Review: The Ethics of Money Production

Business ethics is all the rage. This is the first look—well, the second: the first, as the author points out, was 700 years ago by a French Bishop—at the ethics of the business of making money. Not earning money, but producing money. This was near the last in a series of books I have been reading in a self-designed study unit on money and banking issues: The Case Against the Fed, The Mystery of Banking, Money, Bank Credit, and Economic Cycles and a series of articles on both sides of the fractional reserve vs. 100% reserve debate.

The Ethics of Money Production has several unique things to offer.

While simply stated, it covers a tremendous breadth, touching on all the key issues in clear form. It also squarely addresses the issues from both ethical and utilitarian angles and clearly distinguishes both. 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. Yet as a highly trained economist, the author is in thorough possession of the utilitarian arguments in favor of various forms of what he identifies as unethical money production and he examines each one finding them to be flawed or self-contradictory on purely economic grounds.

He finds that there has been basically no attempt whatsoever to defend unethical monetary practices such as fractional reserve banking and monopolization of note issue on ethical grounds, and indeed, he can find no ethical grounds to support such practices. Moreover, there is substantial reason to condemn them 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 as a result 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 are willing to pay.

Inflationary financing is essential to state power, to its wars, to its expansion, to the consolidation of its domination of its subjects.

The conclusion of my study unit: money is a central, if not the central, strategic issue in the strength of the state vis-a-vis its ability to dominate its subjects by having for itself a virtually 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?

The author goes even further than his predecessors in imagining the conditions of free market money production. A key weakness in previous formulations was a presumption that only one type of metal would form a circulating monetary unit. It is entirely possible that more than one could function in parallel for different purposes, and there is no need to have an arbitrary "bimetalist" exchange rate established between them. For example, gold for the high-end, silver in the middle, and copper at the low end of types of 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 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: if one begins to become corrupted or weakened for any reason, it is easy for consumers to switch to another at the margin, preserving monetary stability, tending to mitigate and rebalance speculative value shifts, and preserving for consumers the ability to shift away from problem areas. This is the very consumer power that the state has always sought to take away in order to protect its sad parade of 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.

An important technical point that was new to me was a subtle error in previous monetary standard formulations. Saying that "an ounce of silver" of a certain quantity is the monetary unit is still not clear enough and leads to problems. The unit must be a specified type of coin that contains this amount of metal. It is costly to mint coins. If the 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, but the former is actually less valuable than the latter because of liquidity differences and minting costs from bullion. The market solution would likely be to make a specified type of coin itself the contractual 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 the balance, essentially a minting discount plus, would be due in addition to the bar.

As I describe this, I realize that it means that the bar is not the money; it is another commodity. Money is an economic rather than a physical concept. The coin, in this example, would be the money, the bar still another commodity in a technical sense.

As the author shows, all such problems 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 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 population, at the expense of everyone else, should be the first point taught in any exposition of monetary theory. In state-run educational institutions, how much prominence do you think this point is given? It is hidden as well as it can be hidden. The author shines the light on it for all to see and shows a way forward that is more ethical, more economically sound, and truer.