Fiat Culture

Jӧrg Guio Hülsmann has given a fantastic lecture on the cultural and political consequences of fiat money as well a short article off of his book The Ethics of Money Production. All of which are highly recommended but if you only have time for the lecture/article it’s worth it. I would like to just highlight a few of the points he raises which I alluded to in my response to Russell Moore on payday lending.

Beyond the distasteful economic effects of the business cycle (which I plan to write on shortly) created by inflationary central banks printing money out of thin air there are serious cultural consequences of fiat money. A Fiat money system is when money is not an inherently valuable good which arises as a commonly useful medium of exchange, but an intrinsically useless arbitrarily mandated legal tender over which the state has a monopoly over supply. Which is to say unbacked paper money which can be printed in an unlimited supply by the government for its purposes. The main effect of this system for our concern is near permanent price inflation. As more and more money is created and enters the market through the banking industry money becomes cheap. As money, in the form of expanding credit, is loaned in greater and cheaper amounts the cost of goods rises (some goods more than others). This means that someone may have the same dollar amount in their savings account yet what it can buy has decreased. They have lost the purchasing power of money (PPM). Inflation is the dilution of the dollar bill with paper no less than the dilution of gold and silver with inferior metals so thoroughly condemned in the bible.

For many of us inflation is so constant and so permanent we assume inflation is a just a natural part of the economy. The price of everything always has and always will go up, right? Wrong. In a properly functioning free-economy with natural money prices tend to stay flat over time or to decrease. As firms become more efficient, more innovative, and more technologically advanced input costs decrease allowing them to become more competitive and to bid prices down. With natural money only as prices fall can it really be economical to invest in the mining and minting of whatever precious metals that are used in the market to make new money pushing prices back up slightly higher. What are the effects then of a fiat monetary system and the permanent price inflation it brings. While the most commonly thought of consequence is increased governmental debt and financing we must also focus on how it has changed individuals and businesses incentive structures and largely institutionalized moral hazard.

One factor is that it favors borrowers and spenders over savers. As Hülsmann explains

“In a free economy with a natural monetary system, there is a strong incentive to save money in the form of cash held under one’s immediate control. Investments in savings accounts or other relatively safe investments also play a certain role, but cash hoarding is paramount, especially among low-income families.”

Yet central planners and others government idealogues have deliberately strived at pushing people to spend and preventing savings or thrift in order “stimulate” the economy and boost aggregate demand, which they believe to be the driving force of the economy. This is false. Savings do not harm anyone or have a negative macroeconomic effect. Such saving “increases the purchasing power of money and thus gives greater “weight” to the money units that remain in circulation. All goods and services can be bought, and all feasible investments can be made with these remaining units.” Yet  Hülsmann states that “when there is constant price inflation, as in a fiat-money system, cash hoarding becomes suicidal.” Ordinary savings achieved by households spending less and setting that money aside becomes inadvisable.

The fiat money system then and more importantly the permanent price inflation it institutes instills and teaches us then to adopt a very short-term perspective. Our time preference therefore favors present consumption much than it otherwise would have. The goal becomes “to obtain credit as soon as possible and obtain revenue from that debt as soon as possible, because savings lose value if we just hold on to cash.” A penny saved becomes a penny lost in a fiat money system. “There is then a generalized rush into leverage in a fiat money system since debt- financed investment brings greater returns than savings in cash or equity-financed investments.” This is true of households as well as businesses. A regular blue collar worker with little knowledge of the stock market and perhaps zero knowledge of the funds and company he is investing is pushed toward using “financial products” simply to offset the loss of the purchasing power of his savings.

What happens is a general push in the economy towards financial markets and away from true production. Permanent price inflation great benefits financial intermediary services and banks since almost everyone becomes dependent on them either for a return on their savings or to finance their ventures since the price of capital goods rises so quickly during the boom in a fiat system.  This is not the same as the Austrian theory of the business cycle but things to exacerbate the problem. From the mid-nineties through the Dot com bubble and to the 2008 crisis more and more people and resources were pushed to the financial sector, into derivatives and other new financial products, and into the real estate market because the bubble had made it look so profitable. Yet each of these industries is not really truly productive in the real sense and their trajectories were not sustainable or in line with real economic growth.

The effect then of this over-dependence on banks and financial intermediaries as well as a diversion of labor and resources toward financial and bubbled assets means that there is less true entrepreneurs in the market. Fiat inflation reduces the number of independent innovative men who operate and risk their own money.

“As a general rule, any new product and any thoroughgoing innovation in business organization is a threat for banks, because they are already more or less heavily invested in established companies, which produce the old products and use the old forms of organization. They have therefore every incentive to either prevent the innovation by declining to finance it, or to communicate the new ideas to their existing partners in the business world.”

This is a point few Austrian economist have made. While fiat currency and central banking does allow established firms with easy access to credit to be reckless (since it is not their equity being invested or risked), it also causes banks to be more conservative than they would otherwise be in regards to more innovative entrepreneurs.

“The fundamental fact is that inflation does not bring into existence any additional resource. It merely changes the allocation of the existing resources. They no longer go to companies that are run by entrepreneurs who operate with their own money, but to business executives who run companies financed with credit.”

This is the rub of the problem. Over leveraged business and increasing household debt throws entire populations in financial dependency.

“The fact that the fiat money system pushes us into riskier investments also increases dependency on others because one must depend on the good behavior of those on whom the value of our investments depend. Similarly, the stronger the level of debt the stronger is the selfish concern about the behavior of others who may owe us money or affect the value of our assets. So fiat money creates an attempt to control others through the political system.”

Money and financial questions come to play an exaggerated role in the life of man. The average joe, carpenter, and plumber desperately pay attention to capital markets, watch financial news, and monitor the price quotations on the financial markets.

None of this is even to speak of the fact that fiat money and central banking is simply wealth redistribution. The lowest rung of the economic ladder will always be playing catch up. Their wage increases will always be lagging behind price inflation. They are already having to pay the higher prices, created by the increased money expenditure of the early users of the new money, out of their previous lower income.

While nearly every industry is scrutinized and brought through the ringer of business ethics and their own cultural impact the question of our money itself seems to have escaped us. Inflation is fraudulent theft. It is sin and it has serious cultural consequences. Christians who justify inflation and central banks can do so only on utilitarian grounds, and false grounds at that. It is a violation of the eighth and ninth commandment. Money is not the same thing as wealth. We cannot print prosperity.

“he who earns wages does so to put them into a bag with holes.” Haggai 1:6

“Hear this, you who trample on the needy and bring the poor of the land to an end…that make the grain measure small and the shekel great and deal deceitfully with false balances, that we may buy the poor for silver” (Amos 8:4-6)

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