[This is part 2 of an ongoing live blog of The Ethics of Money Production (book, webbed)]
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.
{ 5 comments }
“one might think that the general fall in the purchasing power of money systematically favors creditors over debtors. But this is not the case.”
Can you fill this out a bit? It still seems that deflation pressures favor creditors over debtors. How does anticipating the purchasing power trend make any difference?
jeffrey, it seems he might have gotten those backwards. Unexpected inflation (fall in money purchasing power) benefits debtors at the expense of creditors, but only unexpected inflation. The same with unexpected deflation.
“…the Christian doctrine of usury produces ethical challenges…”
The Catholic church generally allowed loans with interest between wealthy people, and often borrowed money at interest. It came down hard on loaning money to poor people for interest. Calvin took a similar approach and compared the loaning of money to renting property, which the Bible approves of. So the prohibition of interest in the Bible must refer to loaning money to the poor, and in Biblical days the poor were the only ones who needed to borrow.
fundamentalist, Yes I got the expression turned around — I have now fixed it in the blogpost. Nonetheless, I think the basic question remains.
jeffrey, Suppose that Abe lends Ben 10 Krugerrands to be paid back in 1 year at the nominal interest rate of 10% – that is, Ben owes Abe 11 Krugerrands at the end of the year. This deal is predicated upon the joint expectations of several factors: ability of Ben to pay, Abe’s alternative possible uses of the money, and the change in the purchasing power of Krugerrands. That is, change in the purchasing power of money is always a component of the interest rates charged. If, at the end of the year, the purchasing power of Krugerrands has increased considerably, this *may* favor Abe — but only if it were not anticipated as part of the credit transaction.
It is only *unexpected* changes in purchasing power that will adversely affect either creditors or debtors.
“Aha!” exclaims the defender of debtors, “but creditors may be systematically better judges of the future changes in purchasing power — if they are, this will then favor them.” Not so fast. If there is a market in credit, then competition will drive creditors to offer the best terms to prospective debtors. As such, the interest rates charged will tend to drive the entrepreneurial component of the interest rate to zero, leaving only the pure interest rate plus a best guess of PPM adjustment, whether that anticipated adjustment be positive or negative.
I’m finding this liveblog helpful as I just finished reading this book, so it’s a good way to review without re-reading (which I plan to do in a few years).
I disagree that this is a replacement for What has government done to our money? As someone who is newer to this literature than you (Gil), I found Hülsmann’s book quite challenging (although still clear, just more advanced) whereas Rothbard’s book was the first economics book I read. Rothbard’s book is much more appropriate for a beginner, while I think a beginner would really struggle to get through Hülsmann’s.
So, in that way, I think they are more complementary (especially if you read Ethics of Liberty in between, as I did).
to fundamentalist:
you’re perfectly right. however, loans to the poor weren’t some equivalent of today’s sub-prime, as gary north in “honest money” (a sort of mises-meets-the-bible) points out. there was no moral hazard:
“Charity loans in the Old Testament were supposed to be cancelled nationally every
seventh year (Deuteronomy 15). Those who had defaulted on charity loans and had been
put into servitude as payment were to be released in this year. This indicates that the
zero-interest loan used the individual’s own freedom as collateral. If he defaulted, he
could go into servitude until the seventh year. So, men took debt seriously”
north again:
“The translators of the King James Version of the Bible (1611) translated the Greek
word toku as “usury.†But it doesn’t mean usury in the Greek; it means “interest.†This
is how modern translations translate it. There is a difference between usury and interest.
How did the King James scholars make such an error? Because they assumed that
the concept of interest in the Bible always means usury. The Hebrew word “usury†was
a term of criticism. Usury referred only to interest taken from a poor fellow believer, in
other words, interest secured from a charitable loan. Such usury is prohibited by Biblical
law. But interest as such isn’t prohibited.
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