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Money (and Credit) Production

Posted by ProjectC 
'Fiat money regimes create economic disequilibria, and do so inevitably. This is because the rise in circulation credit lowers market interest rates below their natural levels — that is, the levels that would have otherwise prevailed, had the credit supply not been artificially increased.

The downward-manipulated interest rate induces additional investment and, at the same time, provokes a rise in consumption out of current income, at the expense of savings...'


'Money and Credit

To explain this one-sentence conclusion — which may of course be surprising or even irritating to many — it must be noted that the defining characteristic of today's monetary systems is that state-controlled central banks hold the monopoly over the money supply. The US dollar, euro, Japanese yen, British pound, and the Swiss franc share the essential feature of being currencies produced by governments.

What is more, these monies are produced through circulation-credit expansion — credit that is not backed by real savings. One can even say that today's monies are produced out of thin air. These monies are often called fiat money: they are established by government decree, not legally convertible to any other thing, and created by political expediency.

Fiat money regimes create economic disequilibria, and do so inevitably. This is because the rise in circulation credit lowers market interest rates below their natural levels — that is, the levels that would have otherwise prevailed, had the credit supply not been artificially increased.

The downward-manipulated interest rate induces additional investment and, at the same time, provokes a rise in consumption out of current income, at the expense of savings. Monetary demand outstrips the economy's resource capacity. A rising money supply pushes up prices sooner or later, be it the prices for consumer goods or for assets.

What is more, the artificially suppressed interest rate shifts scarce resources increasingly into more time-consuming production processes for capital goods — at the expense of production processes for consumer goods, causing intertemporal distortions of the economy's production structure.'

- Thorsten Polleit, Toward a New Monetary Order, June 25, 2010


'Money production is therefore a problem of justice in a double sense. On the one hand, the modern institutions of money production depend on the prevailing legal order and thus fall within one of the innermost provinces of what has been called social justice. On the other hand, the prevailing legal order is itself the very problem that causes perennial inflation. Legal monopolies, legal-tender laws, and the legalized suspension of payments have unwittingly become instruments of social injustice. They breed inflation, irresponsibility, and an illicit distribution of income, usually from the poor to the rich.'

'Economics not only deals with moral beings—human persons—but it also addresses a great number of questions that have direct moral relevance. In the present case, this concerns most notably the question of whether any social benefits can be derived from the political manipulation of the money supply, or the question of how inflation affects the moral and spiritual disposition of the population.

...

We will argue that natural money production can work; that it has worked wherever it has been tried; and that there are no tenable technical, economic, legal, moral, or spiritual reasons to suppress its operation. By contrast, there are a great number of considerations that prove conclusively the harmful and evil character of inflation. And in our time inflation has become persistent and aggravated because various legal provisions actually protect the monetary institutions that produce this inflation.

Money production is therefore a problem of justice in a double sense. On the one hand, the modern institutions of money production depend on the prevailing legal order and thus fall within one of the innermost provinces of what has been called social justice. On the other hand, the prevailing legal order is itself the very problem that causes perennial inflation. Legal monopolies, legal-tender laws, and the legalized suspension of payments have unwittingly become instruments of social injustice. They breed inflation, irresponsibility, and an illicit distribution of income, usually from the poor to the rich. These legal institutions cannot be justified and should be abolished at once. Such abolition is likely to entail the elimination of the predominant monetary institutions of our age: central banks, paper money, and fractional-reserve banking. ... a necessary condition for a more humane economy.

It is true that these are rather radical conclusions. However, one must not shy away from taking a strong stance in the face of great evil; and great evil is precisely what we confront in the present case. Our goal is not to press a partisan program, however. We seek merely to acquaint the reader with the essential facts needed for a moral evaluation of monetary institutions. (- page(s) 5, 6, 7)

...

The general thrust of the above-mentioned works is to cast serious doubts on the necessity and expediency of the government-sponsored production of money through central banks and monetary authorities. The authors argue that money and banking should best be subject to the general stipulations of the civil law. The government should not run or supervise banks and the production of paper money. Its essential mission is to protect property rights, especially the property of bank customers; any further involvement produces more harm than good. Now it is one of the home truths of the economics profession that virtually all of its members are government employees. Even more to the point, a great number of monetary economists are employees of central banks and other monetary authorities; and even those monetary economists who are “only” regular professors at state universities derive considerable prestige, and sometimes also large chunks of their income, from research conducted on behalf of monetary authorities. (- page 16)

Economists relish in pointing out the importance of economic incentives in the determination of human behavior. While virtually no section of society has escaped their scathing criticism, until very recently few of them have been concerned about their own incentives. Yet the facts are plain: championing government involvement in money and banking pays the bills; promoting the opposite agenda shuts the doors to an academic career. No consistent economist could expect monetary economists to lead campaigns against central banks and paper money.27

He who acquaints himself with the modern scientific literature on money and banking must not close his eyes to these facts. (- page 17)'

- Jörg Guido Hülsmann, The Ethics of Money Production (pdf), August 2007



27 See Lawrence H. White, “The Federal Reserve System’s Influence on Research in Monetary Economics,” Econ Journal Watch 2, no. 2 (2005): pp. 325–54. Significantly, the only recent successful campaign for monetary reform that was led by professional economists had to avoid the involvement of “experts” employed with monetary authorities. When Fritz Machlup, Milton Friedman, and others prepared the reform of the Bretton Woods system in the late 1960s, they studiously excluded any intellectuals employed by or affiliated with the IMF. Institutional backing came from outside the monetary establishment, namely, from the American Enterprise Institute. The movement eventually rallied in the town of Bürgenstock in Switzerland. See the eyewitness account of one of the members of the Bürgenstock Group in Wolfgang Kaspers, “The Liberal Idea and Populist Statism in Economic Policy: A Personal Perspective,” Hardy Bouillon, ed., Do Ideas Matter? Essays in Honour of Gerard Radnitzky (Brussels: Centre for the New Europe, 2001), p. 118.


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'Hulsmann has provided not only a primer in understanding our times, but a dramatic extension of the work of Menger, Mises, Hayek, Rothbard, and others to map out an economically radical and ethically challenging case for the complete separation of money and state, and a case for the privatization of money production. It is a sweeping and learned treatise that is rigorous, scholarly, and radical.'

- (Book store) Ethics of Money Production

- The-Ethics-of-Money-Production

- The Ethics of Money Production: a live blog