Chapter 3: Money within the Market Process
The law of marginal utility applies to all goods, including money. A man who produces additional units of money can allocate the money to an end which is not currently satisfied. This results in higher money prices being paid for goods; that is, an increase in the money supply will, exchange by exchange, cause some prices to rise. A general rise in prices is also called a decrease in the purchasing power of money.In a free market of the production of money, additional production of money will proceed, with the purchasing power of money falling, until the rate of interest earned on the production of money falls to that of other lines of production. However, it must be emphasized that in most places at most times in the history of Western Europe, silver, gold, and copper all circulated. The parallel production and use of more than one money is an expected feature of a free market in money.
As money is produced and distributed, one might think that the general fall in the purchasing power of money systematically favors debtors over creditors. But this is not the case. Interest rates on loans are comprised of pure, originary interest; a compensation for the rate of change in the purchasing power of money; and a residual representing an entrepreneurial profit or loss, according to the successful or unsuccessful estimate of the other categories. To the extent that a person successfully anticipates the changes in the purchasing power of money, he will not be favored or disfavored, whether debtor or creditor.
As money is produced and spent, this changes the distribution of goods other than money. These changes, called Cantillon effects, redistribute real income from later to earlier owners of the new money. These effects cannot be neutralized by improved expectations.
A proper observation of ethics requires that money be produced as distinct from other money produced in the market, and that what they contain be clearly marked: fineness of metal, weight. But weight should not be the unit of account, for a good 1-oz coin of silver is not merely 1 oz of silver: it is the value of the silver plus the built-in certification of the silver. As Hülsmann states: “the value difference between coins and bullion of equal weight is not a perversion of human judgment that could be overcome with a moral postulate, but a fact that lies in the very nature of things.” Historically, coinage has sometimes been named for the unit of weight: the pound, the mark. But the unit of account should be related to specific moneys: for example, Krugerrands, Eagles, or Maple Leafs. Hülsmann also seems to suggest that the etymology of “ecu” includes a reference to a weight of some sort, but my references do not indicate this.
On the use of money, Hülsmann invokes the Parable of the Talents to legitimate the making of money as an ethical endeavor; but concedes that the Christian doctrine of usury produces ethical challenges, and the interpretation of the doctrine has varied considerably. He embraces the views of Conrad Summenhardt and Bernard Dempsey, holding that virtually no interest payment that market participants voluntarily agree upon could be considered usury, and that interest payments deriving from fractional reserve banking are tantamount to “institutional usury”. This latter view seems only to logically agree with the previous if the fractional reserve banking is maintained through violations of rights via legal tender laws or other privileges or prohibitions.
Thus concludes Chapter 3.
This book is exceptionally well-written. It is concise like virtually no modern work treating ethics is, but it does not hesitate to treat seriously matters that all those concerned with ethics must consider, such as the role of charity and morally proper disposition of resources. Even though I have only now read halfway through it, I consider it to be an admirable replacement for Rothbard’s What Has Government Done to Our Money. Yes, I said replacement.
Not only does The Ethics of Money Production have a much better title when considering the book as a gift, it has an open and clear ethical viewpoint — that of a Christian — which is serious and scholarly, but also fresh and accessible. He does not assume that the reader is a Christian, but engages the moral teachings and reasoning at much more than a superficial level, so that the reader is convinced that he is serious about ethics.
The dedicated libertarian should never forget that, in the end, it is a passion for justice that will win the day. This book has just the right tone: ethically serious, economically sound. I can already wholeheartedly recommend it.