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.