MoneyandMorality:TheChristianMoralTraditionandtheBestMonetaryRegime ThomasE.Woods,Jr. TheeconomicdifficultiesofthepastseveralyearsintheUnitedStateshaveledmoreand morepeopletotakeanactiveinterestinmonetarypolicyandin theFederalReserve System.Manypossessaninchoatesensethattheremustbeaconnectionbetweenpast monetarypolicyandourcurrentdoldrums.Atatimewhenmonetarymattersare attractingsomuchattention,therefore,itmaybeparticularlyopportunetoconsiderthe moraldimensionsofthepresentmonetaryregime.Asweshallsee,currentmonetary policyleavesmuchtobedesiredwhenevaluatedagainsttheChristianmoraltraditionand thethoughtofseveralChristianhistoricalfigures.Tostateitmorebluntly,thecurrent monetarysystemfailstocomplywitheventhemostbasicChristianmoralrules,suchas theprohibitionsagainsttheftandfraudandthecalltopracticebiblicalfinancial stewardship.

ThegreatChristianthinkersofthelatemedievalandearlymodernperiod typicallycondemnedthetypeofmonetarydebasementthathasoccurred,andcontinues tooccur,inthecurrentmonetarysystemoftheUnitedStatesofAmerica. Thismonetarydebasementtaintsourpresentmonetarysystemprimarily becausethe currencyweusepossessesnopreciousmetalbacking.In1933,thefederalgovernment removedthegoldbackingfromourcurrency(whichuntilthattimehadbeenconvertible intogold)andforcedpeopletoturnovertheirstocksofgold.Thiswasnothingotherthan amassiveactofconfiscation.Thepapercurrencycontinuedtocirculateoutofhabit,so accustomedhadwebecometoitsuse.Butithadbecomeconvertibleintonothing.Its lackofconvertibilitymadeitwhateconomistscallfiatmoney,asopposedtothe commoditymoneywehadwhenourcurrencywasconvertibleintogold.Thisisalla nicewayofsayingthatthegovernmentunabashedlyviolatedGodscommandmentnotto steal.Wecanhardlybesurprisedthatsuchdisobedienceshouldhavehadsuchregrettable consequences. Thebestknowndifficultywithafiatcurrencyisinflation.Inflation,wronglydescribed bymanypeopleasrisingprices(amereeffect ofinflation),referstoanincreaseinthe amountofpapercurrencyincirculation.Withrespecttocommoditymoney,inflation referstoanincreaseincurrencythatdoesnotcorrespondtoanincreaseinthecommodity intowhichthemoneyisconvertible.Thus,commoditymoneyprovidesaninherentcheck againstinflation.Theeverpresentdemandbydepositorsforredemptionofbanknotes intoacommoditysuchasgoldpreventsanysustainedinflationofthemoneysupply, sincetheissuinginstitutionfindsitselfunabletosettlealltheinevitableclaimsfor conversionoftheinflatednotesintogold.Goldpossessestheadvantageofbeingfinitein quantityandimpossibletocounterfeit.Butifdepositsareredeemableinnothingbut worthlesspaper,acrucialcheckagainstmonetaryexpansionhasbeenremoved.Thereis practicallynolimittotheamountofpaperthatcanbeprintedandstampedasmoney. Animportantiffrequentlyoverlookedfeatureofinflationisitsdistributioneffects. Inflationofthemoneysupplyleadstorisingpricesor,attheveryleast,topricesthatare higherthantheywouldhavebeenintheabsenceoftheinflation.Butthepriceincreases

associatedwithinflationdonotoccurallatthesametime,reachingallgoods instantaneouslyacrosstheentireeconomy.Thenewmoneydoesnotentertheeconomy inauniformwayrather,itaffectseveryoneindifferentdegreesatdifferenttimes.Some getthenewmoneyearlierthanothers.Thosewhoreceivethenewmoneyfirstareableto spenditinaneconomyinwhichpriceshavenotyetrisen.Thosewhoreceivethenew moneyfromitsfirstrecipients,inturn,findthemselvesatanadvantagevisavisthose whohavenotyetreceivedit,becausepriceshavelikelynotyetrisentoalevel commensuratewiththenewquantityofmoney. Asthenewmoneyworksitswaythroughtheeconomy,itraisesthepricesofthegoods thatitsrecipientspurchase.Thosewhoreceivethenewmoneylast,afterithasworkedits waythroughouttheeconomy,sufferthebruntofthedistributioneffect,becauseallthis time,withouthavingcomeintopossessionofanyofthenewmoney,theyhavehadto paythehigherpricesthatthenewmoneyhasbroughtabout.Wenowseethatthe distributiongainsofthefirstpossessorsofthenewmoneyhavecomeattheexpenseof thosewhoreceivedthemoneyonlymuchlater.IfthereisaprincipleofChristian moralityaccordingtowhichsuchinsidiouswealthredistributionisacceptable,itisnot knowntothepresentwriter. Inflationalsohurtsthoseonfixedincomesandthosewhorelyfortheirsustenanceon accumulatedsavings.Ineithercase,thesamenominalamountofmoneypossessesless realpurchasingpowerasaresultofthegovernmentsincreaseofthemoneysupply,and practicallyeveryoneparticularlythemosteconomicallyvulnerabletherebybecome thevictimsofindirecttheft.Thus,thegovernmentsillicitconfiscationhasbegottenmore theft,visitingtheharmfuleffectofthissintothethirdandfourthgeneration. Furthermore,inflationalsothrowsbusinesscalculationintochaos.Underaninflationary regime,businessesfinditdifficulttodistinguishbetweengenuineandillusoryprofits. Basingthemselvesonnominalexpenditureandrevenuefigures,theytendtooverestimate profits,mistakingtheconsequencesofaninflatedmoneysupplyforanincreaseinreal profits.Itisstandardaccountingpracticeforanassetscosttobereckonedastheamount ofmoneyspenttopurchaseit.Butwheninflationoccurs,thepriceofreplacingthatasset whenitwearsoutrises.Thus,inflation causesbusinessestooverstatetheirprofits, becauseitencouragesthemtonotproperlytakeintoaccountthenowhigherreplacement costsoftheirassetsandeventospendandinvestmoneythattheyactuallyneedjustto maintaintheircapitalstock.In otherwords,bymisleadingbusinessesintoafalsesenseof prosperity,inflationcancausebusinessexecutivestoengageininadvertentcapital consumption,therebycausingexecutivestocommitfraudwhetheradvertentlyor inadvertentlywhenpreparingtheirfinancialstatements.Ontheotherhand,commodity monies,asHansSennholzhaspointedout,canactuallyfacilitateeconomiccalculation, becausetheirquantitiestendtochangesoslowly.Inflationaryactivitythusprofoundly disruptsthecommongood nomatterhowthatconceptisdefined. Inflationsinterferencewithbusinesscalculationisnotinsubstantial.Asthedistribution effectsofinflationworktheirwaythroughtheeconomy,businessfirmsmayseethe pricesofthegoodstheyproducebegin torise.Ifentrepreneursbelievethattheseprice

risesrepresentapermanentphenomenon,theyareliabletoexpandproduction,investing inadditionalcapitalandlabor.If,ontheotherhand,theybelievethattheseprice increasesarecausedsimplybyinflationandarenotlikelytobelonglasting,theywill refrainfromrearrangingresourceallocationinlinewiththerisingprices.Thetroubleis thattheyhavenowayofknowingwhethergivenpriceincreasesarecausedbygenuine increasesindemandorbyinflation.Theyhavenowayofknowingthespecificpathof theinflationasitworksitswaythroughouttheeconomy,andwhethertheirownfirmsare partofthatpath.Inflation,writesStevenHorwitz,isamajordragoneconomic growthbecauseitunnecessarilycomplicatestheentrepreneursjobandleadstoerrorand wastedresources.Thus,inadditiontoencouragingfraud,inflationdiscouragesthe practiceofbiblicalfinancialstewardship. Thisdiscouragementofbiblicalstewardshipextendsbeyonddistinctlybusiness environments.Themillionswhoseethemselvesdeprivedofsecurityandwellbeing becomedesperate,explainsLudwigvonMises.Therealizationthattheyhavelostall ormostallofwhattheyhadsetasideforarainydayradicalizestheirentireoutlook.They tendtofalleasypreytoadventurersaimingatdictatorship,andtocharlatansoffering patentmedicinesolutions.Theseeffectsareespeciallystrongamongtheyouth.They learntoliveinthepresentandscornthosewhotrytoteachthemoldfashionedmorality andthrift(emphasisadded).Inflationtherebyencouragesamentalityofimmediate gratificationthatisplainlyatvariancewiththedisciplineandeternalperspectiverequired toexerciseprinciplesofbiblicalstewardshipsuchaslongterminvestmentforthe benefitoffuturegenerations. Beforemovingon,letusconsideroneadditionalpointaboutafiatcurrency.One implicationofMisesregressiontheorem(whichhedevelopedin TheTheoryofMoney andCredit,1912)isthattheonlywayafiatmoneycanariseisbymeansofgovernment confiscationofthepreciousmetalbackingofexistingcommoditymoney,thereby transformingthepapercurrency,atonetimeconvertibleintoapreciousmetal,into worthless,irredeemablepaper.IfMisesisright,thispointmustsurelyenterourmoral calculusiffiatmoneycancomeaboutonlyasaresultofmassivegovernment confiscation,itsmoralstatusmaywellbefatallycompromisedonthatgroundalone. Beyondinflation,averyseriousproblemassociatedwithfiatmoneyistheboombust cycle.ItwasLudwigvonMises(18811973)whodevelopedthesocalledAustrian theoryofthebusinesscycle,andhisstudentF.A.Hayek(18991992)whose elaborationsonitwonhim theNobelPrizeineconomicsin1974. Spaceconsiderationsprohibitallbutthebriefestoverviewofthetheoryhere,butwhat followsmayserveatleastasanintroductorysketch.WhentheFederalReserveengages inmonetaryexpansionthroughcreditmarkets(tostimulatetheeconomy,soweare told),theeffectistolowertheinterestrate.Normally,theinterestratecoordinatessaving andinvestment.Whenpeoplesavemore,theinterestrategoesdown.Thelowerinterest rate,inturn,alertsentrepreneurstothecorrespondinglyincreasedavailabilityoffundsto beborrowed.Theincreasedsavingalsoreflectsthepublicsincreasedwillingnessto deferconsumption.This,naturally,iswheninvestmentprojectsmakethemostsense.

Also,thelowerinterestrategivesadisproportionatestimulustohigherorderstagesof productionlikeminingorrawmaterialsthatis,stagesfurthestawayfromfinished consumergoods. TheproblemwiththeFedsstimulusisthatbyartificiallyloweringtheinterestrateit makesinvestorsthinkthatthepublicismorewillingtodeferconsumptionthanitactually is.Itmakesinvestorsthinkthepublichassavedmorethanitactuallyhas.Butthe publicssaving/consumptionpreferences,inthisscenario,havenotchangedatall. Businessexecutivesareledtoengageinanexpansioninhigherorderstagesof productionthatiscompletelyatoddswiththepublicsunchangeddesireforconsumption inthepresent.Theybeginprojectsthatcannotallbecompletedgivenexistingresources. Theresultingmisallocationofcapitalandoveralleconomicdiscoordinationeventually bringtheartificialboomtoanend. Misesanalysisreinforcesthemoralclaimofapuregoldstandard,becauseifallmoney wereconvertibleintogoldon demand,nocentralbankwouldbeabletoengageinthe kindofcreditmanipulationandstimulusthatleadstothebusinesscycleinthefirstplace. Surelyifaparticularmonetarysystemcanavoidtheimpoverishmentanddislocationof recessionsanddepressions,thisfactoraloneshouldspeakvolumesinitsfavor. Moreover,theAustriantheoryalsocontainscriticallyimportantinsightsforpropermoral analysisandshowswhymoraljudgmentisliabletogodreadfullywrongifundertakenin ignoranceofthetruecausesofthebusinesscycle.Countlessmoralistsaretobefound duringrecessionsanddepressionscallingforvariousstatemeasuresintendedtoalleviate thedislocationsassociatedwiththedownturn.Sincethistopiciswellcoveredinthe Austrianliterature,letusconfineourselvestoonetypicalsuggestion:emergencyaid, fromlowinterestloanstooutrightsubsidies,tofailingbusinesses.AstheAustrian analysismakesclear,thisispreciselywhatshouldnotbedone,becauseitonly perpetuatesthecreditinducedmisallocationofcapitalintotheindefinitefuture. Liquidationofthemalinvestmentsincurredduringtheboommustbeallowedtocontinue unimpeded,lesttheinevitableliquidationprocessanditsattendantsufferingbe indefinitelyprolonged. Infact,thepolicyimplicationsoftheAustriantheoryareobvious:thegovernmentshould donothingatall.Anyattempttolendsupporttomalinvestedcapitalonlyobstructsthe recovery.Economicallysoundfirmsareforcedtocontinuetocompetewiththese unsoundfirmsforthescarceresourcestheyneed.Supportforfailingbusinessesthus tendstoimpoverishthosefirmsthatarecapableofemployingtheresourcesoftheirless successfulcounterpartsmoreefficientlyandmoreinlinewith consumerdemandsand timepreferencesbuttheyareimpededfromdoingso.Governmentstimulusto consumption,whichremainstheconventionalwisdomdespiteitsrepeatedfailure(asin Japan,whichhasbeenintheeconomicdoldrumsaftersomefourteenyearsof consumptiondrivenpolicy),isatleastasbadanideaassupportingfailingbusinesses. Businessdownturnsarenotcausedbyinsufficientconsumption.Inacertainsense,a downturniscausedbytoomuchconsumption,makinglongterminvestmentprojects correspondinglyunprofitable(becausetheywereoutoflinewithconsumerdesiresto

consumeinthemoreimmediatefuture).ThisiswhyMurrayRothbardsuggestedthatthe mosthelpfulpathtopursueatsuchatimeiscertainlynotmoreconsumption,butmore saving,tovalidatesomeoftheexcessiveinvestmentsoftheboom. Theimportanceofeconomicknowledgetomoralanalysisis,therefore,amplyreinforced inthecaseofthebusinesscycle.Withoutanadequateknowledgeofthecausesandcures of thecycle,someonetrainedinmoralphilosophyortheologycannotbesurethatheis notinfactrecommendingacourseofactionthatwillonlyexacerbatetheproblemshe aimstosolve.OneprominentCatholicwriterduringthe1930swrotethatthecauseof the GreatDepression,supposedlysocomplex,couldbedistilledtooneword:greed. Suchpronouncementsare,tosaytheleast,unhelpful.Evenifgreedmagically disappeared,misleadingsignalstoinvestorswouldstillleadtothemisallocationof capitaldescribedintheAustriantheory. Thepracticeoffractionalreservebanking,whichlayattheheartofmodernbanking systems,alsocarriesmoralimplications.Afractionalreservebankisonethatlendsout muchofitsdemanddeposits(thatis,fundsthatitsclientsareentitledtoatanymoment, ondemand)atinterest,trustingthatacriticalmassofitsclientswillnotdemandtheir moneysimultaneouslyandthatthemoneythebankskeepinreserveamerefractionof theirliabilitieswillsufficetomeetthedemandsofthosewhododemandtheirmoney. Banksthatengageinthispracticeareinherentlybankrupt.Ifalltheirclients simultaneouslydemandedthattheirdepositsbeturnedovertothem,thebankwouldbe forcedtoconcedeitsinability tomeetitsobligations.Theonlycaseinwhichitwouldbe morallylegitimateforadepositorsmoneytobetreatedastemporarilynothisownwould beinthecaseofatimedeposit,inwhichcasethedepositorwouldhavevoluntarily contractedtorelinquishcontroloverhismoneytothebankforasetperiodoftime, duringwhichthebankercoulddowithitashesawfit. Inmanycases,governmentshavegrantedfavorsandspecialprivilegestosuchbanks. Veryoften,fractionalreservebanks,underpressureforredemptionfromdepositors,have beenlegallypermittedtosuspendpaymenttotheirdepositorswhichmeanstheyare allowedtocontinueinoperation,demandingthattheirowndebtorsmeettheir obligations,whileatthesametimerefusingthejustclaimsoftheircreditors(i.e.,their depositors).Sometimesthisprivilegehaslastedyearsatatime.Nootherbusinessis allowedtooperateonsuchabasis,andthereisnoobviousmoraldifferencebetween bankingandanyotherbusinessenterprisethatshouldentitleittoexemptionfromthis basicstandardofmorality. Thelatescholastictheologiansweregenerallyunfavorabletowardfractionalreserve bankingaswell.Inthesixteenthcentury,suchtheologiansasLuisSaravadelaCalle, MartndeAzpilcuetaNavarro,andTomsdeMercadoarguedthatthedemanddeposit didnotamountcontractuallytoatransferofproperty,evenforatime,fromthedepositor tothebanker,andthatitwouldbewrongforthebankertoattempttoseekprofitby lendingoutdepositsthatweresupposedtobeavailabletodepositorsondemand.Evenin thecaseofsuchscholasticsasLuisdeMolinaandJuandeLugo,whosepositionwas ratherconfusedbutwhichappearedtofavortheprinciplethatthedepositorforfeited

somecontroloverdemanddepositstothebanker,amodernscholarsuggeststhatthey wouldneverthelesshaverejectedthefractionalreservesystemwhenpresentedwithallof itsimplications.Fr.BernardW.Dempseyhasshownthatonthebasisoftheirown principles,eventhesemen,facedwiththemodernsystem,wouldhavefavoredabanking systembasedononehundredpercentreservesorsomethingverymuchlikeit. Theissuesthatariseoverquestionsofmoneyandbankingservetoremindusofthe complementaryrolesofeconomics(apurportedlyvaluefreescience)andmorality. Withouteconomicknowledge,themoralistsadvicecanproveprofoundlymisguidedand evendestructive.Asoundmoralfoundation,inturn,isnecessaryforustoevaluate existingeconomicinstitutionsinlightofgenuineprinciplesofjustice. Insum,thebestmonetaryregime,fromthepointofviewbothofutilityandofChristian morality,isaonehundredpercentreservecommoditymoneysystem.Thissystemalone isfreefromallformsoffraud,requiresnoconfiscationofapersonsproperty,createsno disincentivestohonorourstewardshipresponsibilities,keepsthebusinesscycleatbay, andavoidstheimmoraldistributioneffectsanderosionofaccumulatedwealththat inevitablyaccompanyasystemoffiatmoney.Whatthismeans,inshort,isthatthat monetarysystemisbestwhichobservesthemostbasicmoralrules:Donotstealanddo notcommitfraud.ThiswasthemessageofthegreatChristianthinkersofthelate medievalandearlymodernperiod,whotypicallycondemnedmonetarydebasement,and itisamessagethattheirmoderndaycounterpartswoulddowelltoheed.

ThomasE.Woods,Jr.istheassociateeditorofTheLatinMassmagazine.Heholdsa bachelorofartsinhistoryfromHarvardUniversityanddoctorateofphilosophyfrom ColumbiaUniversity.Hisnextbook,TheChurchConfrontsModernity:Catholic IntellectualsandtheProgressiveEra,willbepublishednextyearbyColumbia UniversityPress.