Mises Daily Articles
[The Ethics of Money Production (2008)]
Before we deal with the impact of monopolies on the production of monetary services, let us emphasize that our argument concerns only legal monopolies. It does not concern economic monopolies — market situations in which products and services have just one provider. Such economic monopolies are fairly common on the free market, and they are per se perfectly harmless. Typically, the economic monopolist is big enough to serve the entire market and can offer better conditions than any competitor. But this is not writ in stone. The characteristic feature of economic monopolies is that they are contestable. Everybody is free to cater to the same market and thus to "test" whether the current monopolist is really so good that nobody can withstand his competition. By contrast, legal monopolies prevent such testing because violations of the law are suppressed through the courts and police forces.
In monetary affairs, we may speak of a legal monopoly whenever only some monetary products (possibly just one product) may be produced, but not any other similar products.
For example, the legal monopoly might provide that only silver may be used as money, or that only the bank X may offer checking accounts, or that only banknotes of the bank Y or coins of the mint Z may be used in payments.
Legal monopolies — which we will call for brevity's sake "monopolies" — entail inflation by the very fact that they shield the privileged products from competition. The monopoly makes the privileged products relatively less costly to acquire (in comparison to competing products) than they otherwise would have been. The market participants therefore tend to use more of them than they otherwise would have used; and as a consequence they also tend to produce more of them than would otherwise have been produced. This inflation works out to the benefit of the producers and first recipients of additional units of the monopoly product, and to the detriment of producers and users of alternative products, which would have been fabricated and used in the absence of those legal privileges. Thus we encounter again the phenomenon that fiat inflation (of the privileged monies or money certificates) goes hand in hand with fiat deflation of other monetary products.
Monetary monopolies are especially harmful when combined with legal tender laws. But even in the absence of such combinations, monopoly has certain baneful effects that are relevant for our present analysis of money and banking from a moral point of view. Let us first deal with monopoly bullion and then turn to monopoly certificates.
The government can decree that only one type of precious metal may be used in monetary exchanges and punish the use of all other metals. Or it might simply be the monopoly owner of all mints, and then decide to mint coins only in one metal.
Such monopolies have for example been created in Germany and France after the war of 1870–71, when both countries adopted a gold standard and prevented the minting of silver coins (except as tokens for gold). It is true that the bullion monopoly in these cases went hand in hand with a coin monopoly. Still a pure bullion monopoly is conceivable. It creates a greater demand for the privileged metal and crushes the demand for all other metals. Thus we have here again the familiar double phenomenon of fiat inflation and fiat deflation.
Historically, the establishment of monopoly bullion has been an important step in the consolidation and centralization of national monetary systems under government control. The outlawing of silver paved the way to an inflation of fractional-reserve certificates backed by gold. The reason is twofold.
On the one hand, fractional-reserve certificates can be a vehicle for short-run adjustment to the fiat deflation of silver. With silver disappearing from circulation the market participants turn to the remaining alternatives such as gold. Because the gold supply cannot be easily extended, the increased demand would entail a drop of gold prices or, in other words, an increase of the purchasing power of gold. But this is a problem for those who operate on debts and who were not shrewd enough to anticipate the drop in prices. These people therefore turn to substitutes for gold that can be easily multiplied, such as the notes issued by fractional-reserve banks.
On the other hand, and quite apart from this short-run problem, silver is no longer available as a competitor for gold and thus money users have less possibilities to protect themselves against the inflation of gold-backed money substitutes. Moreover, it is for technical reasons impossible to replace silver coins with gold coins of the same purchasing power because in general the latter would have to be so small as to be impracticable. A case in point is the British quarter guinea, which was minted in the years 1718 and 1762 and each time failed to be generally accepted for monetary service. In such circumstances the silver currency is therefore not in fact replaced by a gold currency, but by a currency of gold substitutes. These substitutes might initially be fully backed by gold. However, as we have already argued, it is much easier to turn fully backed money substitutes into fractional-reserve substitutes than it is to debase coins. Hence, the doors are now wide open for inflation.
Virtually all the coins that have circulated have enjoyed a monopoly and were legal tender. Private coinage existed at a few times and places, but even then the definition of the proper coin sizes usually lay in the hands of government. An example is the early United States. Here coinage was largely private, but the US Constitution nevertheless reserved the privilege of defining weights and measures to Congress. It authorized Congress to send in the police against anyone producing or using coins other than the official ones. Thus there was no completely free choice in producing and using alternative coins. Certain coins enjoyed a legal monopoly — monopoly coins.
Notice that monopoly coinage per se cannot entail inflation on any quantitatively significant level. This is most certainly so in the case of sound coins. But even in the case of debased coins, inflation is likely to be very limited. The reason is that monopoly privileges "merely" outlaw alternative monies or money certificates. They cut down the menu from which money users may choose, but they do not prevent them from evaluating the monopoly monies as they see fit. In the case of debased coins, this means that monopoly laws leave the people at liberty to distinguish between old coins (which contain more fine metal) and the new debased coins. There might then be two price systems or, if it proves to be too cumbersome to distinguish old and new coins in daily trade, the market participants might just as well decide to melt down the old coins or sell them abroad. It follows that there is no inflationary effect whatever (if anything, a slight deflationary effect is more probable).
From the point of view of the debaser — the government — the entire exercise is therefore more or less pointless. He might for some time manage to cheat his customers into thinking that no debasement is going on. But this deception cannot last for any considerable length of time. As soon as the market participants realize what is going on, they will buy and sell the new coins at different nominal prices, so as to leave the real exchange ratios (in precious metal weights) unchanged. No additional revenue can thus be gained for the debaser. This is of course the reason why debasement has never been orchestrated under the mere protection of monopoly privileges. In practice, debased government coins have always been protected by the additional privilege of legal tender laws.
Things are very similar in the case of certificates that are not physically connected to the monetary metal (in particular banknotes and demand deposits). They too can be produced on a free market. And in distinct contrast to coins, they actually have been produced under competitive conditions at many times and places in history. In the 19th century, most Western governments established banknote monopolies, which were granted to banks with especially close ties to the government. These banks operated on a fractional-reserve basis and created a considerable amount of banknote inflation. But just as in the case of debased coins, the monopoly alone was not the enabler of that inflation. The simple reason is, again, that the monopoly privilege merely suppresses competing products, but does not prevent people from evaluating the monopoly banknotes as they see fit. A banknote monopoly does not therefore prevent the market participants from rejecting these banknotes altogether and conducting their business only in coins (cash). Thus as in the case of coins, we must conclude that monopoly privileges for banknotes are inherently harmful and socially disruptive, but that their quantitative impact is likely to be rather small.
The Ethics of Monetary Monopoly
Our foregoing discussion did not shed any positive light on legal monopolies in money. Why, then, has monopoly been so widespread and longstanding in this field? One standard argument is that the control of the money supply is one of the prerogatives of secular government. But this is of course not an argument at all, unless we equate government omnipotence with the welfare of the commonwealth. The question is why the certification of weights should be entrusted to government, and to government alone. One plausible answer to this question is that it is natural to trust government. Oresme argued quite succinctly that the princes were the natural leaders of society. It seemed only natural to confide the certification of gold and silver weights to the men who were trusted to make life-and-death decisions on behalf of all members of society. If they could not be trusted, who else could?
Even if we grant this deduction for the sake of argument, it is by no means clear that it can be readily applied to our times. The princes of the High Middle Ages personally led their armies into battle. There were therefore much better reasons to trust one's prince, who constantly pledged his own blood, than to trust the members of modern parliaments, who seldom are required to walk their talk.
But even if we concede, again for the sake of argument, that Oresme's deduction could be applied to the modern context, the deduction itself does not hold water. The only conclusion one could infer from the premise that governments are inherently trustworthy is that governments would tend to be successful in the money certification business. But it does not follow at all that only the governments should be allowed to enter this business. There is no reason why other people than the princes should not acquire a reputation of trustworthiness equal to, or even superior to theirs. It might be true that in medieval Europe the princes were the most widely trusted members of society. Other people might be most widely trusted at other times and other places. The point is that there is no reason at all to grant such people a monopoly and thus to shield them from competition. Few things are better known in economic theory than the baneful effects of monopoly. Coinage is no exception. As long as a minter lives up to his reputation of being honest and trustworthy, the monopoly is simply pointless, because people will use his coins anyway. But as soon as a formerly honest minter gives in to temptation and starts to cheat, his monopoly prevents other people from switching to the better services of other minters. Oresme acknowledged that such cheating was highly unworthy of public authority:
Also it is absurd and repugnant to the royal dignity to prohibit the currency of the true and good money of the realm, and from motives of greed to command, or rather compel, subjects to use less good money; which amounts to saying that good is evil and vice versa, whereas it was said to such from the Lord, by his prophet: Woe unto them that call evil good and good evil. [Isaiah 5:20]
Notice that this consideration not only applies to the case of a formerly honest monopoly minter who has fallen from grace. It applies to monopoly minting itself, because it necessarily involves "commanding, or rather compelling, subjects to use less good money" than they might be able to use if competition were free.
Monopoly prevents people from using what is rightfully their property and thus prevents them from competing with privileged market participants. This is partial theft. If the government allows me to drive my car on all days of the week except for Sunday (for example, because the government itself wants to preserve the monopoly of transport services for that day) then it deprives me of the full use of my property. And I am similarly deprived of the full use of my legitimate property if I may not use it to produce money.
In light of these considerations, it should not be surprising that monopoly's bad press is hardly a fabrication of the classical economist and their followers, who stressed various utilitarian considerations against monopoly. These authors could in fact build on the traditional ethical rejection of monopoly. From a biblical point of view, legal monopolies are condemnable because they violate the Eighth Commandment ("You shall not steal"). The ethical case against legal monopolies is simply an elaboration of this insight. As one historian of thought summed up 20th-century scholarship on medieval views,
The Scholastics did not oppose the free operation of the marketplace. On the contrary, the Scholastics … related the just price to competitive market condition, castigated cartels and the activities of guilds to restrain trade, and had no intention of stigmatizing profits legitimately earned.
According to a subtler argument for government monopoly in money, the government has the right to do to the money of the country whatever it wishes because at all times it owns the entire money supply. Thus the money that the citizens keep in their wallets and their bank accounts is not really their money. They are just stewards for the true owner: the government. The standard justification for this argument is the famous verse in Matthew 22:21. Here the Pharisees show Jesus a coin with Caesar's image and he commends them to "repay to Caesar what belongs to Caesar and to God what belongs to God." Some advocates of monopoly in money take this to mean that all coins belong to the government, in the present case to Caesar.
But this opinion is untenable, as the passage in which the verse appears clearly shows. The passage reads,
"Tell us, then, what is your opinion: Is it lawful to pay the census tax to Caesar or not?" Knowing their malice, Jesus said, "Why are you testing me, you hypocrites? Show me the coin that pays the census tax." Then they handed him the Roman coin. He said to them, "Whose image is this and whose inscription?" They replied, "Caesar's." At that he said to them, "Then repay to Caesar what belongs to Caesar and to God what belongs to God." (Matthew 22:17–21)
Thus it was not just any coin that the Pharisees presented to Jesus, but a coin that was specifically used for the payment of taxes to the Roman Empire. Moreover, Jesus did not even say that the coin itself belonged to the government (Caesar); but only that those sums of money that were owed to the government (if any) were to be paid to it. Oresme too explicitly rejected the opinion that governments somehow are the inherent owners of the entire money supply. He placed great emphasis on this point:
But if anyone should say that … certain commodities are the private property of the prince for which he may set his own prices, as some say is the case with salt and a fortiori with money, we answer that a monopoly or gabelle of salt, or any other necessity, is unjust. And that princes who have made laws to give themselves this privilege are the men of whom the Lord says, in the words of the prophet Isaiah: "Woe unto them that decree unrighteous decrees, and write grievousness which they have prescribed." [Isaiah 10:1] … money is the property of the commonwealth.
Is it licit to apply this argument in our modern context? Are democratically elected governments really quite on equal footing with the princes of the Middle Ages? As far as the present question is concerned, there is indeed no essential difference and Oresme's point applies today as it did in the 14th century. Democratic governments do not own their citizens. They do not own their citizens' money either.
 See especially Murray Rothbard, Man, Economy, and State, 3rd ed. (Auburn, Ala.: Ludwig von Mises Institute, 1993), chapter 10. See also Pascal Salin, La concurrence (Paris: Presses Universitaires de France, 1991).
 The same effect can be brought about through legal tender laws, when they apply only to one metal. We will deal with this case in the next chapter.
 See the classic exposition of the argument in Jean Bodin, Les six livres de la République (Paris: Jacques du Puys, 1576), bk. 1, chapter 11. See also Arnold Luschin von Ebengreuth, Allgemeine Münzkunde und Geldgeschichte, reprint of the 2nd ed. (Darmstadt: Wissenschaftliche Buchgesellschaft,  1976), pp. 235–44.
 Nicholas Oresme, "Treatise on the Origin, Nature, Law, and Alterations of Money," in Charles Johnson, ed., The De Moneta of Nicholas Oresme and English Mint Documents (London: Thomas Nelson and Sons, 1956), p. 31.
 What we see here is that any advocacy of monopoly contradicts one of the most cherished principles of Catholic social doctrine, namely, the principle of freedom of association. It is true that 20th-century popes and the Second Vatican Council have defended this principle mainly in the context of the legitimacy of labor associations. But the principle itself extends far beyond that realm. Pope John Paul II made this crystal clear in a passage of Centesimus Annus (§7) in which he discussed Leo XIII's Rerum Novarum, where the same point had been made:
In close connection with the right to private property, Pope Leo XIII's Encyclical also affirms other rights as inalienable and proper to the human person. Prominent among these, because of the space which the Pope devotes to it and the importance which he attaches to it, is the "natural human right" to form private associations. This means above all the right to establish professional associations of employers and workers, or of workers alone. Here we find the reason for the Church's defence and approval of the establishment of what are commonly called trade unions: certainly not because of ideological prejudices or in order to surrender to a class mentality, but because the right of association is a natural right of the human being, which therefore precedes his or her incorporation into political society. Indeed, the formation of unions "cannot … be prohibited by the State," because "the State is bound to protect natural rights, not to destroy them; and if it forbids its citizens to form associations, it contradicts the very principle of its own existence."
As Leo XIII had pointed out, this right is so primordial that it may only be qualified in the case of associations that are "evidently bad, unlawful, or dangerous to the State." (Leo XIII, Rerum Novarum, §52.) But the State has no right whatever to prevent or dissolve any legitimate association. It follows that there is no moral basis, at any rate from a Catholic point of view, to prevent or dissolve associations of persons who wish to produce and use a specific kind of money.
 See for example, Adam Smith, The Wealth of Nations (New York: Modern Library,  1994, pp. 680–82, 700, 814; Etienne de Condillac, Le commerce et le gouvernement, 2nd ed. (Paris: Letellier, 1795), part 2, chapter 7, pp. 273–76.
 Julius Kirshner, "Raymond de Roover on Scholastic Economic Thought," introduction to R. de Roover, Business, Banking, and Economic Thought in Late Medieval and Early Modern Europe (Chicago: University of Chicago Press, 1974), p. 19. Before Raymond de Roover, this point had been stressed by Armando Sapori, Albert Sandoz, Josef Höffner, and Joseph Schumpeter. For a recent restatement see Cardinal Josef Höffner, Christliche Gesellschaftslehre (Kevelaer: Butzon & Bercker, 1997), pp. 246–47.
 See in detail Gary North, Honest Money (Ft. Worth, Texas: Dominion Press, 1986), chapter 6.
 Oresme, "Treatise," p. 16.