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.