More crank theories have been advanced about money and banking than about any other economic topic. While it is not difficult to find people who oppose the Federal Reserve System, all too many such opponents would replace it with something at least as bad.
Although Catholic thinkers have not been notably worse than their non-Catholic counterparts on the subject of money, my background and interests lead me to concentrate here. Fr. Charles Coughlin, who enjoyed considerable popularity during the 1930s and whose writing is admired by some even today, actually advocated more inflation than was occurring under the existing system. He favored a system in which the government would control the money supply directly rather than through a central bank.
Such a proposal would simply have led to all the problems traditionally associated with inflation – erosion of savings, calculation problems, countless (and destructive) market distortions – except on a larger scale. A similar proposal was advanced by Fr. Denis Fahey, another figure popular among certain Catholics. (See Jesús Huerta de Soto [pdf] on how the Late Scholastics, on this issue as with so many others, were far superior to most modern Catholic spokesmen on economics.)
Fr. Coughlin placed much emphasis on the “private ownership” of the Federal Reserve System, but it is surely an unusual “private” organization whose officers are all appointed by the federal government and which was established by an act of Congress. A far more significant and substantive critique of the Federal Reserve would involve its ability to create money out of thin air, its dilution of the value of our currency, and its responsibility for the business cycle. On these fundamental issues, Fr. Coughlin was in lockstep with the Federal Reserve – he simply wanted the federal government, rather than the Federal Reserve, to do the inflating. How is this a sweeping critique?
To their credit, Frs. Coughlin and Fahey recognized that something was wrong with fractional-reserve banking, and both would have forbidden the practice. Strangely, Hilaire Belloc, who appears to have had a far sounder grasp of the issues, considered the practice essentially harmless, and even somewhat beneficial, if carried out on not too extensive a scale.
Unlike Frs. Coughlin and Fahey, Belloc appreciated the dangers of a state-manipulated currency. Frs. Coughlin and Fahey, on the other hand, appalled at the control that central bankers exercised over the money supply, would hand monopolistic control over the money supply directly to the government. Why the state, an institution as monopolistic as any that has ever existed, could be trusted with such a task these men simply never addressed in any serious way.
Indeed both theory and history tell us otherwise. The French revolutionaries, for instance, destroyed their country’s currency within months, and the Americans hardly fared any better. Gary North suggests: “Here is the question we must ask every monetary reformer: What, legally and economically, will keep the government from printing too much paper money or issuing too much credit? The honesty of the politicians? The good judgment of the bureaucrats in charge of printing money?”
Fr. Coughlin’s answer, such as it is, reveals little if any grasp of the immensity of the problem. “Those empowered to issue money would have no incentive to over-issue money,” he wrote. “They would not be the beneficiaries of the new purchasing power.” Worse than the naïveté of such a statement is its ignorance – the distribution, or Cantillon, effects of the injection of the new money would certainly benefit certain people at the expense of others.
Favored firms with which the government does business would get the money first, since Fr. Coughlin recommended increasing the money supply through government purchases. These firms would therefore be at an advantage vis-à-vis everyone else in the economy, and would gain at the direct expense of everyone else. Since prices have not yet risen to a point commensurate with the new infusion of money, the first recipients prosper at the expense of those who will get the new money later and who in the interim have had to pay the higher prices that the new money brings about.
It hardly requires much imagination to realize that, contrary to Fr. Coughlin’s assurances, politicians would benefit very handsomely from the purchasing power of the new money, insofar as they could simply direct it toward favored sectors and constituents.
Here is another way to think about it. Money in your possession amounts to compensation for some good or service you have provided in the past. (Gifts and inheritance do not invalidate this statement, since we can eventually trace the gift or inheritance money back to the original benefactor – who, assuming he is not a criminal, earned it through voluntary exchange or himself received it as a gift.) When you buy a dozen apples, therefore, you do so with the proceeds from a good or service that you yourself (or, in the case of money given to you as a gift, someone else) provided in the past. This process is clearer under a barter system, since there you directly exchange the apples for some good or service of your own.
Now imagine a situation in which business firms or banks connected to the government are the recipients of a new round of paper money courtesy of Fed credit expansion. That money comes not from the sale of some previous good or service. It comes out of thin air. Thus when these favored firms spend this money, they are in effect taking goods out of the economy without providing anything themselves. Here we see very clearly how they benefit at the expense of the rest of society: they take from the stock of goods without giving anything in return. The analogous case under a system of barter would be one in which I come and take your apples, period.
But let us return to Frs. Coughlin and Fahey: both men claimed, for whatever reason, that money should be issued on the basis of the nation’s productive capacity, as measured in estimated national wealth. The fatal flaw in this approach is that this estimate of the nation’s wealth is itself denominated in money. As soon as the money bureaucracy that these men want to establish issues money on the basis of this estimate, the result will be higher prices, and therefore a higher nominal value of the nation’s wealth. This higher figure will then be used to justify another infusion of money, and such theorists as these will be heard to complain of yet another “scarcity of money.” The process will repeat itself again and again, all the while debasing and destroying the currency. Unlike a 100-percent reserve system, in which banks cannot issue more in notes than they have specie in their vaults, there is no logical limit to the expansion of the unbacked paper money favored by Fathers Coughlin and Fahey. Paper, ink, and a printing press are all that is required.
The inflationist approach of Frs. Coughlin and Fahey would have produced all the negative consequences of any inflationist scheme. All the injustice toward non-favored segments of the community (who get the new money last), all the confusion and chaos in business calculation, all the incentives to consume and spend rather than save and invest, all the impoverishment – these would remain. They did not object in principle to the counterfeiting and inflationism of the Federal Reserve; they simply wanted the government itself to engage in these practices directly rather than through what they considered the plutocratic intermediary of an institution like the Fed.
To say the least, it is rather peculiar to hear some present-day Catholics endorsing the monetary policies of these men as if they constituted a radical break with the present system, when in fact on every significant point they represent no difference at all. Increasing the number of green paper tickets in circulation does absolutely nothing to increase the amount of wealth in existence. The creation of wealth occurs when capital investment allows the same amount of goods to be produced with less labor, thereby freeing up labor for the production of goods that could not otherwise have been produced. This takes real effort and sacrifice, not paper and a printing press.
And on the most fundamental issue of all, namely granting the government a monopoly of the note issue, Frs. Coughlin and Fahey again have no fundamental disagreement with the Federal Reserve. Their one divergence from the present system would be that politicians, rather than central bankers, would possess a monopoly of the note issue. The government would possess a monopoly on printing paper currency that would be backed by nothing. Individual banks, on the other hand, would be prohibited from issuing notes backed 100 percent by reserves in their vaults. If this doesn’t have the proper order of things exactly reversed, I don’t know what does.
In the midst of all their theorizing, Frs. Coughlin and Fahey never really examined the 100-percent gold alternative in any serious way. (Fr. Fahey stacked the deck in advance by conceiving of a gold standard as a system in which the Bank of England printed more notes than it had gold in its vaults – not exactly a genuine gold standard.) Both were convinced that the economic well-being of a nation was intimately connected to how many green paper tickets are in circulation. And both would have converted the central bank monopoly into a direct government monopoly. In their ideal world, each government would be one great counterfeiter.
What a shame that such men possessed so much contempt for and so little comprehension of a genuine gold standard – a monetary system based on simple honesty and in which counterfeiting by anyone, including the government, would be impossible. Any other system must lead not only to inflation, but also to corruption, influence peddling, impoverishment, and economic instability--just what these men sought to minimize or abolish.
Frs. Coughlin and Fahey believed that their proposed monetary schemes would make the average American more prosperous and the family more secure. They would do no such thing, of course. But having concluded on the basis of exceedingly faulty economics that their approach alone would guarantee both justice and prosperity, they went on to propose a system radically at odds with both. This is why, in The Church and the Market, I join Pascal in affirming that working hard to think clearly is the beginning of moral conduct.
