Introduction 1. MONEY PRODUCTION AND JUSTICE

The production of goods and services is not a purely technological matter. It always relies on a legal and moral framework, and feeds back on this framework. A firm or an industry can pursue its activities in a way that confirms and nourishes the basic legal and moral presuppositions of human cooperation; yet it can also, intentionally or unintentionally, contradict and destroy these foundations.

Ethical problems of production have been assessed in a great number of industries, ranging from agriculture to textile manufacturing in developing countries to pharmaceuticals. Today only a few important industries have escaped such scrutiny. The most important of these is the production of money. Money is omnipresent in modern life, yet the production of money does not seem to warrant any moral assessment.

To be sure, central bank representatives are lecturing the public on the importance of business ethics; but their concerns do not seem to apply to themselves.¹ Similarly, the subject of business ethics is in a boom phase on campuses; but it is applied mainly to industrial corporations. And the churches and other religious institutions pronounce on many matters of politics; but monetary phenomena, such as paper money, central banks, dollarization, currency boards, and so on, are hardly mentioned at all. For example, Catholic social teaching only vaguely says that economic activity presupposes a “stable currency”² and that the “stability of the purchasing power of money [is] a major consideration in the orderly development of the entire economic system.”³

There are very detailed statements of Christian doctrine when it comes to the morals of acquiring and using money; for example, the Christian literature on usury and on the ethics of seeking money for money’s sake is legendary. But important though these problems may be, they are only remotely connected to the moral and cultural aspects of the production of money, and especially to the modern conditions under which this production takes place. Here we face a wide gap.

Things are not much better if we turn to the discipline that is supposed to be most concerned about money production, namely, economic science. There are innumerable economic writings on money and banking, but the number of works that are truly helpful in understanding the moral and spiritual issues of money production is rather small. The more recent literature in this field has tended to be especially myopic in regard to our concerns.

Monetary economics deals with discount and open-market policies, and with the typical goals of policy-makers, such as price stability, economic growth, full employment, and so on. But it does not usually offer any wider historical, theoretical, and institutional perspective. For example, few textbooks actually address the workings of a gold standard; yet a basic acquaintance with this institution is necessary to understand the present state of monetary affairs in the Western world, as well as our political options.

The same textbooks also tend to suffer from an overly narrow conception of economic analysis, focusing on the relations between a few macroeconomic aggregates, such as the money supply, the price level, and national production. This focus might have a certain pedagogical justification, but it is nevertheless much too restrictive to do justice to our subject. The production of money has an enormous impact on the relationships between human persons and groups such as families and private associations. The rules of money production determine to a large extent the transformation of monetary systems through time.⁴ All of this is important from a moral and spiritual point of view. Yet it simply vanishes from our intellectual radar screen if we look on money and banking only through macroeconomic spectacles.

Finally, few works actually make the step of integrating economic and moral categories. The great bulk of the literature either offers no moral assessment of monetary institutions at all, or it sets out on moral criticism of existing institutions without a thorough grasp of economics. Unfortunately, the latter shortcoming is particularly widespread, even among concerned and well-intentioned theologians and teachers of business ethics.

Let us emphasize that this gap concerns most notably the moral aspects of modern monetary institutions—in particular banks, central banks, and paper money. The Bible provides rather clear-cut moral guidance in regard to the production of money in ancient times, in particular with regard to gold and silver coin making.⁵ Similarly, the medieval scholastics had developed a very thorough moral doctrine dealing with the old ways of making money. The first scientific treatise on money, Nicholas Oresme’s Treatise on the Alteration of Money, made important breakthroughs and is filled with insights that are still relevant in our day.⁶ Prior to his writings, the teaching office of the Catholic Church had addressed these problems, most notably Pope Innocent III’s Quanto (1199), which denounced debasement of coins made out of precious metals.

But then the gap appears as soon as we turn to modern conditions. The old precepts about coin making do not exhaust the problems we confront in the age of paper money. And perhaps we encounter here the main reason why contemporary popes did not follow up on their medieval predecessors with any statement addressing the monetary institutions of our age.

In our book we purport to show how high the price of this gap is. Our exposition will be arranged around the economics of money production.⁷ Adam Smith and many of his followers have called economics a moral science, and rightly so. Economics not only deals with moral beings—human persons—but it also addresses a great number of questions that have direct moral relevance. In the present case, this concerns most notably the question of whether any social benefits can be derived from the political manipulation of the money supply, or the question of how inflation affects the moral and spiritual disposition of the population. The economics of money production will lead us quite naturally to considerations of a juridical, moral, historical, and political nature. Our goal is not to be exhaustive, but to paint a broad picture in sufficient detail.

Accordingly, we will first deal with what we will call the “natural production of money” (Part One) and discuss the ways it can be improved in light of moral considerations. Then we will turn to inflation, the perversion of natural money production (Part Two). Here we will place great emphasis on the difference between two types of inflation. On the one hand, there is private inflation, which springs up spontaneously in any human society, but which is combated by the power of the state. On the other hand, there is fiat inflation, which as its name says actually enjoys the protection of the state and is therefore an institutionalized perversion of money production. In the final part (Part Three) we will then apply these distinctions in a brief analysis of the monetary systems of the West since the seventeenth century.

We will argue that natural money production can work; that it has worked wherever it has been tried; and that there are no tenable technical, economic, legal, moral, or spiritual reasons to suppress its operation. By contrast, there are a great number of considerations that prove conclusively the harmful and evil character of inflation. And in our time inflation has become persistent and aggravated because various legal provisions actually protect the monetary institutions that produce this inflation.

Money production is therefore a problem of justice in a double sense. On the one hand, the modern institutions of money production depend on the prevailing legal order and thus fall within one of the innermost provinces of what has been called social justice.⁸ On the other hand, the prevailing legal order is itself the very problem that causes perennial inflation. Legal monopolies, legal-tender laws, and the legalized suspension of payments have unwittingly become instruments of social injustice. They breed inflation, irresponsibility, and an illicit distribution of income, usually from the poor to the rich. These legal institutions cannot be justified and should be abolished at once. Such abolition is likely to entail the elimination of the predominant monetary institutions of our age: central banks, paper money, and fractional-reserve banking.⁹ Yet far from seeing herein merely an act of destruction, such an event can be greeted as a restoration of monetary sanity and as a necessary condition for a more humane economy.

It is true that these are rather radical conclusions. However, one must not shy away from taking a strong stance in the face of great evil; and great evil is precisely what we confront in the present case. Our goal is not to press a partisan program, however. We seek merely to acquaint the reader with the essential facts needed for a moral evaluation of monetary institutions.¹⁰

2. REMARKS ABOUT RELEVANT LITERATURE

The argument for natural money production and against inflation goes back many centuries, to the fourteenth century French bishop, Nicholas Oresme.¹¹ Before him, St. Thomas Aquinas and others had considered various aspects of the problem. But none of them had tackled it from a consistent point of view and none of them had presented their ideas in a treatise. There were the beginnings of a doctrine, but this doctrine was scattered throughout the writings of Aquinas, Buridan, and others.¹² Oresme’s great achievement was to integrate these previous works, as well as his own penetrating insights, into a treatise—the first treatise on money ever. The great historian of medieval economic thought Victor Brants pointed out that there is certainly merit in assembling such a work. And Brants observed very justly that Oresme was unsurpassed for centuries; he expressed “ideas that were very much on the point, more on the point than those that would dominate long after him.”¹³ In hindsight we can certainly say that Oresme’s “Treatise” has stood the test of time. Translations into English, German, and French are still in print and monetary economists all over the world admire the work for its conciseness, clarity, and depth.

Later on the case for natural money production and against inflation was taken up and refined in various directions through the writings of the “proto-currency school” branch of the School of Salamanca (Saravia de la Calle, Martín Azpilcueta, Tomás de Mercado).¹⁴ Yet none of these authors seems to have produced a treatise that could match Oresme’s earlier work.

Another two centuries later, however, economists such as Richard Cantillon, David Hume, Étienne de Condillac, John Wheatley, David Ricardo, and William Gouge published noteworthy contributions on problems of money production.¹⁵ These writers had more or less dropped the scholastic concern for the spiritual dimension of the question, but they pioneered a realistic economic analysis of fractional-reserve banking and paper money. Some of these writings are still in print today and have thus stood the test of time. We do not disparage their merit and their brilliance in noting that they, too, in the new field of banking and paper money, could not quite match the achievement of the old master, Oresme, in the field of commodity money.

In our age, the authors who have contributed most to the analysis of our problem were two agnostic Jews, Ludwig von Mises (1881–1973) and Murray N. Rothbard (1926–1995), who in turn were followers of the founder of the Austrian School of economics, Carl Menger (1840–1920).¹⁶ Mises integrated the theory of money and banking within the overall theory of subjective value and pioneered a macroeconomic analysis in the realist tradition. In Rothbard’s work, then, the Austrian theory of money found its present apex. Rothbard not only developed and refined the doctrine of his teacher Mises; he also brought ethical concerns back into the picture, stressing natural-law categories to criticize fractional-reserve banking and paper money. Our work is squarely built on the work of these two writers. Important living authors in this tradition are Pascal Salin, George Reisman, and Jesús Huerta de Soto.¹⁷

The affinity between Austrian School economics and the scholastic tradition is fairly well known among experts.¹⁸ The modern Austrian School distinguishes itself by a quest for realism that pervades both its arguments and the problems it deals with. Much more so than any other present-day paradigm in economic science, its cognitive approach and its practical conclusions are in harmony with the scholastic tradition. One historian of economic thought characterized the scholastic approach to the analysis of economic phenomena in the following words:

they did not examine an economic problem as an autonomous phenomenon, consisting of measurable variables, but only as an adjunct of the social and spiritual order and in the context of the cura animarum, the care of souls.¹⁹

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.²⁰

Not surprisingly, Austrian economics has inspired the few viable modern contributions to the moral analysis of money production. Apart from Rothbard’s works, we need to mention in particular Bernard Dempsey’s Interest and Usury (1943). From the pen of a trained Thomist philosopher and economist, this book is a path-breaking contribution to the moral analysis of fractional-reserve banking and thus covers some of the ground of our present study. Dempsey has shown that economic analysis can be successfully blended with the scholastic philosophical tradition into something like the natural theology of money and banking. The reason is that “there is no irreconcilable conflict of basic principle; both parties proceed from truths known from natural reason alone.”²¹

Two decades later, Friedrich Beutter undertook a systematic moral assessment of inflation in our time and came to conclusions very much akin to those of Nicolas Oresme. He argued that inflation, in principle, is morally evil and that it could only be licit to overcome ”epochal” conflicts and crises.²²

In our day, Thomas Woods has brilliantly argued that Austrian economics on the one hand and Christian morals—Catholicism in particular—on the other hand are fully compatible. In The Church and the Market (2005), he gives a concise statement of the Austrian analysis of the labor market, of money and banking, of foreign aid, and of the welfare state; and he shows that this analysis provides crucial information for an adequate moral assessment of the market economy and of government interventionism.

Unfortunately, these works have been rather exceptional. During most of the past 150 years, Christian writers, and Catholic intellectuals in particular, have been quarreling with the economic institutions of the modern world; and this uneasy relationship had ample foundations in fact, as we will see in more detail. But whereas these thinkers refused to make peace with the secular world, they fatefully made their peace with pro-inflation doctrines that became fashionable again during the Great Depression. And this in turn vitiated their moral assessment of modern monetary institutions.

A good case in point is Anthony Hulme’s book Morals and Money. Truly excellent in its exposition of what the Bible and the Christian moral tradition have to say about money, it also endorses age-old mercantilist fallacies about the workings of money within the economy. Hulme believes that the money supply has to grow along with output and that the slowing down of aggregate spending is disadvantageous, as is hoarding, deflation, and the diversion of spending streams into financial markets. This leads him straight to the conclusion that “our currency needs to be managed.”²³ He deplores the inflation produced by fractional-reserve banks, but not because it is inflationary (after all he believes that inflation is necessary), but because it benefits private agents. The solution to present-day monetary calamities is not to abolish the institutions of inflation root and branch, but to hand the inflation machine over to elected politicians.²⁴

In short, misconceptions about the economic role of the money supply have vitiated the efforts of scholars to develop a cogent moral assessment of modern monetary institutions. We will therefore discuss the crucial question whether there are any social benefits to be derived from the manipulation of the natural production of money in a special chapter (chap. 4) of the present work.

Another group of noteworthy studies integrating moral concerns and Austrian economics comes from the pen of evangelical scholars who call themselves “Christian Reconstructionists.” In particular, Gary North’s Honest Money (1986) brilliantly combines biblical exposition and economics. Any serious attempt to come to grips with money and banking from a moral point of view must take account of the arguments presented in North’s work.²⁵

Other authors have argued along similar lines, yet without attaining the level of sophistication displayed in North.²⁶ Money and banking are fascinating subjects. They have attracted a panoply of writers who have neither the knowledge nor the intellectual ability to master this field. The quantitative dominance of these poor writings might have contributed to throwing the entire enterprise of integrating ethics and monetary economics into disrepute.

But there is also another strong mechanism at work that helps account for the dearth of scholarship along these lines: professional and institutional bias.

The general thrust of the above-mentioned works is to cast serious doubts on the necessity and expediency of the government-sponsored production of money through central banks and monetary authorities. The authors argue that money and banking should best be subject to the general stipulations of the civil law. The government should not run or supervise banks and the production of paper money. Its essential mission is to protect property rights, especially the property of bank customers; any further involvement produces more harm than good. Now it is one of the home truths of the economics profession that virtually all of its members are government employees. Even more to the point, a great number of monetary economists are employees of central banks and other monetary authorities; and even those monetary economists who are “only” regular professors at state universities derive considerable prestige, and sometimes also large chunks of their income, from research conducted on behalf of monetary authorities.

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.²⁷

He who acquaints himself with the modern scientific literature on money and banking must not close his eyes to these facts.