Authors Forum: The Ethics of Money Production

0:00The Ethics of Money Production is a concise exposition of the principles of money and banking. From an Austrian point of view, the book is organized in three parts. The first part deals with the natural production of money, so in a free market setting. The second part deals with inflation, various forms of infringements of property rights leading to inflation. And the third part is an application of this type of analysis that is being developed to an analysis of the history of monetary systems in the past 300 years, so it's a very concise exposition, and drawn to the present day. The background of the book was that I was being asked by the Action Institute about five years ago, six years ago, to write a book on money and morals, monetary policy and morals, which I sent out to do, I was very glad to have this opportunity because I intended to write a book of this sort for some time, and then it got a little bit out of hand, so it was very interesting, as Lou said, very interesting, and you go on writing and on,

1:11Eventually it was the double of the size that was initially planned so they wouldn't anymore publish me unless I cut down all the interesting things that I thought were in the book so they just wanted me to basically restate those things that were already in the literature for their audience and I was not happy with this so we had to separate our parts and I eventually published it with a very decent publisher which is the Mises Institute I'm happy with all this and they put it online so we can read the book online. It's actually not even a dollar, it's zero. It's a very handy, nice book, very beautifully made. It's a layout by Katie Weidig. She does most of the layouts here for the Mises Institute. It's particularly beautiful. So what you see here is an excerpt from a German medieval law book. In those days there were comics.

2:04Law books were comics and not actually commented, so what we have here is from the 13th century from the Saxon Spiegel the scene where it says that render to Caesar what belongs to Caesar and to God what belongs to God so God is in the middle, Jesus, and we have to the left hand the citizen or should we say subject that's being lectured, to the right hand there is the emperor This is a very nice setting because nobody looks at the emperor. Yes, good old times. So, the book is dedicated to Hans Zennalls, because Zennalls was one of the only major Austrian writer, monetary economist, who try to integrate Austrian analysis with Christian teaching, with Christian perspective and that's exactly what the book is doing as well, or trying to doing as well.

3:08So I'm not only arguing the standard three Austrian lines on our current monetary system which are, you do not need it because there is a private alternative. We can run a monetary system on a completely private basis that is only on the principle of private property and contracts that are implied. So there can be competitive production of money, can be a competitive production of banking services and so on. We don't need a systemic risk authority and we don't need a central bank and these other things. and other things. Second, monetary interventions do not provide any service. That is the only service more precisely that they do provide is to create redistribution of resources to the benefit of certain privilege groups and to the difference of the rest of society. But apart from this, there is no value added, so to say, of monetary policy.

4:11and the third line would be that not only does monetary policy or monetary interventions do not create a value added, do not promote the common good, but they rather create positive harm. This comes in particular in two forms. One is redistribution, which brings about disruptive effects within society and the second one is the inter-temporal disequilibria that are analyzed in Austrian business cycle theory. So we have these three standard lines and then a fourth point that is a little less stressed in typical Austrian text which is that these interventions are immoral. They are immoral on two accounts. First of all, they are intrinsically immoral because all of them are based on or imply violations of property rights.

5:06What I do in the second part of my book is to go into detail analyzing the various ways in which governments violate property rights by setting up legal rules under which money production takes place that involve the violation of property rights. of Property Rights, Monopoly, for example, and legal tender laws, which override choices by market participants. And the second account on which it is immoral is indeed that it's contrary to the common good, so it creates positive harm, it does not promote production and consumption within the economy, but diminishes those things. So, utilitarian arguments play has played a central role and therefore economic science has come to play the elevated role it has come to play for more than 200 years and therefore plays a very big role within the argument of the book, but it's not all that there is to it, it's more.

6:07Now, what are the particular objectives that I set myself writing this book because now you might think, Now you might think, well, what's the point of buying this other book, Austrian book on monetary economics because Mises seems to have said pretty much the same thing, Rothbard as well, and others as well, Walter de Soto, Hayek even, and I agree, of course, I didn't even attempt to reinvent the wheel, okay, so there's no absolute new thing here, but there are a couple of new things that I tried to stress in order precisely not to repeat, and what we find in the standard Austrian text. So one, four or five particular features.

6:53The first one is that I stress the tradition of Austrian economics, the tradition that reaches way back beyond Carl Menger. The take that Austrians have on questions of monetary policy reaches back to the 14th century to a very important intellectual of the time, Oresmy was a bishop in Caen. He was born in Caen. He was the confessor of the king. He was the author of the first treatise entirely dedicated to an economic subject, namely the production of money, which is also an inspiration for the title of the book. By the way, the The title of the book is kind of funny, it was first planned to be just money, playing on words, just money is money that is just, it's justice, but it's also just money, it's not something else.

7:56And then Lew Rockwell actually, who now as I've just learned, takes lessons as far as title giving is concerned from Judy Thomason, recommended that I better choose the ethics of money production. I've been very happy with this title, which is, therefore, in this tradition, reaching back to Oresme. And Oresme strongly opposed any government meddling with money production. Typical money production of its time was coin making. And so Oresme said, well, once you have created a coin, well, you can just have it run out if nobody needs it anymore. You just let it drop and produce new coins, but once the coin is there you shouldn't change it. You should not debase the coinage in particular.

8:43And he rejected all utilitarian justifications of such meddling. And of course there his argument was not much developed, rather primitive, but often just implied. But he clearly was of the opinion that no positive utilitarian contribution could be reached by government meddling with money. And this inspired a long row of thinkers who developed monetary thought in the same tradition. So we have people like Gabriel Biel in the 15th century, we have Ptolemy of Lucca, we have the late scholastics in Salamanca, and then we have the whole line of monetary thought that starts in the 18th century with Richard Cantillon and goes through David Hume and Adam Smith, David Ricardo and finally reaches the Austrians.

9:46So the Austrians are just the Herrs and this is particularly clear in the present day, which virtually everybody else is a kind of a mercantilist or neo-mercantilist and often they say that they are inspired by Keynes, the Keynesian economics but truly Keynes just warmed up, brought back doctrines that were already known and argued for in the 18th century. So the Austrians are in a long tradition and this tradition at its beginning emphasized The strong connection between utilitarian considerations and moral considerations was dropped a little bit in the middle and then brought up in the 20th century again very forcefully by Murray Rothbard. The second objective was to focus on the role of legal rules under which money is being produced.

10:42So the title, the Ethics of Money Production, is significant because in Christian literature and in the literature of other religions as well, we find huge volume of tracts written on the morals of money. Usually this concerns the way we should use money, that is, how we should spend it, under which circumstances we are allowed to keep it, according to the Keynesians. Never. But there is virtually, very few things are actually being said about the ethics of money production, the way money should be produced and this has, as I try to show, very important consequences on the functioning of the economy. And then, so what I do less in the book is to repeat myself so you won't find much about fractional reserve banking, you won't find much about central banking, You won't find much about the theory of money prices, I don't repeat the subjective theory of value, it gives just a very brief summary of monetary pricing, because all of this was done already in other texts.

11:53On the other hand, I stress legal rules and I stress certain other subjects that have not been dwell on much by Mises in particular, And Mises in particular, for example, deflation, so I take a rather positive view of deflation. I think it plays a very important social function. I do not agree on this account with Professor Zenold, my distinguished predecessor on this podium, that deflation is like running over a dead person a second time. I rather think deflation is like taking out the driver out of this cab so that he will not run over the next person. So, the book is not a treatise on money, but it's much more than an introduction. It's kind of an intermediate text, let's say, between Rothbard's What Has Government Done to Our Money, which is a wonderful and very, very important introductory text, and on the other hand, Mises' Theory of Money and Credit.

12:54A third point that I try to do in this book is to clarify important logical distinctions in monetary analysis. This concerns for example the distinction between the production of money and the production of certificates. Now as I discovered in writing the book, actually we have the category of certification which Which is a very general category. It includes both coin making and banking services. So what banks did originally in issuing money certificates, was precisely this, issuing certificates under the form of substitutes, whereas what we did in former times in coin making was to create certificates that are physically integrated with the monetary object.

13:43Then another clarification concerns the origins of fractional reserve banking. I distinguish three origins of fractional reserve banking. It can come as a perversion of either credit banking or a perversion of deposit banking, but it can also come as a preemptive anticipation of future government interventions because what governments often did was to just crack down on banks and say, The famous story about the robber was being asked, why did you rob a bank? He said, well, because that's where the money is. And it's a little bit the same thing with governments. In the past they have often robbed banks, have confiscated the deposits because that's where the money was.

14:30So what banks then did often in anticipation of such an event was to go ahead and loan out this money before it could be taken away. Fourth point and this is rather central and I think really different as compared to the standard Austrian text is the stress on the pervasive role of moral hazard which results from monetary interventionism. This is probably the most significant shortcoming in Rothbard's writing on monetary economics and I consider Rothbard to be the most important Austrian when it comes to monetary analysis. For example, take his book, Power and the Market, you can rewrite the entire book, rewrite another Austrian, a new Austrian theory of government interventionism by just taking a point of departure in the theory of moral hazard.

15:27There is a very, very important role in social security systems, of course, various other government interventions, and in monetary policy in particular. That's what we have seen on the markets nowadays. This pervasive moral hazard which has encouraged and therefore produced, so to say, business practices, business investment strategies that would not otherwise have existed, The banks have run down their cash balances because you don't need any more cash balances if you have a Federal Reserve. So if you want to rob somebody these days, you don't go to a bank. That's where the least money is. You go somewhere else, a grocery shop or something. And they have also reduced their equity, because the only point of holding equity is to protect yourself against oscillations of your investments, of your assets.

16:24If you have a Federal Reserve that stabilizes financial titles on the stock markets, on the bond markets, you don't need much equity, so people are running down their equity. As a consequence, the whole financial markets become very fragile and vulnerable. The last point was to bring the Austrian analysis of monetary history up to date. What we have here is up to date 2007 approximately, so it's pre-crisis. There is room for further elaboration, but what I do is to analyze the dynamics of our current fiat money regime and explaining why there is a tendency toward a unified fiat money global system.

17:17I think the book is a wonderful, or useful, I shouldn't praise myself too much, it's a useful tool for people who wish to go beyond the beginner state, who don't want to stay at an introductory level, and it might be used in classrooms, Dr. King was using the text at Benedictine College, I'm very happy about this, And so, I can only encourage you to consider this, at least as a possibility. If not, you can always hold this up as a sign. If you walk down the streets in protest lines, before the entrance of the Federal Reserve, run down to Caesar what belongs to Caesar, and to God what belongs to God. Thank you.