REVIEW | The Ethics of Money Production by Jörg Guido Hülsmann

Business ethics, or at least violating them, if the media is to be believed, is all the rage. The Ethics of Money Production is the first in-depth look (well, the second; the first, as Hülsmann points out, was written 700 years ago by a French Bishop) at the ethics of making money. Not the business of earning money, but the business of producing it.

Money production has been monopolized by the state for so long that it is difficult for us to even conceive of it is a business. The very idea sounds like science fiction. But might this not be in the good sense of science fiction, the sense in which it invites us to question fundamentals and consider what else is possible?

Money production is a business, one that happens to be a state monopoly, generating massive financial gain for the state in multiple layers. Like any business, even a state monopoly, money production ought to be viewable from the perspective of business ethics.

Is the monopolization of money production by the state really necessary, wise, or ethical, or is it simply a practice of long standing that needs to be called into serious question? The Ethics of Money Production takes on just this challenge from both ethical and economic perspectives.

For me, this book came at the end of a concentrated series of readings I did on money and banking issues. Years earlier, I had read several works in the free banking literature from Larry White, George Selgin, and Kevin Dowd, but this time my readings included The Case Against the Fed, The Mystery of Banking, Money, Bank Credit, and Economic Cycles and a series of more recent back-and-forth academic articles on the fractional reserve vs. 100% reserve debate. Even after all this, Hülsmann's volume had a number of unique and important perspectives and insights to offer.

While it is simply stated, it covers a tremendous breadth, touching on all the key issues at just the right level of detail to make it accessible without oversimplifying. It squarely addresses the issues from both ethical and utilitarian angles while clearly distinguishing which is which. It gives priority to the ethical. If something is just plain wrong, there is no basis for excusing it on some set of utilitarian grounds. Nevertheless, the author is also in thorough command of all the utilitarian arguments made in favor of what he identifies as unethical money production, and he examines them all, finding each to also be flawed or self-contradictory on purely economic grounds.

He finds that there has been no real attempt to defend conventional statist monetary practices on ethical grounds at all, and indeed, he can uncover no non-utilitarian ethical grounds in support of such practices to even address. Moreover, he finds substantial grounds for condemning these practices as fraudulent and socially destructive on many levels, from both ethical and purely economic standpoints.

He summarizes the forms that this destruction takes. The continuous loss of value of everyone's money discourages saving, responsibility, and long-term planning and thereby even assists in the break-down of family bonds and other institutions of civil society. The sole beneficiary is the state itself and its closest friends, the banks that help finance its activities beyond what the citizens would be willing to pay in visible taxes.

Inflationary financing is essential to state power, to its wars, to its expansion, to the consolidation of its domination of its subjects. Control of money is a central, if not the central, strategic issue in the strength of the state, providing the state with a nearly limitless means of financing itself at the expense of its subjects in a way that is hidden from, and quite mysterious to, most of them.

What is new in The Ethics of Money Production?

Hülsmann goes even further than his predecessors in imagining the conditions of free market money production. A key weakness in previous formulations was a working assumption that only one type of metal would form a circulating monetary unit. However, it is quite possible that more than one could function in parallel for different purposes. There is no need to have an arbitrary, state-imposed "bimetalist" exchange rate between metals, which has historically driven one or another metal out of circulation whenever the market rate for it exceeded the official rate. In a truly free market for money, gold could end up being used for higher-end transactions and savings, and silver and/or copper coins for everyday transactions. He mentions historical precedent for such arrangements where, for brief periods, the state has not banned them. The metal rates would obviously have to float, as all state-manufactured bimetalist disasters and Gresham's Law-generated deflations in history have clearly demonstrated.

Multiple, freely floating monetary metal currencies are also defensive for the monetary order as a whole. If one metal begins to become corrupted or weakened for any reason, it is easy for consumers to switch to another at the margin. This helps preserve monetary stability, tending to mitigate and rebalance speculative value shifts, and preserves for consumers the ability to quickly and dynamically shift away from any potential problem areas. This is exactly the same consumer power that the state has always sought to take away in order to protect its sad parade of monopolistic funny-money schemes. The essential point is to have total monetary freedom, which means that people are never forced to accept money they do not wish to, and are free to use any money they do wish to.

The book also pointed out a subtle error in previous monetary standard formulations. Saying that "an ounce" of a certain grade of a metal is the monetary unit is not clear enough. Rather, it may be better for the unit to be a specified type of coin that contains this amount of metal.

It is costly to mint coins. If the monetary unit is not specified as a coin, a debt of 100 ounces could be paid, for example, with 100-oz. bar instead of 100 coins. However, the bar is quite likely to be less valuable than the coins because of liquidity differences and minting costs. The market solution would likely be to make a specified type of coin itself function as the contractual monetary unit. If someone wanted to pay in bullion, it would have to be discounted so that the value of the 100-oz. bar, for example, would be lower than the value of 100 of the minted coin units, and a balance would be due in addition to the bar.

Understanding this means taking yet another step toward the consistent application of the subjective theory of value in monetary theory. In this scenario, the bar, even though of the same metal, is not the money; it is just another commodity. This is because "money" is an economic rather than a physical concept. The coin, in this example, would be the "money," but not the bar.

As Hülsmann shows, all such problems, such as confusion as to the actual monetary unit, ultimately arise from the state arrogating to itself the right to set arbitrary "standards," which inevitably have some flaw in them that leads to problems that people operating in free markets could easily have solved and would not have generated.

But the state does this for a reason: it profits. That it profits at the expense of its subject population, should be the first point taught in any exposition of monetary theory. In state-run educational institutions, however, how much prominence is this point likely to be given?

As expected, it is hidden as well as it can be. The author shines light on it for all to see and shows a way forward that is at the same time more ethical, economically sounder, and truer.

The perfect crime is the one not detected

Orson Scott Card, in his open letter Would the Last Honest Reporter Please Turn On the Lights? argues that the Community Reinvestment Act and Fannie and Freddie's antics were responsible for the financial crisis due to Democratic party policies.

Card is correct that the deleterious effects of forced and subsidized lending practices helped set up the sub-prime bubble. Unfortunately, the fundamental problem is much broader, much worse, and lies elsewhere. Indeed, it lies well beyond any issues about which Republicans and Democrats differ. The Big Government parties (available in an exciting selection of Blue and Red colors) are united on being unwilling or unable to say a single word about this larger issue.

To place the effect of the CRA in this larger perspective, it may be helpful to imagine the process of overinflating a balloon. The CRA created a weakness at a particular spot on the latex surface of the balloon. When the balloon popped, it naturally popped starting at the weakest point, after which the air proceeded to rush out altogether, deforming the entire balloon.

However, we would not expect the balloon, in the process of being overinflated, to have not popped if only the weakest point on its latex surface had happened to be somewhere else. We would expect it to pop perhaps half a second later, starting in a different place. This is not to advocate or excuse the unending list of nonsensical policies, such as the CRA, that weaken the surface of the balloon, it is rather to argue that the overinflation of the balloon is arguably worse than each and all of these lesser destructive policies.

What few but the Austrian school economists and the Ron Paul movement are currently addressing is the fact that the balloon is quite unlikely to pop at all unless it is being overinflated.

The air pump in this case consists of the fractional reserve banking system pyramiding on top of ever-expanding fiat currency and electronic "deposits" (of nothing) created on central bank computers. The underlying process has, in one form or another, been going on for centuries, becoming ever more refined, effortless, massive, and destructive up to the present day. It exists and persists for a very simple reason. It is the usual reason: the use of state power to channel money. But how does it work and in what direction does the money flow?

The government provides special exemptions to the ordinary rule of law for banks. This allows banks to simultaneously lend out the exact same money that they are supposed to be "safekeeping" on deposit, a form of fraud. Indeed, most of that "money in the bank" that people are lulled into feeling that they have, is not actually in the bank. In return for this special legal treatment of banks, the government, its best friends, and the banks themselves are the first beneficiaries of the new money and loans thus generated fraudulently out of thin air.

The classic question to ask about a policy system such as this is who benefits? Most of the early forms of such fraudulent loans of other people's money went straight from banks to the king for his wars, or to the city for its expanding budget. Of course, the system has come a long way since then.

Today, this process operates as a massive hidden tax that extracts wealth from all the people to whom this money and its effects "trickle down" only late in the process, after the general price level has already been lifted.

In understanding this racket, it is important to realize that creating money out of thin air lifts the price level artificially, but this is a process that takes time, extending out over several months or years. During this period, those who get the money first can spend it before the general price level has been lifted—in other words, when the money still buys more goods and services. Those who get the money later, can only spend it after the general price level has already been lifted—by which time it doesn't buy as much. This is a massive scheme to transfer wealth:

  • From the poor, the retired and others on fixed incomes, savers, and those who work in industries farthest removed from government expenditures.
  • To bankers, government employees, debtors, government contractors of all kinds, and any other industries and operations (don't forget universities) that are relatively close to the sources of government expenditures and new money creation.
And the magical thing is that most people, especially the ones being ripped off most in this process have no clue that it is even happening. Only a few of the most pitiful examples would be granny with her retirement savings and little kids with their special little-kid savings accounts that pay interest at a small fraction of the true rate of inflation.

Indeed, a more perfect criminal scheme has never been devised. It is insanely profitable, its victims are unaware of the source of their losses, and the state not only calls it all legal, but is itself at the top of the pyramid, the biggest player in the game.

It makes for fascinating reading, and once you know about it, perhaps also a certain degree of responsibility to learn more and spread the word. The first step is to find out more.


1. (Shorter, introductory): The Mystery of Banking (pdf), 2nd ed. by Murray N. Rothbard
Or order a physical copy.

2. (Longer, more detailed): Money, Bank Credit, and Economic Cycles (pdf) by Jesus Huerta de Soto
Or order a physical copy.