Ben Bernanke and the Federal Reserve are at it again. The most recent policy statement by the Federal Open Market Committee (FOMC) said that current inflation is "somewhat below" levels consistent with stable prices, and that it is "prepared to provide additional accommodation if needed to support the economic recovery and to return inflation, over time, to levels consistent with its mandate" to maintain stable prices.
Never mind that in the old days when words actually meant something, stable prices meant prices that were actually stable, that is, did not go up or down. Now it seems that stable prices mean prices that are not actually stable, but are prices that continually go up at an acceptable target rate. Also never mind that, as Mises showed us in his Theory of Money and Credit prices are never actually stable, so the Fed's price stabilization policy is doomed from the start.
A full analysis of any economic policy requires holding up that policy to the light of both economic truth and ethics. There is a voluminous literature documenting the economically disastrous consequences of monetary inflation. Work from the likes of Mises, Hayek, Rothbard, Sennholz, Salerno, Garrison, Huerta de Soto and Hülsmann have ably communicated how inflation through artificial credit expansion shrinks the purchasing power of money and sets in motion the business cycle.
What may be less known is that there is a substantial literature amongst Christian scholastics that were able forerunners of later monetary theorists in the Misesian tradition. Guido Hülsmann in his excellent The Ethics of Money Production identifies a long Christian tradition against monetary inflation. In the fourteenth century Nicholas Oresme, a French bishop, integrated various isolated statements about money by Thomas Aquinas, Jean Buridan, and others, and developed what is believed to be the first systematic treatise on money. Drawing upon the work of Oresme and Christian ethics, the later Spanish scholastics further developed monetary theory, roundly criticizing monetary debasement and inflation as both economically destructive and morally evil. More recently Christians such as Gary North, Herbert Schlossberg, and Thomas Woods have argued that monetary inflation violates sound ethics.
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There is good reason the Christian tradition finds monetary inflation incompatible with Christian morality. The source of ethics for the Christian is God's revelation in both nature and Scripture. Readers of the Bible will find that it is not silent about monetary debasement, identifying it as a form of fraud. The Levitical law explicitly prohibited fraud in commercial dealings. "You shall do no wrong in judgment, in measures of length or weight or quantity. You shall have just balances, just weights, a just ephah, and a just hin. . ." (Lev. 19:35–36). This negative view of commercial fraud is confirmed in the book of Proverbs which teaches that "Unequal weights are an abomination to the Lord, and false scales are not good" (Prov. 20:23). Through the prophet Micah we find the voice of the Lord indicating he will not "acquit the man with wicked scales and with a bag of deceitful weights" (Mic. 6:11).
We also find that this general moral prohibition against fraud applies specifically against monetary debasement. In the first chapter of the book of Isaiah, the prophet rebukes God's people for numerous sins. "How the faithful city has become a whore, she who was full of justice! Righteousness lodged in her, but now murderers. Your silver has become dross, your best wine mixed with water. Your princes are rebels and companions of thieves. Everyone loves a bribe and runs after gifts. They do not bring justice to the fatherless, and the widow’s cause does not come to them." (Isa. 1:21–23). Notice that, in the midst of the sins of murderers and corrupt rulers who administer injustice, the sin of monetary debasement is referenced. It is a clear rebuke against passing off cheap metal as pure silver.
Such debasement is akin to counterfeiting, the act of passing off an inferior object as real money. This is what the people rebuked by Isaiah were doing. They mixed some cheap metal in with silver, thereby making an alloy that looked like pure silver but was not. The money producers were fraudulently passing off the cheap alloy as the real thing.
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Money producers did this because they could more cheaply accumulate wealth. Counterfeiting increases the money stock by increasing the number of monetary units. If a silver smith begins to make ingots that are only half silver and half base metal, he can affectively double his cash holdings, because the same amount of silver will go farther. With larger cash balances, counterfeiters can buy more, thus making themselves wealthier. However, those who contractually agree to be paid in pure silver but who instead receive alloy money are being deceived and are victims of fraud.
Such debasement is unethical and results in negative economic consequences, but at least the consequences are kept as local as where the counterfeiter spends the money. The negative consequences of monetary debasement were greatly magnified after the state monopolized the production of money.
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In What Has Government Done to Our Money? Murray Rothbard documents the decline of our monetary system from the early days of private gold and silver coinage to the adoption of legal tender laws and government monopolization of money production, the advent of government paper currency, and ultimately to state legitimization of fractional reserve banking and fiat paper money. Rothbard also understood that such a decline is ethically pernicious as well as economically so because, when commercial banks backed by the central bank create money out of thin air ex nihilo, as if they were God, such money is claimed to be payable on demand. However, because banks hold a mere fraction of the reserves necessary to cover all of their outstanding demand deposits, there is no way for them to make good on all of their promises. It turns out that government supported fractional reserve banking is but a contemporary example of monetary fraud. However, legalized counterfeiting is still counterfeiting.
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In addition to the ethical problems of fraud, government monetary inflation creates the ethical problem of coercive wealth redistribution. Economists since Richard Cantillon have understood that because of the way newly created money enters the economy, inflation always redistributes wealth. Those who receive the new money first have the advantage of increased purchasing power because they have more money to spend. As the new money ripples through the economy, however, overall prices begin to increase so that, at some point, those who receive the new money are no better off because their increased cash balances are offset by price increases. There are those, alas, who get the new money late in the process and whose increase in cash balances are not enough to offset the increase in prices. Additionally, those on a fixed income do not see a dime of new money, but must pay higher prices just the same. Therefore, monetary inflation increases the wealth of those who receive new money sooner at the expense of those who receive the new money later or not at all. This wealth redistribution is not the result of voluntary exchange of private property, but due to the state's using its monopoly on money production to increase the money supply. It is wealth redistribution at the point of a gun. If you or I tried to do that we would rightly be prosecuted for criminal activity. That fact that when the state does it is considered "monetary policy" does not make it more legitimate.
Government monopolization of the money supply and state inflation violates the right of private property on many levels. Such state intervention in the monetary system, therefore, cannot be accepted as ethical. Moving to more moral monetary institutions requires abolishing the Federal Reserve and fractional reserve banking and getting the state completely out of the monetary system.
September 24, 2010