In his excellent work, The Ethics of Money Production, which was published by the Mises Institute in October 2008, Jörg Guido Hülsmann presents (pages 238-239) the below summary analysis regarding the current international monetary framework and its evolution (or rather devolution). Given the framework’s instability, the continued and reckless increase in debt and in debt monetization, and the inability of the large majority of governments to significantly control spending, Professor Hülsmann’s analysis is illuminating.
“There is no tenable economic, legal, moral, or spiritual rationale that could be adduced in justification of paper money and fractional-reserve banking. The prevailing ways of money production, relying as they do on a panoply of legal privileges, are alien elements in the capitalist [i.e., true free market] economy. They provide illicit incomes, encourage irresponsibility and dependence, stimulate the artificial centralization of political and economic decision-making, and constantly create fundamental disequilibria that threaten the life and welfare of millions of people. In short, paper money and fractional-reserve banking go a long way toward accounting for the excesses for which the capitalist economy is widely chided.
“We have argued that these monetary institutions have not come into existence out of any economic necessity. They have been created because they allow an alliance of politicians and bankers to enrich themselves at the expense of all other strata of society. This alliance emerged rather spontaneously in the seventeenth century; it developed in multifarious ways up to the present day, and in the course of its development it created the current monetary institutions.
“…The driving force that propelled the development of central banks and paper money was the reckless determination of governments, both aristocratic and democratic, to increase their revenue, if necessary in violation of good faith and of all established rules of commerce.”
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Hulsmann’s book was one of the first Austrian School books that I read cover-to-cover (I think after Hazlitt’s One Lesson).
Contrast Hulmann’s wisdom with this penned idiocy from The Pragmatic Capitalist:
“The global economy has become too complex and too intertwined to be constrained by the gold
standard. The fiat currency system is a product of economic evolution and the growing demands and strains of international trade.” – Reflections on Gold as an Asset Class, The Pragmatic Capitalist
http://pragcap.com/reflections-on-gold-as-an-asset-class
So horribly, horribly misguided.
Of course, if contract says that I will give you gold for a piece of paper I issued and then tell you to get lost when you want to redeem it, it must be economic evolution.
So people (and businesses, and governments) should be forbidden from writing “IOU 1 oz. of silver” on a piece of paper, unless they are in current possession of 1 oz. of silver. (No matter that the writer might have property that is worth millions of oz. of silver.) Furthermore, other people should be forbidden from using those pieces of paper to buy groceries.
The real devolution here is in Austrian theories of money.
Mike,
Nice strawman. Slow clap for you. Next up, actually reading Hulsmann..
The fact is that absent government interventions such as legal tender laws and the suspension of species (commodity) payment for money substitutes, these unbacked or only partially backed IOUs would not long function as the generally accepted medium of exchange or would do so only at a discount to face value.
Fractional reserve banking and a real bills monetary framework can only exist through government intervention and subsidization.
I’m not talking about unbacked or partially backed IOU’s. For example, in 1690, Massachusetts issued notes that were acceptable for taxes in lieu of 1 silver shilling. They were not legal tender; they sometimes traded at a discount and sometimes at par, and they functioned as money until about 1750 when Britain finally suppressed them. They were fully backed by the tax-collecting ability of the colony, even though there was seldom an actual silver shilling in the treasury with which to redeem them.
A similar example would be a landlord who buys groceries with his own IOU, and accepts is own IOU’s in payment of rent.
The Michael Sproul Doctrine
http://mises.org/daily/4692
Mike’s statements/scenarios are not related in any way. They are not analogous. Promising to pay something one does not currently possess is a separate topic from counterfeiting the means of payment and substituting them for actual claims on real things—real previously produced goods.
Well, while I don’t agree with Mike Sproul’s RBD, I think he has a point here. FRB banks do not print bank notes so they logically cannot be accused of counterfeiting them. Maybe you could argue that if a central bank prints “pay the bearer this and that” on the note, but subsequently refuses to redeem them, that it is fraud. But there is no such text on euros, for example. So where is the fraud?
Without repeating the Austrian school theory of money, the real bills doctrine commits a fundamental error in not differentiating money, the generally accepted medium of exchange, from other goods and services including financial securities such as debt instruments (IOUs). The generally accepted medium of exchange is unique in its use compared to all other goods and services.
Don’t bother, I’ve been over this with him way back when. He thinks that any old random bullshit you throw into a bank and print money against is perfectly fine. Assets are interchangable in his mind and nothing ever depreciates. So you can throw gold, Twinkies, shoes, and hotdogs into the same pile and the money is eternally good just so long as something that some individual decides to call an asset and assign an arbitrary Dollar value for is exchanged for it. Never you mind that the hotdogs and Twinkies will rot and that shoes and gold aren’t at a fixed exchange rate in preferential value.
MIke, nobody nor any law prevents any individual or business from issuing an IOU for an ounce of silver (or whatever) nor from accepting such (regardless of whether or not there was in existence any “reserve” from which that obligation might be paid) but, by the very same token, no one in that trading universe is under any obligation to accept such an IOU or to use such IOU in discharge of their legal bebts.
It’s different with the IOUs that the government mandates we use as money; that variety enjoy the benefit of “legal tender” laws requiring that they be accepted (at face) in payment of any (public or private) debt. Moreover, a certain inescapable “demand” for such is guaranteed simply by the necessity of individuals to acquire sufficient stocks of that variety with which to pay their taxes (no matter how one wishes to characterize it, this aspect itself lends a certain unearned “value” to the official stuff–reducing the price of other things in relation to it).
The direct implications of legal tender law are often exaggerated. Unless you are a bank or receiving money from the government, the likelyhood that you are under obligation to accept legal tender is quite slim. The indirect effect created by taxation is in my opinion much stronger.
Are you feeling ok?
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