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.
Sunday, May 31, 2009
Monday, May 25, 2009
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.
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.
Friday, May 22, 2009
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.
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.
Saturday, May 16, 2009
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.)
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.)
Friday, May 8, 2009
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.)
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.)
Saturday, May 2, 2009
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.)
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.)
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