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Introduction and Part 1, Chapters 1 & 2

Guido Hülsmann’s newest contribution (book, webbed) is a “concise exposition of monetary theory, with special emphasis on the ethical and institutional aspects of money production” (Preface). He has a tough act to follow, for the scope of his book is similar to that of Rothbard’s What Has Government Done to Our Money (book, webbed). However, as is apparent from the beginning, Hülsmann’s book is more scholarly than Rothbard’s, in the sense that he points the reader to a vast trove of writings on money from Church fathers to modern secular economists, across many languages, with brief notes on their essential claims, merits, and flaws — all without unduly bogging down the main narrative; and, Hülsmann is more deeply concerned with ethics and exploring the economics of money with more thoroughness.

On to the summaries and reflections…Introduction

Ethics is rarely applied to the topic of money production, but it should be. It is the most important industry to have escaped such scrutiny. But, we cannot run off half-baked. To set out on useful moral criticism, we must have a thorough grasp of the economic issues.

In the West, there is a long tradition of scholarship on both the economics of, and morals of, the acquiring and using of money, mainly in the scholastic tradition, and drawn upon by the papacy. Scholarship combining ethical and economic analysis on the production of money seems to have reached its heights with Oresme’s Treatise on the Alteration of Money (book, webbed) until developments in the XXth Century, with the important ones being outside of Catholic thought. This gap in scholarship has been born at the high price of immoral, and therefore dysfunctional, monetary systems.

The XXth Century authors most responsible for rejoining natural law ethics and sound economics are Bernard Dempsey, Murray Rothbard, Friedrich Beutter, and the still-living authors Pascal Salin, George Reisman, Jesús Huerta de Soto, and Thomas Woods. Hülsmann also has praise for the work of “Christian Reconstructionists” such as Gary North.

The general thrust of all these authors’ works is to cast serious doubts upon the institutions of government-sponsored production of money and all their accoutrements: legal tender laws, redemption freezes, fractional reserve banking, central banks, etc. But why have they been in the minority of voices among economists?

The answer perhaps lies in the fact that the vast majority of economists owe their livelihood to the state and its monetary institutions. Monetary economists derive considerable prestige, and sometimes also large chunks of their income, from research conducted on behalf of monetary authorities. As Hülsmann so aptly puts it: “He who acquaints himself with the modern scientific literature on money and banking must not close his eyes to these facts.”

Part 1: The Natural Production of Money

1. Monies

In barter, the problem of divisibility (say, trying to exchange one twentieth of a chair for 10 pounds of flour) is the principal problem that gives rise to the use of indirect exchange. Not mentioned by Hülsmann is the problem of double coincidence of wants, which is also solved by indirect exchange. Historically, precious metals have been preferred as media of exchange over and above other goods, due to properties such as scarcity, durability, divisibility, distinct look and sound, etc.

When a medium of exchange becomes generally accepted, it is called a “money”. From Menger’s research and Mises’s regression theorem, we know that money must originate as a non-monetary good. Interestingly, this was known even to the scholastics, who called money a res fungibilis et primo usu (a thing that is fungible and primarily used in consumption).

Money, as it arises in a free market, is a natural phenomenon, and so we call such things “natural money”. By “free market” is meant the respect of private property, and this is morally grounded in the Judeo-Christian tradition in the 6th and 9th Commandments. In the Catholic church, the right to property has been upheld even in the face of owners who do not have the intention to pursue the common good. Aquinas championed the distinction between justice and morals (IIa-IIae, q. 66, art 2 answer), and this was also championed by the popes. For example, Hülsmann quotes Pius XI: “…they are in error who assert that ownership and its right use are limited by the same boundaries; and it is much farther still from the truth to hold that a right to property is destroyed or lost by reason of abuse or non-use.”

Having explored natural money, simpliciter, Hülsmann goes on to explain other money categories.

Credit money is simply IOUs. Ben lends Mike 10 oz. of silver for one year. In exchange, Mike gives Ben a paper note bearing a promise to repay a sum of silver. This note, if Mike is expected by others in the community to make good on his promise, can circulate as a medium of exchange. This is credit money. Historical examples include American Continentals and French assignats. A more mundane example is the market of commercial paper.

Paper money is another category. There is the wide sense of “notes” which includes credit money and paper certificates; but the sense used here is the narrow one of paper money that circulates as money, but cannot be redeemed into commodity money. Hülsmann shows that in no period of human history has paper money emerged on the free market: that is, in all known historical cases, paper money has been introduced by government-sponsored breach of contract and other property-rights violations.

We can understand why this is the case from examination of theory. Paper money, by nature, provides only monetary services; whereas commodity money adds to this its commodity services. Because of this, paper money’s value can shrink to naught, while commodity money has a floor equal to the value of the underlying commodity. In a free market of monies, the most far-sighted and prudent traders would get rid of their paper money first and others would follow their lead. This would drive the paper money’s value to zero. Paper money must have a special privilege attached to it for it to remain a money.

Lastly, there is “electronic money” — electronic bookkeeping entries of money. As a class of paper money, it is irredeemable and the same economic analysis applies to it. Hülsmann is clear to note that this category is not the means developed to record transactions, access and transfer money. The distinction is important.

2. Money Certificates

Certification of commodity money has been done in two ways: integrated with money (coins) and physically disconnected from money.

Coinage imprints on a weight of precious metal the weight, fineness, and name of minter. This process adds to the value of the metal, and so a trustworthy minted 1-oz coin is of greater value than a poorly minted 1-oz coin, or just 1 oz of metal with no certification. This presents an interesting dynamic that even Rothbard seems to have glossed over. For, the unit of account cannot be “oz of gold” without qualifying that it be “oz of gold rendered in good coin”.

If minting is an open, competitive profession (not closed by regulation or guild), then abuse of trust will be regulated by the free market. Oresme suggested that princes did not have the right to alter coins unless they had the consent of the entire community. Hülsmann explains that this requirement is fulfilled best in a free market, where each market participant chooses which coins to use; and hence, all users of coin community A join by the voluntary act of using coins of minter A, and the ability to switch to community B is simple: trade coins A for coins B.

Certificates that are physically separated from money present special advantages and special challenges. If bullion is placed with a bank (this was common for about two centuries in the cities of Amsterdam and Hamburg), the bank can issue a certificate stating that the bearer of the note is the legal owner of X weight of fine silver on deposit at the bank. Such a certificate is called a money substitute.

There are many money substitutes: “…token coins, certificates of deposit, checking accounts, [debit] cards, and electronic bank accounts on the Internet.”

The money substitutes are with the public; the money itself (“reserves”) are held by the bank. The substitutes offer the advantages of lower costs of storage, transportation, and certification. The main disadvantage is that bankers are tempted to use the reserves for lending, turning their operations from mere warehousing into fractional-reserve banking. Hülsmann, taking the matter from a historical perspective, justly accuses the Bank of Hamburg and the London goldsmiths of the mid-1600′s as violating the property rights of their depositors.

Due to the potential for abuse of money substitutes, Hülsmann doubts that on a free market they could gain much wider circulation than they did. He points out that “Even David Ricardo, the great champion of paper currency, admitted that it was unlikely that such substitutes could withstand the competition of coins.”

And so, 42 pages in, it is clear that the basic groundwork has been laid.

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