

But if such a bank is also privileged by legal tender laws, its money certificates will turn into paper money (see next chapter).

A legal permission to suspend payments means an even greater moral hazard. The bank does not have have to careful and its customers will take on more debts, as it has the blessing of the state. This of course leads to more bankruptcies.

3. Ethically, there is no justification for this behavior, which amounts to a breach of contract. The bank demands, that others honor their obligations, a principle which it breaks at the very same moment. Enough said.

The Ethics of Money Production: Chapter 10

Chapter 10: Legal Tender Laws

1. Legal Equivalence and Gresham's Law
Legal tender is a money, that can be used in a transaction against the will of the exchange partner. This might be in itself an inconvenience, but nearly always is also a conversion ratio specified, how is the privileged money to be priced in the units of other monies. The law is passed, to benefit the debtors (like the state) to the loss of the creditors.

For example, let's say the law sets the ratio at 20 ounces of silver for one ounce of gold, but the market price is 15. Any contract or debt in silver can be now paid in gold - and much cheaper. As a result, no one will be willing to enter a contract quoted in silver.

This is called Gresham's Law: that an overvalued money will drive undervalued money out of the market. Or simply, the 'bad money' drives the 'good money' out.

Legal tender laws tend to cause a money to be held and produced in greater amounts, thus they have inflationary tendencies; conversely, they tend to deflate the other monies.

(Hülsmann actually writes, that inflation and deflation is caused by these laws, but here I have to disagree: what if a money was so privileged, but its supply wasn't increased? Then, a higher demand and holding by its users would create a deflation instead. The situation arises only in combination of legal tender laws and inflation - and inflation is much easier with these laws.)

(Here follows a more general note: gold has a much higher purchasing power than silver. It is unpractical for smaller purchases and downright unsuitable for the really small things. Like other effects discussed here, it leads to the usage of more money substitutes, which carries known risks.)

To come back to the general effects of legal tender laws, the suppression of one money by another has immediate effects on people's valuation of affected monies, but their actual exchange takes time. The undervalued money vanishes from the market, bringing down prices quoted in it.

Those still using this money will likely find themselves in trouble, because they made debts and investments under the old price level and expected their incomes to be correspondingly higher.

As said, the exchange of currencies takes time, while the choices of people are impacted immediately. One of the effects will therefore be greater usage of money substitutes. Since they can be produced in great amounts in little time, these laws tend to bring about more fractional reserve banking.

Lastly, ask Hülsmann, why were there so many instances of legal tender laws? Since the 14th century, the effects were far from unknown. It is concluded, that they were passed on purpose.

2. Bimetallism
Bimetallism is a currency system with forced exchange ratios between coins from different metals, usually precious metals. The Gresham's Law is here equally valid and Hülsmann quotes several historical examples, where it has manifested in notable ways (the British currency reform of 1717, the US reforms of 1792 and 1834). In each case was the money exchanged through friendly helpers, in exchange for nothing but a solid profit. Each has also led to a greater proliferation of money substitutes and Fractional Reserve Banking.

3. Legal-Tender Privileges for Money Certificates
Legal tender laws can also prescribe to use money certificates in a certain ration to other monies. As long as they are "real" (100% backed) certificates, it is not much of a problem. The law stimulates demand for the privileged money. Those asking for other monies (like uncoined metals), do so for a reason. Certificates are a matter of trust and trust cannot be mandated. Where trust is lacking or is uneven, the monies can't be really equal. Imbuing a money with legal privilege disturbs the market and has a tendency to disrupt the cooperation between people.

This effect may be negligible in case of real money certificates. From a moral point of view, there is no difference, only the impact becomes larger.

Fake certificates are very empowered by legal tender laws. Because all money certificates are equal before the law, no one is motivated to pay more for the real certificates. Their producers also also aim for the lowest costs. Precious metals will be held ("hoarded") or sold elsewhere and are completely driven out of circulation.

Debased coins: there is no proof, that private minters can't compete well with with governments within a free market. But, there is more than ample evidence, that states have abused legal tender laws many, many times. Legal tender laws make it possible to debase coins, until there is not a trace of precious metal in them. Then they can be produced in massive amounts, until it stops being profitable.

But there are disadvantages for those debasing money in this way: it takes time to exchange the coins. Once the people take notice, they will hoard the better coins and use only the new ones. The supply of coins will, at least temporarily, undergo a deflation, which will create problems for private users as for public finances. This problem will go away, once the coins become purely nominal, without any precious metal. It is one of the reasons why the states keep the debasement in secret like private counterfeiters.

Also, legal tender laws benefit debtors on the cost of lenders (one of the main reasons to enact them in the first place). But the state will be also paid with debased coins. Also, its position as a debtor will worsen, and it will be harder for it to become credit.

Thirdly, these laws disrupt international and national trade and produce chaos in many ways.

Finally, if this privilege is granted to several minters without difference, they will compete in money production until they completely destroy their monies and the people will refuse them. This is why this privilege is so rarely granted. (Hülsmann notes an example from 15th century Austria, with immediate destructive consequences. More on it perhaps later.)

Fractional reserve banknotes don't have the mentioned disadvantages, as they are not physically connected to the precious metal

If it is decided to create more banknotes, the currency does not become heterogeneous and will avoid the deflationary effects. As long as the inflation stays moderate, they can be exchanged for precious metal. Banks are not in immediate danger, as long as they keep sufficient reserves. At least directly, the incomes of the state are not threatened, international trade and the state's creditors are not harmed - and there is still some competition between banks. The bankers are still motivated to inflate, but need to hold certain reserves. The system is highly inflationary, but there are limits.

This is the reason, why the western countries have given up coin debasement and turned to cooperation with fractional reserve banks. This partnership, a blessing for the banks, is not that practical a common citizen. The inflationary effects increase and the resources taken by the state are in equal or greater measure drawn out of the economy.

4. Legal-Tender Privileges for Money Certificates
Credit money will not be very widespread because of its risks. But if the people are forced to use it, its circulation will increase. In might increase even more that other types of money, because it is cheaper.

5. Business Cycles
Like any other form of inflation causes fractional reserve banking protected by legal tender laws a redistribution of wealth since the inflation is high, it can be quite significant. Hülsmann notes here the likeness of a market system to a democracy, with each cent being a vote. If that is so, the bankers and the state have much more votes than they'd have in the free market.

But there is another dangerous effect, the business cycle (the 'boom and bust cycle'). The banks may be unable to pay back the demands of their customers, but that doesn't have to be obvious for a long time (esp. with legal tender laws). Due to high profits and competition are bankers pushed to ever lower reserves... until they go bankrupt one day.

Due to the many connections between banks and companies is the fall of one bank (or a few) likely to cause a collapse of the entire system. This has been often the cause with fractional reserve banking, notably in the 19th century USA. Such a collapse will have further negative consequences for the whole economy, with the usage of and demand for money going down pushing all prices down, including wages. The damage can be even greater, if the businesses are misled about the availability of resources. To bring a project to its end, they can calculate their costs, based on prices and interest rates. But if the interest rates and prices are distorted by the production of inflated money, the businesses will start many projects, which they won't be able to complete. Many of the projects, that appear profitable, will fail and waste their resources. And that, dear children, is the business cycle. (More on it in other places.)

6. Moral Hazard, Cartelization, and Central Banks
A bankruptcy of a fractional reserve bank can cause a systemic collapse, unless the other banks help it out. The bankers are therefore highly motivated to support their coleagues in a time of crisis; the more, the smaller their own reserves are. The less careful bankers know, that somebody else will pick up the tab. They are tempted to undergo even greater risks. This temptation to let others pay for their risk is called moral hazard.

The banks can create cartels, that will grant access to a pool of cash, which their members can draw on in case of problems. In turn, the cartel regulates their banknote emissions and reserves. The actual owner of the pool will havea great influence over the other banks, thus there is a natural tendency for the creation of a "central bank". But voluntary cartels have their weaknesses, which is why banking was mostly cartelised through laws.

The cartelization, centralization and regulation by law are all attempts to solve the problems of fractional reserve banking.

7. Monopoly Legal Tender
What if a single type of money is privileged by legal tender laws, which is usually the case? In case of coins made of precious metal, this currency becomes the standard of debasement for others: it isn't worth to have a lower or higher metal content, since they would be rejected by one or the other side of a transaction. And so become legal tender laws fully functional, with a monopoly. But the disadvantages of the process stay - heterogenous coinage, forced deflation, lower incomes for the state, destruction of the lenders and disruption of international trade.

If a specific type of fractional reserve banknotes is privileged in this way, it will bring about an inflation as well. But here, the other banks are free to inflate even more. The moral hazard is even increased, as they can use the notes of the privileged bank to cover their own emissions. Thus it naturally becomes the central bank.

But exactly because of this has the central bank to keep higher reserves than others and be less profitable. (Complaints of the Bank of England are mentioned.) At the same time, it must follow the inflation of the other banks, or the whole system might fall apart. Finally, it can't lower its reserves forever, or it will suffer the same fate.

The history of banking in the 19th century is a history of searching for ways to defer the unavoidable bankruptcy of this system.

8. The Ethics of Legal Tender
Monopolies (as discussed in the previous chapter) limit the freedom of choice of citizens, but still leave them some freedom. Legal tender laws force the citizens of a state to use its money, overriding any contracts they have or might have. As Oresme put it, they are far worse than usury, because usury is at least based on a voluntary agreement between a debtor and creditor.

To Hülsmann, it is impossible to justify legal tender laws, especially when they are made to protect fractional reserve money and certificates. Here is inflation at its worst, even self-defense is denied to the people. The state and the banks are free to enrich themselves.

Allowing the state to alter money for profit leads to tyranny, ends the discourse a quote from Oresme.

The Ethics of Money Production: Chapter 9

Chapter 9: Legal monopolies

1. It is noted, that this chapter does not apply to economic monopolies, that arise in a free market and are by itself harmless. Whether they are the best supplier of their product can be tested at any time by competition. Legal monopolies are by definition protected from it.

This monopoly makes the privileged products cheaper to get than competing products, which become in turn more expensive. Thus a forced inflation and deflation is produced, to the benefit of the producer and detriment of the producers and users of alternative products.

2. A monopoly can be granted to a specific metal, for example to gold. But gold is not very practical for daily use (too small coins) or easy to spread among a large population, especially during the transition. Therefore, gold currency in theory often means gold substitutes in practice. They may be fully covered by in the beginning, but they are extremely easy to turn into fractional reserve certificates. Inflation looms on the horizon.

3. A monopoly on coins or banknotes, by itself won't have overly large inflationary effects. The users of money have still the freedom to price money as they see fit and can exchange money according to their new value, or sell old coins for their real metal content or avoid banknotes and use only coins. This limits the income of the counterfeiters. That is why these monopolies were always employed with legal tender laws.

4. Why are these monopolies so persistent and widespread? It is often said, that they are the privilege of the state, but that is not an argument. That the state is a naturally trustworthy institution can be considered as true or not; but it is notable, that today's politicians do not risk their lives as the kings of old did for their subjects. Even then, a trustworthy state is not a justification for a monopoly - other people and organizations can be trustworthy as well.

The negative effects of monopolies are very well known to the economical profession. As long as the producer of money is honest, there is no need for such a privilege. But as soon as he gives in to the temptation, a monopoly hinders people from using other monies. Such a fraud, says Oresme, is "absurd and repugnant to the royal dignity". A monopoloy prevents people from using their own property and amounts to theft.

There is also the claim, that all money belongs really to the state and it can be therefore freely manipulated with. Hülsmann responds with an argument from the Bible, which I will not repeat here. For those of us of a less biblical bent, let me try: if the state is the owner of all money, it shall dispose with it in any way desired. However, if the citizens of the state are forced to use this money, no matter how it is treated and mistreated, they are in this regard slaves of the state and cannot be considered 'free'. any pretense of "state is your servant" democratic illusions must be put aside. The state may act in the "common good", whatever that means; it may also do with its subjects as it finds convenient. Besides this, any incidental theft it may involve (on the top of being a monopoly), the arrangement may be a fraud - this doesn't appear to be common knowledge, it is not publicly argued, that all money belongs to the state and the people are merely its (temporary) carriers, not allowed to choose alternatives.

A better argumentation would be certainly welcome at this place.

The Ethics of Money Production: Chapter 8

Chapter 8: Legalized Falsifications

1. The legalization of counterfeited certificates can mean the declaring of a debased money to be mandatory for use by everyone - but that will be analyzed later.

More importantly, it can mean the state decides to stop understanding common language. For example, a coin marked "an ounce of gold" will be allowed to have any amount of gold or none, and can have any meaning.

(This would be a great place to include an example, as this feels unbelievable... though I faintly remember something of the sort. At least the famous "promise to pay" from Chapter 6 is mentioned. Another specific example would be great here.)

This willful ignorance has of course inflationary tendencies for the "privileged" money. In a still partially free market can people protect themselves against this, by choosing another money. If coins are debased, they can use only the new coins for payment, while pawning off solid old coins for their true metal content, or hold them. Finally, counterfeiters will jump on the opportunity to do what is the state is doing. It is impossible to exchange all of the coins at once. And so will be the government's intended profit smaller.

2. The legalization of counterfeit money is by itself relatively harmless. But it is a necessary ingredient for other abuses. Oresme is quoted at length about its morality: that it is a shame on the ruler and unacceptable, unless all users of money agree. Even then should it be never used as a regular source of income, but only for emergency situations.

Update:

There, found a review of the book on Mises.org. Just for the reference.

The Ethics of Money Production: Chapter 7

Chapter 7: Enters the State: Fiat Inflation through Legal Privileges

1. Inflation is profitable for the creator of new, debased money and states were always its biggest users. When people can choose their money, inflation is limited to the fringes of society. But the state has the power to force its citizens to accept a certain money and extract the resulting profit off them.

2. It is noted, that a government can't force any sort of money on its citizens, but it must be in some way based on existing money. It also cannot (at least initially) lose its value too rapidly. Two ways have been used until now: a government issues paper money with the same name as another, already existing money and mandates its citizens to use this replacement. Or, it grants some already existing money legal privileges, turning them into fiat monies and fiat money certificates.

3. Money privileged by law will be in greater circulation, than it would have be on its own. It is by its nature inflationary. Other moneys will have a reduced circulation, creating a forced deflation.

There are a few groups of legal privileges granted by the state (there is usually more than one present):
- legalized counterfeiting
- monopoly
- legal tender laws
- legalized suspension of payments

Each will be analyzed separately in separate chapters, then the effect of all of them together.

---

This has been a short chapter, so let me add a few thoughts. I am now in about a half of the book. Until now it was pretty readable and nicely categorized - excellent for an inclusion of its points into the wiki. There were some shorter chapters, that are more summaries of previous material and pointers to the next, but they don't detract from the really important content. Good book.

I have also updated the chapter titles and added links, that were missing. This Gil Guillory guy doesn't seem to post anymore, which is a shame, he was writing pretty well. Hope he comes back to the topic.

The Ethics of Money Production: Chapter 6

Chapter 6: Private Inflation: Counterfeiting Money Certificates

1. In times long past, the usual way of inflating money was the debasement of coins. Often perpetrated by private persons and organizations, it was used to a much larger degree by the rulers. However, it was never as much as with paper currency and the counterfeiting was relatively easy to detect.

2. Counterfeiting money is an expensive business. Coins from precious metals have an advantage, as the fakes can be identified with some ease, due to the changed composition. The color and even sound can change; and there is always the possibility of cutting the coins or melting them down. Paper money fakes, once a corresponding initial investment is made, can be produced in unlimited amounts. Their recognition is also harder.

3. Banknotes were used in increasing numbers with the rise of trade and banking from the 16th century onward. The banks of that time were money warehouses - they took care of storage and transfers and had the whole reserve of money at hand. But soon, many circulated more notes, than were their reserves, becoming fractional reserve banks. It was a risky practice: a bank run, when panicked customers would demand their money en masse, destroyed more than a few of these institutions. By definition, a fractional reserve bank is unable to meet the demands of all its customers.

Credit banks could issue notes, that could be immediately redeemed, to give them greater acceptance; and also engaged in FRB. But in this case is the bank the rightful owner of money; something they do not tend to point out. Hülsmann shows, how the banks obfuscated this little difference, which amounts to fraud (they "promise to pay", but are not specific about how exactly).

Lastly, Hülsmann notes the bankers may have been motivated by more than simple greed. With kings of that time willing to seize their reserves, they had another reason to keep them them low.

4. Surprise: there is also a positive effect to private inflation (or counterfeiting). The negative effects stay, but people are more careful about their money and watch out for the fakes. Fraud tends to be quickly discovered and the damage is low - if it is a free market and people are allowed to choose their money.

5. There is no ethical justification for the debasement of money and FRB. Even if done for the "greater good", what would it be? No answers seem to be forthcoming. Christian ethics are not forgiving either (noted: some Christian authors considered it punishable by death or a valid reason for war). And there is no pardon for governments: anything they gain from inflation is a loss of their people, 'an act of a tyrant, not a king'. One shall do no evil so that good may come of it. To Oresme is counterfeiting a worse transgression than other money related sins.

The Wiki is Coming

For the last month, I have been quietly working on a different project: the Austrian Economics Wiki on http://austrianeconomics.wikia.com/.

Wikia is, I think, a good place for fringe groups, benefiting from its connection to Wikipedia, but having different criteria, that would shoot down a lot of content from the Austrian School. It is also quite visible (Alexa rank 300) by itself. The wiki I took was made 2007 or so, but there was absolutely no content, so it was ready for a take over. I made a few pages, of course there needs to be much more.

The wiki needs a community, I hope to attract some editors. The forums of Mises.org will be a good start recruit them. It also needs more visibility, which will come with more content.


Now, there are a few more wikis, or at least wiki-like pages out there with the same or similar theme. Ignoring the lack of content in some, none of them are 'true' wikis. They do not interlink enough and don't do much in the way of referencing. While a pain to make, it is actually pretty important, if one would like to argument for or against a certain concept - and this wiki should, in the end, contain a lot of such arguments (not to mention that it looks impressive if the references to authors and their works are all there). I have started with one, there is A LOT to add; and a lot more arguments to be made. The wiki will provide the theoretical background and definitions of basic concepts, plus a ton of pointers for anyone interested. Some of the articles, if they, say, link to pretty much every work of a given person, might become general sources... but we'll see.

Let's hope it works out. Please help this wiki to grow.

The Ethics of Money Production: Chapter 5

Chapter 5: General Considerations on Inflation

Inflation is defined here as the extension of money supply beyond free market production; or, in other words, extension of money supply by violating private property rights. Other recent definitions (like the growth of prices) do not help in understanding of the problem as much as this one.

Why would anyone cause it? Creation of new money benefits the creators, which is not bad in itself. Problems arise if someone wants to force the increase of money supply. A forced inflation equals redistribution to the profit of some and detriment of others.

Inflation is, according to Hülsmann, impossible to unite with Christian ethics (and not only those). He usefully notes, that basically all human activities are to someone's benefit and to someone's "cost". That is just, as long as the property rights of others are not injured. It is not the case for a thief or a fraud - even one creating a fake money certificate.

The Ethics of Money Production: Chapter 4

Chapter 4: Utilitarian Considerations on the Production of Money

This chapter summarizes the most popular arguments against money based on goods and the presumed advantages of paper money.

1. If paper money cannot dominate in the market otherwise than trough legal enforcement (i.e. the threat of violence), there have to be some pretty good arguments in its favor. Let's take a look.

2. It is sometimes claimed, that economical growth is only possible with a corresponding growth in the money supply - otherwise, how could be the additional goods and services bought? Simply: any given amount of goods and services can be exchanged against any amount of money. If more goods are produced, their money prices will sink.

Now, there are of course technical limitations. Assuming a long period of robust economical growth, some forms of money (like gold coins), could possibly shrink enough to be impractical. But this is no problem on the free market - people can switch to another form of money, like silver coins. In a free market, there are strong incentives to do this change swiftly and efficiently.

Some might object, that if businesses are forced to sell for lower prices, these could be too low if compared to their costs, leading to their bankruptcy. It is forgotten, that the businessman could foresee the sinking prices and strive to lower their costs appropriately. This is standard procedure in times of stable and sinking levels of prices, as is observed in dynamically growing industries (computers, IT, etc.), where such a situation is normal.

3. Hoarding has been warned against by many. And truly, there can be pathological cases of hoarders, that deprive themselves of their full potential and contribute little to the lives of others. But does it have to cause damage to the economy? Hardly. Any amount of money can serve for exchange. In the worst case, if a large part of the population became hoarders, they might cause a given currency to be replaced by another. (To be fair, there are perfectly reasonable AND moral reasons to hold large amounts of money. And to make it more complicated, the only way to find out is to analyze each case on its own. So much for regulation without side effects.)

But let's say the government will try to raise the supply of money to stop the hoarding, will it work? Not necessarily, points out Hülsmann: more money will push to create higher prices, which may motivate those strangely behaving people to hoard even more. Or not. So much for regulations with a predictable effect.

Hoarding, closes Hülsmann, may in some extreme cases require spiritual or psychological guidance. But it is no excuse to increase the supply of money.

4. Deflation is one of the greatest dangers the increase of money supply is supposed to prevent. What exactly are these dangers? Four are dealt with immediately, two follow (5. and 6.):
- There is no historical evidence, that deflation is damaging to long-term economical growth.
- An unexpected strong deflation can motivate people to alter their behavior, that much is true. But that does not necessarily mean a slowing down of production in general. The consumers will eventually buy the goods and services they desire, even if observing constantly sinking prices: they would like to enjoy them sooner rather than later (good old time preference). It can be therefore expected, that consumption during a deflation period will continue at a marginally slower rate, but the total production will actually grow: because resources unused for consumption are saved, and as such serve to increase production further.

(This point doesn't feel to me as persuasive as others. It can be said, that any abrupt change in the structure of consumer demand and prices will tend to have negative effects. It can be also said that a) in a free market are price changes likely to be smoother and b) an inflationary system is not exactly immune to these shocks either. This could handle some more working out.)

- a deflation complicates the paying of debts. This can be indeed a problem for companies going bankrupt in case of a large deflationary shock. But ultimately, the resources they control will not be lost, they will merely change hands.

- a deflation can indeed damage the banking industry (see previous point). If one assumes a string of bankruptcies on the side of customers, a bank's liquidity may be stretched to such a degree, that it goes bankrupt itself. (Here I have to point out again, that a 'dramatic change', no matter its cause can have such negative effects.) However, it is pointed out, that the negative effects will impact mostly the industries most profiting from inflation, like banks and highly indebted companies. This problem will eventually adjust itself.

A reduction in bank credit does not destroy any resources, it merely guides them to other applications. The dangers of deflation are not as terrible as it is claimed.

5. A further argument for inflation were "sticky prices". Let's imagine, that powerful unions were able to raise wages in such a way, that the companies were unable to employ a large part of their employees profitably, resulting in mass unemployment. A good dose of inflation could raise the price level and make them employable again, problem solved!

Well, not quite. This 'solution' assumes, that the unions fail to recognize the inflation and won't raise their demands appropriately - which, historically, they eagerly did.

(The section does not mention, whether such union activity is desirable or possible due to legal privileges, probably for the sake of brevity. It also does not mention the moral implications of this strategy - that it is misleading, in other words, lying. There goes transparency and honesty in public matters.)

6. It is also thought, that by lowering the interest rate can paper money help the economy to grow. Offering this newly printed money as credit raises its supply and makes cheap credit available for businesses. They will invest more and the economy will grow.

There are too many mistakes to answer in one place. For once, capitalists invest only, if they can earn some concrete rate; expectations of rising prices will make them ask for more.

Will the printing of new money lower interest rates and if it does, will it create more growth? If the businessmen estimate the rise in prices exactly, it won't. The only effect will be a new structure of capital and production; some will make money off it, some will lose.

If the businessmen were to overestimate the expected rise in prices, the interest rates would rise, depriving many of them of credit and again, cause a different structure of capital and production, but wouldn't make things better or worse. (Really? Need some clearing up here.)

What if they underestimate the expected rise in prices or are unaware of it? The real interest rate will decline and business may be easily persuaded to borrow more and invest more, beginning more projects. But they won't be able to finish them (or at least not under the same conditions). The amount of capital hasn't changed and much of it will be wasted.

7. Stability of money appears to be a reasonable demand, In the classical meaning, it meant a stable composition of money, which is hard to argue against. But to many it is the purchasing power, that should be stable. Money stable in the old way tends to have a stable purchasing power as well; and the free market allows its participants to avoid rapid fluctuations in the value of money (not that there were so many - the largest upswing in precious metals in history stayed well below regular growth rates of paper currencies).

Perhaps it is "fine tuning" of the purchasing power of money, called for by many, led by the economist Irving Fisher, that is desirable. It failed in practice; evidenced by an unprecedented fall in value and fluctuations. If so, could it be done better some day and is it desirable?

The problem is, the "purchasing power of money" doesn't and can't have a clear and impartial definition. Any choice of goods and their relations, that should represent the it, is completely arbitrary and as an average of many values may not apply any particular person - some people may experience rising prices, others a drop. Those, that create the definition of purchasing power (and have to do so every year anew) are granted a large, arbitrary power.

8. The high costs of commodity money are said to be another argument for paper money.

But are they really a problem? If a money is harder to multiply, then it has, in fact, a natural insurance against loss of purchasing power - something, that is too often seen with paper.

Fiat money causes further costs, like bureaucracies, that regulate them and large numbers of experts kept busy watching central banks and foretelling their policies.

There is nothing wrong, per se, in experimenting with a cheaper medium of money, just note, that all such experiments have failed. That may be the reason, why the proponents of fiat money never argue for competition, but want to establish it by force.

(See also the complementary post from Gil Guillory.)

The Ethics of Money Production: Chapter 3

Chapter 3: Money within the Market Process

Scarcity is a basic economic fact of life as is marginal utility. It follows, that the production of additional units of money will decrease the value of already existing units. Therefore, argues Hülsmann, those owning these additional units will tend to pay more money for goods and services, and demand more money when selling their own goods and services. (It isn't mentioned, that they could strive to pay the same money for the usual expenses and buy additional goods and services, driving the prices up in this way; but that is part of the argument in the end.)

Thus has the production of money a tendency to raise money prices, starting from the producers of money, spreading to other economical actors, without a guarantee of any regularity or a definable timeframe.

How much money should be produced depends in the free market on the consumers. They decide not only the amount of goods (or money) to be produced, but also the the types of money widely used. Historically, coins of several metals and alloys were used concurrently, this appears to be the natural state of things.

It is often asserted, that higher money prices benefit debtors, as it lowers the relative value of their debts. This may not always be the case: if the lender's estimate of the rising prices is too high, the debtor may end up paying more on account of the expected inflation.

The final and possibly most important effect of a rising money supply is in its timing - the positive effect of "having more money" benefits the producer of money and those getting it first; while the negative effects impact the latecomers. This redistribution of wealth and rising prices may be limited to some degree, but cannot be avoided.


It is perfectly acceptable to consider the ethical side of using money, but the ethics of money production are no less important. Part of it is the proper marking of a coin's producer and its content. Here notes Hülsmann a problem of naming a coin after its weight, as it renders different services than the same weight of uncoined metal. (While the difference in value is a valid point, what if the name of a currency becomes a synonym for its weight and is used as such?)

Finally, the Christian aspect is considered: the use of money and banking are legitimate, though there is some discussion on which interest rates are acceptable and and which constitute usury. In the end, what matters is the way, how somebody gets the money and how they use it.

(See also the same chapter from Gil Guillory.)

The Ethics of Money Production: Chapter 1 and 2

Chapter 1: Monies

Subsections 1 to 4 deal with general economical concepts of little controversy. Cooperation is useful, so is the indirect exchange of goods with money, that allows much more than mere barter. The free market and property rights lead to a more perfect fulfillment of human needs. Considered is also the birth and selection of "natural money", money chosen by free people in a free market, inevitably tending to be precious metals,

Hülsmann notes, that there are two key conditions for a good to become money. It must have the physical properties AND be considered valuable by itself. The price of a good, when employed only for nonmonetary purposes, is a good starting point to estimate its price for use as a money. Also, should the good stop being accepted as money due to whatever reason, it will still have value due its other uses.

There is a honorary mention of credit money, which, unless in special conditions, won't see widespread use. (Similar note for electronic money.) With that, onward to paper.

If gold and silver are supposed to be the best types of money, how comes that everybody uses paper? Before analysing in the detail the supposed advantages, Hülsmann asks whether this money is a product of the free market.

The answer is a No. First off, all paper currencies were forced on the people by their governments. It was never a creature of the free market. But could it conceivably be one? Still a (most likely) No: whatever its perceived advantages, paper notes have one great risk attached to them. Should free people be unwilling to accept it, it has no alternative uses, so its value could plummet to zero. With such a risk, people would be abandoning it until it stops being money.

Therefore, the only way to keep paper money in circulation is through force, by mandating its use in all transactions, or at the very least to pay taxes ("the value of avoiding trouble with the police"). To state, that paper money is incompatible with a free society is a good initial argument.

Chapter 2: Money Certificates

It is noted, that the process of coinage raises the value derived from precious metals used as money. Knowing the exact amount used in a transaction and being certain about it does save time.

In the same breath, Hülsmann notes, that the value of such a coin depends on the trustworthiness of its maker. If trust is lacking, weighing or even melting down the coin may be considered. A trustworthy coin saves this expense and is therefore of greater value; thus a coin costs more than the metal of the same weight (He notes the premium was historically around 0,2% seldom above 0,5%.)

Finally, a coin will be used where its maker is trusted, which can be world-wide in some cases (the Mexican dollar is mentioned as a popular example of its time.)

In the matters of trust are rulers too often a disappointment, competition is much better at preventing fraud.

Hülsmann speaks also about money certificates (or substitutes or "certificates separated from money"), which simplify transactions, as the real money is physically stored in a bank. However, it seems impossible for the banks to resist the temptation to commit fraud with them.


(Note: there is another blog about the same book.)

The Ethics of Money Production: Introduction

The Ethics of Money Production, by Jörg Guido Hülsmann.

The book is available here and there is one for download as well. (I am reading the German version, Waltrop und Leipzig 2007, but I will quote and refer to the publicly accessible pdf.)

I didn't have an opportunity to read anything from Hülsmann yet, so this should be my first. The introduction summarizes the literature on the ethical side of the production of money, starting, not surprisingly with Oresme and the School of Salamanca. The author notes, while looking on other resources, up to the most recent ones, that there is a definite lack of serious work on this topic.

A notable exception is the Austrian School of Economics, particularly that of Mises and Rothbard, which he intends to draw heavily from. As a side note, while tracing the connection of this school to the scholastics, he puts down the following definition or characterization:

"Austrians share the scholastic belief that there is no such thing as an economic science dealing with autonomous variables. Economic problems are aspects of larger social phenomena; and it is most expedient to deal with them as such, rather than to analyze them in some twisted separation." (p.12)

This is an extremely brief, yet poignant summary of the argument about the use of the scientific method in economics.

The autor also goes through the available Christian literature on the topic, notes the few bright points and clearly intends to keep Christian morals as an important part of the analysis. It is a book on ethics, after all.

Up until now was the writing quite scholarly, but accessible, it is a small bok with under 300 pages. It has also a very "friendly" tone, in the way it praises valuable sources and doesn't detract the lacking ones. It notes very lightly , what others would rightfully spew fire on:

"Economists relish in pointing out the importance of economic incentives in the determination of human behavior. While virtually no section of society has escaped their scathing criticism, until very recently few of them have been concerned about their own incentives. Yet the facts are plain: championing government involvement in money and banking pays the bills; promoting the opposite agenda shuts the doors to an academic career. No consistent economist could expect monetary economists to lead campaigns against central banks and paper money."

This should make for an amusing reading.

To summarize, this book will look upon the production of money, notably the current system of fiat money, inflation and their effects. But in the end it is and analysis of the ethical side of the problems, i.e. what effect it has on our morals and whether it is good or evil in the end.


(Update: I also learned of another liveblogging effort by Gil Gillory. Darn. :) )

The Counter-Revolution of Science

A book by F.A. Hayek: The Counter-Revolution of Science, get it from Mises.org, see also the full text online.

Some time passed since I have finished the book, so it's a good idea to look back at what remained from it. The basic lesson seems to have sunk in, though I have to refresh me on the details. The lesson comes later, first the impressions.

At round 400 pages (minus index), the book looks very readable. But don't be mistaken, it is quite a heavy reading, particularly the first part. There are three parts, actually three essays on one subject. It can be clearly felt, that they were written at different times.

The first part, it is noted, is quite difficult to process, so the reader is advised in the preface to consider reading the second part first. However, it seemed to me the most important and telling of all. Suffer through the theory, it is worth it. (I had real difficulty reading it, long, strangely complicated sentences - and I have had my share of Austrian economical literature. Weird. Maybe they were written in German first, then translated into English?)

The second part explains roots of the phenomenon described, with the third part following up. I admit they are in the end of little use for me, the unknown members and founders of long-dead schools of thought. By the time you get to names like Schmoller or even Marx, the huge impact of these ideas through half-forgotten thinkers is already clear. What is it, then?


Once upon a time, the science of economics, as other social sciences, was analyzed through certain methods particular for it. The rise of the "scientific method" in the natural sciences has but opened a new way of research and thinking, promising the same dramatic success. As Hayek notes, this view advanced not rarely by thinkers, that had some difficulty in applying the method consistently anyway. Let it be declared however, that there is nothing wrong with the scientific method, if it properly applied. Now to the when.

The rising Science (capital S here) had to fight against existing preconceptions, especially the interpretation of all events in the world as if it was animated by a mind of its own. A scientist should not look at what people thought of something, or how some other mind would direct the events, but replace it by objective facts and "reconstruct the concepts formed from ordinary experience on the basis of a systematic testing of the phenomena, so as to be better able to recognize the particular as an instance of a general rule". Science breaks up and replaces the system of classification which we use to classify and learn about our world. Things may appear to be the same, but are really something very different; things appearing different may be in all other respects the same (consider water and ice for a short example). Science becomes the way we explain the world as we perceive it; and appearances can be deceiving.

And so does Science frown upon individual observations, they are at most the start of true knowledge, never really the end. But until everything in the human mind is explained to the last detail, what men think of things, events and other men and their perceptions (be it right or wrong), remains very important; and Science tends to overlook this with its otherwise efficient methods.


Social sciences deal with the relationships between man and objects; and man and other men. Not all of them are inviable for analysis by the scientific method. But the social sciences in the narrower sense of the word, the "moral sciences", "are concerned with man's conscious or reflected action, actions where a person can be said to choose between various courses open to him" are different. People "will react in the same way to external stimuli which according to all objective tests are different" and will react differently to the same stimuli at different times. Our procedure is based on the experience that other people (mostly) classify their sense impressions as we do. A purely scientific description reduces the knowledge of the situation, or makes its explanation downright impossible. Many, if not most objects of human action are not "objective facts" (in the narrow scientific sense) and cannot be defined in physical terms at all. "So far as human actions are concerned the things are what the acting people think they are."

If you wanted to define a tool, for example, in the end you will have to refer to what it was intended for. And there may be basically nothing in common between items belonging under the definition (e.g. a hammer and a steamhammer), besides what men think they can be used for. As another example serves the archaeologist, that tries to find out, if something is an actual artifact, or merely a funny piece of stone - to do that, he must try to understand the mind of the prehistoric man and how he would use this item.

A point to mention is the subjective vs. objective assessment of facts: while in one sense beliefs, opinions, etc. of the people are certainly subjective, in another sense are they objective, hard facts of the social sciences; no matter if right or wrong otherwise. These opinions etc. can't be directly observed in the minds of people, but can be interpreted from their actions, because we have a similar mind as they have (but not the same). The knowledge, that guides the actions of any numbers of people, never exists as a consistent and coherent body. It is dispersed, incomplete and inconsistent, appearing in many individual minds - those are the basic facts of social sciences. Unless we can understand what the acting people mean by their actions any attempt to explain them... is bound to fail. It is the good old subjective nature of value, but much more strongly restated. There rises subjectivism.