Ethics and Economics

A review of The Ethics of Money Production

Jörg Guido Hülsmann

Ludwig von Mises Institute, 2008

Kelsey Winther

The modern spheres of business and banking are increasingly embracing the idea of “ethics” yet the monetary system in which they operate is pretending to be above such moral considerations. The current banking practices of the federal government and the Federal Reserve Bank ignore the basic concept of justice. In a convergence of theology and economic theory, Dr. Guido Hülsmann opens the debate on an ethical issue largely ignored by mainstream economics and philosophy. Dr. Hülsmann is not new to the scene of free market economic theory. He is currently a professor of economics at the University of Angers in France and he is actively encouraging economic thought and strengthening economic theory throughout the world. In his most recent book, The Ethics of Money Production, Hülsmann presents the philosophical foundation that is fundamental to a proper understanding of monetary policy.

Hülsmann begins his argument by explaining the natural process through which money emerges in the free market. In the most simplistic economy, barter and indirect exchange eliminate the need for money. Yet, as more complex market conditions develop, a universally accepted medium of exchange is required. The money of an economy is the medium that is generally desired by all members of the market. Historically, this money has often been gold or silver. An unhampered market economy based on a precious metal currency can develop more complex forms of payment, (i.e., checking accounts, bank notes, credit, securities, etc.), so long as the promise of payment is always redeemable in hard currency. A currency given value by government decree, like the dollar, emerges when the connection between the bank notes or credit is severed from the hard currency. This transition occurs by the dictate of the government, never by the voluntary action of market players.

Ethics should be considered both at the point of currency creation and in the effects of such money in the economy. Hülsmann, supporting the fourteenth century economist and bishop Nicholas Oresme, confirms the biblical importance of just weights (Leviticus 19:35-36). Oresme emphasized that it would be unethical for a coin to be marked in such a way as to imply that is worth more than the precious metal it contains. The concepts Oresme applied to coins in the fourteenth century can be applied to today’s money. In his time, the magistrate would remove some of the metal from the coin. In modern America, the central bank increases the supply of credit without backing. Both are forms of debasement in which the money held by the people has lost some value. When the Federal Reserve engages in debasement, the one dollar bill still says it is worth one dollar, while in the market it is not. In the most foundational sense, inflation is deception. Such actions are taken for the sake of increasing the financial position of the state; this counterfeiting is a clear breach of justice.

Guido Hülsmann spends a considerable amount of time discussing inflation as the most visible result of dishonest monetary policy. He defines inflation as “increase of nominal quantity of any medium of exchange beyond the quantity that would have been produced on the free market.” It is essentially an increase in the amount of money in the economy. As the supply increases the value falls, causing each dollar to lose value. Thus more dollars are required to purchase the same amount of goods. The end result is that prices increase.

Beyond the initial ethical concerns regarding the creation of money, the process of inflation allows the state to take money from its citizens without any accountability. As the federal government borrows money from the Federal Reserve Bank, it can spend without the democratic representation that would be in place had the money come from taxes. If the federal government did not have the power of inflation it would be forced to fund its actions with the money approved by Congress. Inflation allows for the growth of the state absent approval from its people or Congress. Americans would have been outraged had they been forced to fund the bailout packages with taxation. However, through inflation, the state can spend beyond its means with limited opposition by the people. Debasement through inflation is a clear violation of the rights of all individuals to hold their property. Yet Christians should be especially concerned with the effects of inflation on the elderly and poor. It is a tax that is largely unnoticed and disproportionately affects the retired and those on fixed or limited incomes. As prices increase, retirement savings become insufficient to provide for basic needs. In addition, the poor are strongly impacted as a larger percent of their income is spent of essential goods. Such individuals are unable to reduce their spending to compensate for raising prices. Inflationary policies rob the elderly and poor and deny them justice (Ezekiel 22:29).

Hülsmann takes his analysis to an even deeper level as he considers the cultural habits that an inflationary economy encourages. If money is consistently losing value there is an incentive to be in debt. At any significant level of inflation the debtor will repay his loan in money which is worth less than when he borrowed it. Thus the incentive—contrary to biblical wisdom (Proverbs 22:7)—is to borrow as much as possible. While the purpose of policy is not to sanctify the citizens, it should never discourage biblical behavior. Inflation endorses undesirable actions by both the government and the citizens. It is in the context of the unethical effects of inflation that Hülsmann writes that “fiat inflation leaves a characteristic cultural and spiritual stain on human society.”

The aforementioned consequences will occur as long as the inflation of money is easy for the state. Money that is backed by gold or silver cannot easily be debased, making inflation a costly and tedious process. Money in the form of paper or credit, however, can easily be multiplied. The closer money is to its natural state in the voluntary market, the farther it is from manipulation by the state.

In 1832, President Andrew Jackson boldly acted to limit federal control of the money supply. Despite strong opposition, Jackson abolished the Second National Bank of the United States and virtually eliminated the national debt. Hülsmann closes the book reminding the reader of Jackson’s success. In so doing, he remains optimistic that positive change can be accomplished. Through reason and sound ethical principles, wise monetary practices can be integrated into the modern economy.

Originally published in The Quad literary magazine, Summer 2009.