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The Right and Wrong of Money Production

Tags The FedFree MarketsMonetary TheoryPhilosophy and Methodology

02/18/2009Michael King

[Book Review: Ethics of Money Production. By Jörg Guido Hülsmann. Ludwig von Mises Institute (2008). 280 pages.]


Not long ago, the lecture topic in my undergraduate course on corporate finance was ratio analysis. We were using the financial statements of a publicly traded company that day, so I began the class by demonstrating how students could retrieve these statements from financial-market websites.

As I was navigating through a list of component stocks of the Dow Jones Industrial Average, one student asked a perfectly reasonable question for a student to ask his finance professor: "If you had $500, what would you invest in today?" Without hesitating, my response was, "I would buy a half-ounce gold coin and put it in a safe place."

My attention returned to the web browser and my thoughts to ratios. However, my answer had surprised the students, and more hands quickly shot into the air. They wanted an explanation, and their questions came in rapid succession: the economy, the banking sector, the Fed, the government. Their voices revealed genuine concern and a desire to understand these uncertain times. It was soon obvious that the lecture on ratio analysis would have to wait for another day. Anyone who has taught, especially at the college level, understands what happened next.

It was one of those rare moments when the entire class listens attentively and participates in the discussion. That it occurred with this particular class was even more instructive to me personally. This was a principles-of-finance course, required not only of finance majors, but of all students pursuing either a major or minor offered by the school of business at my institution.

While the typical principles class contains some highly motivated students who aspire to careers in finance, banking, and accounting, it is also filled with a fair number of students who look upon the course as a sort of dreaded, compulsory disruption to their nonfinance curriculum. But on this day, they were unified and engaged. A rare moment indeed!

At this point, the reader might consider this a strange way to begin a book review. The anticipated segue is provided by a voice in the back row of the classroom, where a rather quiet and normally imperceptible student began the following exchange with me:

"You know, we hear all about these bailouts and stimulus packages coming out of Washington."

"Yes, I know."

"Hundreds of billions, even trillions of dollars, right?"

"That's right."

"They don't really have the money, though, do they?"

"No, they don't."

"And so they are just going to print it, aren't they?"

"Yes, the banking system is going to print it and loan it to the government."

"Out of nothing, right?"

"That's right."

"But that's not right, is it?"

Just to be clear, the student was not suggesting that the premise was not right, as in not correct. He was asserting that this massive production of money out of thin air was not right, as in not ethical.

Most heads in the class were either nodding in agreement or shaking in disbelief. These students may not understand exactly what is happening to the economy in general and the banking sector in particular, or they may not be able to articulate a sophisticated explanation (not yet, at least), but they instinctively know that something is not right.

Fortunately, they have a definitive answer to the question, is it ethical? Moreover, it is explained in a way they can easily understand and hopefully pass on. I am talking about the wonderful new book by Jörg Guido Hülsmann, The Ethics of Money Production.

As my students can attest, it would be difficult to overstate my appreciation for this book. In fact, I am tempted to conclude my review here and simply say, get it, read it, and then read it again! If I begin quoting my favorite parts, I will end up retyping the entire book, including the table of contents and the preface (okay, maybe not the copyright disclaimer). I trust you get the picture.

Dr. Hülsmann has performed a great service to those who either share the instincts of my unsure-but-probing students, or to those whose advanced understanding leads them to hold as a certainty that the ability of our modern banking system to produce money in unlimited quantities is simply unethical. This verdict may sound radical (more on that below) or even crazy (we can count on hearing that), but it cannot be avoided and should not be suppressed.

As Hülsmann so ably demonstrates, money production is a problem of justice, and the prevailing legal order (e.g., legal monopolies, legal-tender laws, legalized suspension of payments) has "unwittingly become instruments of social injustice" that "breed inflation, irresponsibility, and an illicit distribution of income, usually from the poor to the rich" (p. 6).

I will dwell only briefly on the book's layout and content in order to spend more space speculating on its impact. The book is separated into three parts. Part one covers what the author calls the "natural production of money" and offers improvements based on the moral foundations he has laid down. The second part focuses on inflation and what Hülsmann correctly calls "the perversion of natural money production." An important distinction is made in this second part between private and fiat inflation, and includes a chapter (13) profoundly titled "The Cultural and Spiritual Legacy of Fiat Inflation." In part three, a brief history of Western civilization's monetary systems over the past four centuries is brilliantly analyzed under the author's keen application of morals and ethics.

Dr. Hülsmann's approach integrates three elements familiar to those who navigate these parts of the literary world: the Austrian theory of money and banking, philosophical realism, and a Thomistic/scholastic conviction that science and ethics combine in a unified system of knowledge. Understanding this application is not only helpful in distinguishing the methodology but in explaining its success. The fruits are disclosed by the author in the preface:

[A]ll these aspects lead to the conclusion that a free market in money production is ethically superior to its logical alternative: money production based on legal exemptions and privileges. (p. xi)

Readers of this book will recognize the distinct writing style that Hülsmann shares with so many contemporary Austrian scholars. The simple but beautiful logic, the prose (direct, clear, and concise), the pace, and the length of this book make it easily accessible to the nonexpert, which is of no small significance given the subject.

I was once told by one of the Christian Brothers who taught me in high school that you know a great book when your ability to finish it is continually thwarted by the pursuit of material contained in footnotes, citations, and references. Well, count this as one more reason to call The Ethics of Money Production a great book. Hülsmann states in the introduction that it was not his goal to be exhaustive. However, the breadth and depth of the scholarship is remarkable for such a short work and provides a rich roadmap for further edification.

It is the potential for further edification that, in my opinion, will prove to be Hülsmann's most lasting achievement here. Just as my students sense something is wrong, many of those who are certain something is wrong sense we may be witnessing the death throes of the current world monetary system.[1] The question on many minds is, what comes next? Although it is likely that what comes next will be worse than what we have at the moment (the audacity of distrust, you might call it), it is imperative that people come to understand that a nation's money system is, at its core, dependent upon justice, ethics, and, yes, morals.

This has enormous implications because it demands participation from more than the usual crowd of banking elites, establishment economists, and any so-called "value-free" economic systems. As Hülsmann informs his readers, economics deals both with moral beings (human persons) and questions that have direct moral relevance (p. 5).[2] The production of money, like the production of any goods or services, relies not only on a legal framework, but also on moral presuppositions of human cooperation (p. 1).

He argues convincingly that it is precisely this aspect of money (i.e., its production and the ethics associated therewith) that has escaped the attention of commentary in areas ranging from Catholic social teaching on economic activity, through Christian doctrine on money and usury, all the way up to, and perhaps most glaringly, the innumerable (some might say insufferable) economic works on money and banking. The result is a paucity of literature that offers both a thorough grasp of economics and a moral assessment of monetary institutions.[3] The impeccable timing notwithstanding, this book fills a glaring void. Let us hope it is only the beginning.

My own personal interests lead me to concentrate my enthusiasm especially on the potential for works like The Ethics of Money Production to fill gaps and bring greater clarity on the proper approach for Catholic social teaching regarding the issue of money. As Hülsmann notes in the introduction (p. 7), many diverse Catholic writers have arrived at similar (i.e., correct) conclusions regarding the present monetary system. Unfortunately, the same cannot be said of the prescriptions that have followed their condemnations. Dr. Thomas E. Woods addressed some of the problems with the many well-intentioned but misguided commentators in his outstanding book The Church and the Market.[4]

Catholic social teaching (or claiming papal authority) is used to promote such socioeconomic systems as distributism,[5] solidarism,[6] and the social doctrine of Christ the King,[7] not to mention thinly veiled partisan (and most often leftist) political programs.[8] Some of these propositions appeal to the Catholic-formed intellect, especially the Thomistic approach of Father Dennis Fahey and the Jesuit approach of Father Heinrich Pesch and his esteemed American translator, Dr. Rupert Ederer. However, they all leave this reviewer either unconvinced (as in, I cannot tell exactly what is being proposed) or unsatisfied (as in, that sounds like a variation of the state-imposed privilege system that brought us to this point).

Borrowing from the approach of another great Catholic theologian, St. Augustine, we can insist that any proposal for a universal system of money and banking (and economics for that matter) must, from a Catholic or Christian perspective, satisfy the demands of all three philosophical divisions: the natural, the rational, and the moral.[9] This is not the space to elaborate on any shortcomings of those systems mentioned above using the Augustinian standard.[10] Yet, it can be stated here that Hülsmann hits the mark in all of them, i.e., he makes the natural case, the rational case, and the moral case. Anyone who wishes to reject or dismiss the arguments and conclusions in The Ethics of Money Production must reckon with this reality.

Not only that, the critic must overcome an ethical case that is built upon a prodigious amount of evidence from the relevant literature. Before even getting to chapter 1, Hülsmann builds his case with citations to the first papal denouncement of currency debasement by Pope Innocent III (Quanto, 1199), the first scientific treatise on money by the 14th-century French bishop Nicolas Oresme, the work of Aquinas and scholastic successors such as the School of Salamanca, and Thomists such as Bernard Dempsey, the Christian reconstructionists, the great Austrian economists such as Menger, Mises, and Rothbard, even Popes John XIII and John Paul II. Again, this list is only from a short a glimpse of the introduction!

To be sure, Hülsmann does not expressly promote this book as an exposition of what the official Catholic or Christian position should be regarding money and monetary institutions. But as the title declares, the book is about ethics, meaning it will necessarily integrate all those familiar elements where human action is involved: justice, morals, politics, history, etc. It is unavoidable then that the Christian, and more specifically the Catholic, philosophical tradition will form the basis of an assessment. In the book's conclusion, Hülsmann is justified in pointing out the fundamental agreement between his economic analysis and the concerns of the Church. Any would-be critic simply cannot dismiss this claim without matching its intellectual rigor and logic.

Perhaps the Church will produce a Frank Sheed on money and economics (how about "Society, Money, and Sanity" for a start),[11] someone who can filter Aquinas and Augustine down to the street level and into a genuine Catholic position on which all Catholics can agree. While we might be advised not to hold our collective breath (Sheed had the advantage of writing his best work in the preconciliar days), we can be encouraged by the expanding work of men such as Guido Hülsmann, Thomas Woods, Jesus Huerta de Soto, and many others who deserve mention.

Just as the polis is threatened when the language is corrupted, or just as the faith is threatened when the liturgy is corrupted, the economy is threatened when the currency is corrupted. The economy, it goes without saying, affects everyone. Money is the lubricant that connects it all together. The question is not whether the current institutions will collapse; the question is what will take their place. It is a question that demands a Christian response. One's faith (or lack thereof) is not the issue: I cannot imagine anyone who wishes for a return to monetary sanity (i.e., an ethical system) would disagree that the prospects for such a desired result will be furthered greatly if Catholics speak on the issue with a voice that is clear and confident.

Guido Hülsmann offers his conclusions: the current monetary institutions (central banks, paper money, and fractional-reserve banking) cannot be justified and should be abolished; such an act should be greeted as a restoration of monetary sanity and a humane economy. He admits that his conclusions are radical, but he refuses to hold back his views out of any "misconceived notions of temperance" (p. 7). He continues:

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. (p. 7)

As he discloses in the first lines of the preface, Dr. Hülsmann has intended for some time to "give a concise exposition of monetary theory, with special emphasis on the ethical … aspects of money production" (p. ix, emphasis added).

We are grateful that he did.


[1] Relevant citations are too numerous to list (such as a litany of articles by retired Professor Michael Rozeff, which can be found here), but a recent article by Philipp Bagus and Markus Schiml entitled "The Insolvency of the Fed" deserves special notice and closes with the statement, "The end of the experiment is getting closer".

[2] Hülsmann also reminds his readers, "Adam Smith and many of his followers have called economics a moral science, and rightly so" (p. 5).

[3] It must be acknowledged that claiming a paucity exists is not the same as saying the literature is completely void, as can be attested by those who are familiar with the literature produced by the ethics-based approach of institutes such as Mises, Acton, Rockford, and others.

[4] The level of anger from fellow Catholics that Dr. Woods endured for positions he took in this superb book indicate how difficult it is to have a rational discussion on topics that mix economics, social justice, and Catholic doctrine.

[5] The economic system known as distributism is generally credited to the writings of two popular English Catholics in the early 20th-century, Hillaire Belloc (e.g., The Service State, Economics for Helen, An Essay on the Restoration of Property) and G.K. Chesterton (e.g., What's Wrong With the World, An Outline of Sanity, Utopia of Usurers).

[6] See the writings of Father Heinrich Pesch, S.J. (e.g., Compendium on the National Economy) and those of his American translator, Dr. Rupert J. Ederer (e.g., Economics as if God Matters)

[7] See two books by Rev. Denis Fahey, C.S.Sp., The Mystical Body of Christ and the Reorganization of Society (first published in 1945) and Money Manipulation and Social Order (first published in 1944).

[8] One can only imagine a headcount at Catholic schools and chanceries to determine the number of loud, uncompromising proponents of seamless garments when it comes to Catholic social teaching, who are in open dissent or outright rejection of Catholic moral teaching on such issues as abortion, contraception, divorce, and human sexuality.

[9] See City of God, book 11, ch. 25. With regard to the three-part format used in The Ethics of Money Production, it may be no mere coincidence that the great Bishop of Hippo and Latin Doctor of the Church elaborated in the same chapter of book 11, "Then again, there are three things which every artificer must possess if he is to effect anything — nature, education, and practice. Nature is to be judged by capacity, education by knowledge, and practice by its fruits." Dr. Hülsmann proves up to the task set for him by Augustine. He demonstrates the natures (i.e., capacities) of both natural money and fiat money, leads the reader to an education (i.e., knowledge) of both practical and ethical considerations, and uses brief sketches of history to judge the fruits of privileged monetary systems.

[10] Readers interested in an introduction to the shortcomings of these systems — in particular that of Fr. Pesch and other German economists in the late 19th and early 20th centuries — are encouraged to begin with the work of Dr. William R. Luckey of Christendom College, including this paperDownload PDF and this lecture.

[11] Frank J. Sheed, the great 20th-century Catholic apologist, author, publisher, pamphleteer, and street-corner evangelist, produced brilliant works on morality, theology, and sociology, not the least of which is the all but forgotten classic Society and Sanity. Some of his books are still in print (e.g., Map of Life, Theology and Sanity, To Know Christ Jesus), but his influence has been mostly buried in the post–Vatican II rubble.


Contact Michael King

Michael King is chair of the School of Business at Benedictine College in Atchison, Kansas.