Monetary Sins:

Three Ethical Problems of Monetary Manipulation by the State

Brian Douglass
The Nature of Money in the Western Tradition

Without money of some form, most trade would stop and people would be reduced to the

problematic system of barter. Despite its great importance and daily use in our lives, the ethics behind

money is seldom seriously considered.

In his consideration of money, Aristotle viewed it as a natural creation of man as a result of the

problems created by barter.1 Further, he saw it as a means to an end and not as a means in itself, that is

money is to him simply a tool for exchange.2 With this in mind, Aristotle condemns usury as it “makes

a gain out of money itself” rather than from the use to which money is put.3 To Aristotle, sound money

was an issue of justice, which is why it is discussed in both Nicomachean Ethics and Politics. Because

money was created as a result of dealings between men, it should be clear that justice in trade should be

a natural goal for the virtuous man. Aristotle refers to justice in trade as “reciprocation.”4 Since

Aristotle sees money as simply a convention used to simplify trade between two men, we see other

ethical implications related to just dealing and money which would be developed by later thinkers.5

The Middle Ages saw the support of sound money originate from a number of quarters. At the

time, the most popular method of creating unsound money was debasement by the issuing rulers for

their own gain.6 The incentive to the minting authority is quite obvious. By reducing the precious metal

content of his coins, the ruler could make quite a profit for himself, as will be discussed below. The

problem is that this is, of course, quite dishonest. There are clear Biblical condemnations of the practice

of false weights, which certainly apply since money was given value in terms of the precious metal

1. Politics, I, 9.
2. Ethic. V, 14.
3. Politics, I, 9.
4. Ethic. V, 6.
5. Ethic. V, 11.
6. Jörg Guido Hülsmann, The Ethics of Money Production, (Auburn: Ludwig von Mises Institute,
2008), 90.
content of the coin.7 In addition to the clear Biblical denouncements of such schemes, Innocent III

condemned debasement of coins in his 1199 Papal Bull Quanto.8 Perhaps the most extensive look at

the ethics of monetary manipulation came in the form of Nicholas Oresme's De Moneta in which he

condemns a number of schemes that continue to be practiced to this day, including

debasement/devaluation, and the impact of such acts on both the Prince and the community.9 The

Church took a stance against the State and its attempt to profit from exploiting their power over money

through various schemes that were nothing short of theft, and thus a violation of God's Law.

Nicholas Oresme states in De Moneta that money does not belong to the government that

creates it. While it is the “duty of the prince to put his stamp on the money for the common good,” (to

provide some evidence to the validity of the content of the coin) “he is not. . . the owner of the money

current in his principality.”10 To support this statement, Oresme says in a line clearly influenced by

Aristotle, that “money is a balancing instrument for the exchange of natural wealth. . . [and] it is

therefore the property of those who possess such wealth.”11 While the issue of ownership of money

seems to have been settled by the fourteenth century, all the implications of this statement have some

how escaped the notice of monetary authorities down to our present day.

In the following sections, I will discuss three of the more common and destructive sins against

the owners of money and property: government monopoly of production and legal tender laws,

debasement and inflation relating to currency manipulation, and fractional reserve banking. All three of

these are key features of the modern monetary system. However, it will be made clear that not only are

these three forms of monetary manipulation unjust, but also that the injustices and consequences were

7. Leviticus 19:35-6; Deuteronomy 25:13-6; Proverbs 20:10, 23.

8. Hülsmann, 72-3n20.
9. Nicholas Oresme, “De Moneta,” The De Moneta of Nicholas Oresme and the English Mint
Documents. V.H. Galbraith and R.A.B. Mynors, eds, (New York: Thomas Nelson and Sons, 1956)
http://mises.org/books/oresme.pdf.
10. Oresme, 10.
11. Oresme, 10.
clearly described centuries ago.

Government Monopoly and Legal Tender Laws:

The first monetary sin to be discussed is the double issue of government monopoly and legal

tender laws. It is possible to consider these two legal structures as one issue because in all present cases

both are applied in unison to provide a single, beneficial effect for the State. As Oresme observed, it

was a universal feature of ancient coins to bear the mark of the ruling Prince. One of the duties of the

State was taken to be that of the minting of coins and the guarantor of standards of measure. These two

duties, Oresme implies, are for the good of society. Presumably, the government should be trustworthy

and issue only a guaranteed, high quality coin. In the Constitution of the United States, we see that the

Congress is tasked with the coining of money and fixing of standards of weights and measures.12 As

long as the issuing authority can be trusted, then it does benefit society to have an easy way of telling

the legitimacy and value of coins.

What happens, though, if the Prince wants to be dishonest and begin to manipulate his coins? If

he were to devalue the coins in order to benefit himself, then a number of consequences would follow.

First of all, people would begin to hoard the old coins while only using the new, debased coins in

trade.13 Secondly, it is possible that an alternative money may be created to replace the devalued coins,

possibly the coins of another government that has not devalued their coins. In order to prevent this, the

government enacts legal tender laws and establishes a monopoly on the coining of money.

The impact of monopoly over money production is quite obvious. They prevent any alternative

monies from being created in the country. Even today, while there are certain so-called local currencies,

such as the BerkShares, they are all backed by Federal Reserve Notes.14 Groups who have been more

aggressive and have tried to create metal-backed alternative currencies have recently faced government

12. U. S. Constitution, Article I Section 8.

13. Hülsmann, 135.
14. BerkShares, Inc. http://www.berkshares.org/.
crackdowns.15 While it is clear that the government gains a number of benefits from this arrangement,

the question remains, if the government is not the owner of money (as Oresme explained), then what

gives them a right to impose limits on the forms of money that citizens may use? It seems to me that

there is no difference in this monopoly than if the government were to suddenly dictate that no one may

own or operate any non-General Motors vehicle. If this were decreed, there would be immediate

denouncements of this tyranny and yet the same idea, applied to money, is given very little press.

Legal tender laws are somewhat more complex in their consequences. One of the major

problems pointed out by Hülsmann is that legal tender laws (especially when combined with legal

monopoly power) eliminate all “technical obstacles to an infinite debasement of coins.”16 As he

explains, “any coin, however much it is debased, must be accepted as payment of its full nominal

amount.”17 This is exactly what has happened to modern coins and paper money. However, there is a

danger to granting legal tender laws. Without control of the minting process, the government might just

initiate a “race to the bottom” as competing mints try to devalue their coins as quickly as possible.

Hülsmann notes that this in fact happened under Fredrich III in the mid-fifteenth century.18

Other problems with legal tender laws seen with monetary metal coins listed by Hülsmann

include an implicit deflation caused by the hoarding of old, more valuable coins once the market

recognizes what is occurring.19 This cannot be avoided completely even by governments with legal

tender laws and it explains the historical secrecy surrounding government devaluations.20 Secondly, he

notes that legal tender privileges for debased coins tend to benefit debtors over creditors, due to the fact

that debts may now be paid in coins that are worth less than the value of the original debt.21 Since

15. "Government vs. Liberty Dollar," The Liberty Dollar, http://www.libertydollar.org/ld/legal/raid.htm.

16. Hülsmann, 134.
17. Hülsmann, 134.
18. Hülsmann, 136n11.
19. Hülsmann, 135.
20. Hülsmann, 135.
21. Hülsmann, 135.
governments tend to have large debts, it is clear why legal tender laws combined with debasement is a

favored tactic of governments historically. The third problem cited by Hülsmann is that international

trade tends to be decreased in the case of debased coins in one nation.22

In the case of banknotes, there are other implications that follow from legal tender laws. Once

fractional-reserve banknotes entered the scene, governments could avoid the deflationary impacts

described above while inflating the currency supply to an even greater extent then was possible when

all coins were tied to metal content.23 Of course, there was always the risk of bank runs and not being

able to meet all creditors' demands for bullion.24 For a government, the benefits of legal-tender

fractional reserve notes were quite promising. The greater extent of inflation possible meant a rise in

tax revenue without the negatives listed above with debased coins.25

With the arrival of modern, debt-backed paper currency, the benefits to the State of legal-tender

laws are made quite clear. We have essentially completed the race to the bottom in terms of the natural

value of our money, and yet the coins and notes must be accepted for the nominal value given to them.

Inflation potential is virtually unlimited as there is no constraint imposed by redemption of notes for

bullion. Hülsmann notes that credit money, due to the implicit default risk, would likely have a very

small role on the free market.26 However, legal tender laws actually force people to accept debt money

and the same reasons that make it inferior to natural money make it of great benefit for the issuing

party, as will be further discussed below.27

The combination of legal tender laws and government monopoly of money production are the

keys to the State attempts throughout history to benefit at the expense of citizens. Without externally

imposed control over the legal money acceptable for payment, the market would tend to reject unsound

22. Hülsmann, 135.

23. Hülsmann, 137-8.
24. Hülsmann, 138.
25. Hülsmann, 138.
26. Hülsmann, 138.
27. Hülsmann, 138-9.
money, even those created by the government. No person drawing up a contract would willingly write

one that allows them to be paid with an lesser value of money in the future. Yet, this is the consequence

of legal-tender laws. In themselves, both monopoly power and legal tender laws place impediments on

the market, which is something which may only be permissible in the case of extreme situations.

However, in this case, it is clear that the real beneficiary is the State, and the other market participants

tend to be forced to accept some very negative consequences. Thus, there can be no justification from a

utilitarian view of imposing limits on the market. Further, both features are de facto limitations on the

use of private property in order to gain benefits at the expense of the legitimate property owners.

Debasement, Devaluation, and Inflation: Government Theft

The next monetary sin engaged in by the State can be broadly termed debasement or

devaluation of money. When examined with metal coins, the ethical issues involved are clear. If, for

example, a Prince issues a coin which contains one ounce of gold. At some later point, he decides to

keep the same look to the coin, but perhaps it will only contain a quarter ounce of gold. Clearly, this

debasement is to great advantage for the Prince. Not only is there a resulting inflation in the amount of

money he can now produce, especially if he collects the old, one-ounce coins in taxes, but he can also

repay his debts at a lower cost than he would have been able to before. However, it is also quite clear

that this procedure is highly dishonest and immoral.

Oresme condemns what he terms the “definite alteration of the weight or quantity of money

without any change of name or value” quite severely in De Moneta.28 He states that

such a change is plainly unlawful, especially in a Prince who cannot do it without disgraceful
injustice. Because, in the first place, the Prince's image or superscription is placed by him on the
coin to guarantee the weight and standard of the material, . . . if the weight is not true, this is at
once seen to be a foul lie and a fraudulent cheat. . . . Can any words be too strong to express
how unjust, how detestable it is, especially in a prince, to reduce the weight without altering the

28. Oresme, 19.

 mark?29

In addition to the fraud involved, Oresme also declares such an act to be theft stating that “he

would receive money of good weight, re-coin it and pay out coins of short weight.”30 The Bishop then

declares that this act is an “abomination to the Lord” citing Scripture to support his denouncement of

the act of debasement.31

Hülsmann also notes that because it was impossible for the mint to immediately replace old

coins with new, debased coins, such an act was likely to create, in the short term at least, a deflation of

the money supply.32 As people realize that the new coins are of less metal value than the old, they have

an incentive to hoard them and remove them from the money supply. To avoid problems associated

with such deflation, it is to the Prince's advantage to make the transition as secretive as possible.

Oreseme is of the opinion that no justification is possible for such an act.33 He notes that “the

amount of the prince's profit is necessarily that of the community's loss” and cites Aristotle when he

says that “whatever loss the prince inflicts on the community is injustice and the act of a tyrant and not

of a king.”34 Not satisfied, he continues that the Prince is not to be believed if he claims that the profit

will be used to the “public advantage” calling this the “tyrant's usual lie” and saying that “he might as

well take my coat and say he needed it for the public service.”35 There is no justification for such an

immoral act, which Oresme clearly sees as theft. To drive home his point, he quotes Saint Paul as

saying that “we are not to do evil that good may come.”36 In an interesting comment, Oreseme holds

debasement to be a worse and more unnatural sin than usury, stating that

there are three ways in which profit may be made from money, without laying it out for its

29. Oresme, 19.

30. Oresme, 20.
31. Oresme, 20.
32. Hülsmann, 135.
33. Oresme, 24.
34. Oresme, 24.
35. Oresme, 24.
36. Oresme, 24.
 natural purpose; one is the art of the money changer, banking or exchange, another is usury, a
third alteration of the coinage. The first way is contemptible, the second bad and the third
worse.37

Clearly, this explanation is heavily rooted in Aristotle, but Oresme claims that Aristotle himself did not

comment on debasement because “in his times such wickedness had not yet been invented.”38

Oresme was also concerned with the impact of devaluation under what we would call

government monopoly and legal tender laws on the good of society. Noting that if the Prince is allowed

to make a small change that he (and his heirs) would soon find themselves making more changes,

“because human nature is inclined and prone to heap up riches when it can do so with ease.”39

Eventually, the Prince would be able to “draw to himself almost all the money or riches of his subjects

and reduce them to slavery.”40 The end result of rampant inflation is total bankruptcy of the people. Of

course, for the one instigating the bankruptcy, there are benefits. At least until the people overthrow the

Prince.

This is a very sound and scathing critique of the debasement of money by the issuing Prince.

However, how does this critique apply to today's system of debt-based fiat paper currency? As I shall

show, nothing has really changed.

With the creation of debt-based banknotes, as opposed to either fully-backed or partially-backed

banknotes, we have completed the race to the bottom of debasement. The present melt value of all

commonly used, legal tender coins and notes created in the United States today is greatly below the

nominal value granted them by government decree.41 Since the suspension of redemption of banknotes

by the Federal Reserve System in 1971, the U.S. dollar has been completely paper. It has no exchange

value for gold or any other metal.

37. Oresme, 27.

38. Oresme, 27.
39. Oresme, 24.
40. Oresme, 24.
41. Alec Nevalainen, Coinflation.com, http://www.coinflation.com.
 One of the major constraints on past monetary systems is no longer imposed upon the Federal

Reserve. They cannot go bankrupt since they do not have to cover their banknotes with deposits of

gold. Both the benefits to those controlling the Federal Reserve and the problems presented to the rest

of us by this situation are fairly obvious. On one hand, the government never has to worry about paying

off its debt. The cost of “printing up” a few more banknotes is essentially zero with the existence of

electronic transactions. Even physical paper money does not entail a very large cost. There certainly is

very little risk of the “mines” running out of paper and ink any time soon. Instead of the limitation

imposed by the need to cover their banknotes, the Federal Reserve is instead limited only by the

potential instability and possibly revolutionary turmoil created by hyperinflation should they “print”

too much.42 Because of the nature of our current monetary system, the issue of concern from an ethical

perspective is not debasement (in reality, we have already lost that battle), but rather inflation.

In his essay, “The Case for a 100 Percent Gold Dollar,” Murray Rothbard states that “the natural

tendency of the State is inflation.”43 Inflation entails the same consequences as the debasement of metal

coins. The market becomes increasingly flooded with paper banknotes (or their electronic equivalent)

and thus the value of existing banknotes is decreased. Unlike when metal coins were used as money,

there is no way to attach greater value to one banknote over another in the way that one could keep old

pre-debasement coins to melt down, the addition of new bills immediately decreases the value of all

other bills in circulation. Monetary inflation, because it entails a decrease in value of existing reserves,

decreases the value of all market participants’ money. Since, as Oresme explained, money is our

property, this entails a nearly undetectable theft. The fact that this process can be carried out much less

obviously, because no coin needs to be changed and re-minted, makes the nature of the sin even more

insidious.

42. Hülsmann, 165.

43. Murray N. Rothbard, The Case for a 100 Percent Gold Dollar, (Auburn: Ludwig von Mises
Institute, 2001), 38.
 Money creation is a very profitable enterprise for the State and much easier then producing

other types of goods. It is much harder to detect in everyday life than raising taxes, which allows the

State to gain further benefit while reducing the risks associated with angering the populace.

Other ethical problems also result from inflation of fiat paper currency. Debtors (particularly

government debtors) will benefit from inflation at the expense of lenders. While this is generally

accounted for through interest rates, the existence of uncertainty created by an immoral act does not

seem like a component of an ethical, sound market. Further, through the government manipulation of

inflation via actions taken by the Federal Reserve, bubbles can be created, through increased

malinvestment, which eventually leads to recessions and market crashes. The negative impact on

human life, as well as property, presented by these situations should be obvious from recent events.

Inflation (as with debasement of coins) always benefits the first people to receive the new

money more than those to whom it trickles down.44 Hülsmann points out that this is also true of sound

money whenever the money supply is expanded, such as the case would be if more gold is added to a

nation’s treasury.45 However, in the case of inflation, the benefits come from illicit actions and

violations of property rights.46 This leads him to classify the alleged gains from such inflation in the

same class as the benefits of “robbery and fraud” and argues that inflation is an example of an act

which is intrinsically bad.47 This conclusion seems to be in keeping with Oresme's argument quoted

above.48

It seems clear that the inflation of the currency, and unsound money in general, is of great

benefit to the State for a number of reasons. As Oresme noted, governments will always try and justify

their actions. The Federal Reserve excuses its manipulation as a means “to provide the nation with a

44. Hülsmann, 100.

45. Hülsmann, 100.
46. Hülsmann, 100.
47. Hülsmann, 100n15.
48. Oresme, 24.
safer, more flexible, and more stable monetary and financial system.”49 The devaluation or debasement

of money, culminating in the modern experience of easily inflatable fiat paper currency, can clearly be

seen to be a sin of a very serious nature. Owing its continued existence to legal tender and monopoly

laws, inflated and devalued money of any kind, and un-backed paper currency in particular, arises from

a violation of property rights and the government furthers its own ends through additional property

rights violations, dishonesty, and outright theft of wealth through inflation of the money supply. The

fact that it is all justified in the name of the public good simply adds insult to injury.

Embezzlement by Any Other Name: Fractional Reserve Banking

The third and final of the three monetary sins that I will discuss in this paper is fractional

reserve banking. The fractional reserve system is central to our present global financial system. The

system is a method to expand the money supply in circulation. By definition, this is a form of inflation

and carries the same problems related in the previous section. This bank-created money works because

a depositor deposits a specific amount which the bank can then lend out to other depositors in the

expectation that the original depositor will not come back to them for all of his money at the same time

that all of their other depositors do. This event, a bank run, would be the end of the system. To ensure

that bank runs do not happen, the U.S. government has created the Federal Deposit Insurance

Corporation, as well as taken other actions from time to time as problems arise. The fact that this

system seems to require government guarantees to ensure that it will continue to function as all players

expect is rather strange.

The other obvious problem arises due to simple logic. It is clear that two people cannot claim

full and equal title to the same object at the same time. A person who places their money into a bank in

the form of a demand deposit then has their money loaned out (in part) to other people by the bank.

49. "Mission," Board of Governors of the Federal Reserve System, http://www.federalreserve.gov/

aboutthefed/mission.htm.
Who actually owns the deposit? The depositor? The bank? The people with the loans? Some

combination?

Rothbard draws attention to the strange situation in which we find our demand deposits. In his

example of how fractional reserve banking works, he cites the case of an embezzler who takes money

from company accounts in order to invest for his own gain.50 He notes that the embezzler makes a gain

while using another person's assets; this is exactly what a bank does with the demand deposits of its

customers.51 To counter the objection that there is no crime if the embezzler returns the money when it

is needed by the owner, Rothbard states that he holds that the theft “occurs when the embezzler takes

the money, not at the later time when his ‘borrowing’ happens to be discovered.”52 There is no

justification for the idea that the only problem with fractional reserve banking is when all redemption

requests cannot be covered. The unethical act occurs within the very nature of fractional reserve

banking.

When a person deposits their money as a demand deposit into a bank, it is clearly not

considered their property from that moment on by the bank. However, demand deposits are considered

to be a type of money by the accepted definition of that term and checks are regularly used as money in

everyday transactions.53 As Oresme explained, money is private property. It is a violation of property

rights to make use of property that we do not own in order to exchange it for other goods. Yet, this is

what happens every time a check is written and used.

Further complicating the ethical quagmire that is fractional reserve banking is the issue of what

do people believe about their deposits. Clearly, if we consider them part of the M1 money supply and

regularly write checks against the balances in demand deposit accounts, our actions imply that we

50. Rothbard, 45.

51. Rothbard, 45.
52. Rothbard, 45.
53. “The Money Supply,” Federal Reserve Bank of New York, http://www.newyorkfed.org/
aboutthefed/fedpoint/fed49.html.
believe that we actually have a legal claim to the entire value of our accounts. Otherwise, we would be

willfully engaging in fraud on a massive scale in this country. The general conception of demand

deposits is that of a “warehouse receipt” which gives them legal claim to a specific amount of money in

the bank.54 However, the reality is different, as Murray Rothbard put it, “while banks depend on the

warehouse analogy, the depositors are systematically deluded. Their money ain't there.”55

Confirming the popular conception of what a demand deposit is, attorney Stephan Kinsella

argues that deposits, including demand deposits, are, in fact, legally and ethically to be viewed as a

type of warehousing rather than a loan.56 The depositor retains ownership of the property that he

deposits in a bank, just as any person who deposits furniture in a storage warehouse retains ownership

of his furniture.57 Kinsella describes the bank-depositor arrangement as the bank consenting “to let you

use their property (box) in certain ways; while you let them control your gold in limited ways” such as

providing security checks to control access and in return the depositor agrees “to pay them a fee every

month. . . in exchange for [the bank] letting [the depositor] use their box.”58 There is no transfer of title

involved, and thus no loan is made.

With this final monetary sin, fractional reserve banking, we again see a clear benefit to both the

government and the banks from the inflation produced through this system. This necessarily involves

theft from the other market participants as has been explained previously. We further see violations of

property rights in the form of what could very well be called embezzlement and, as Kinsella argues,

breach of contract.

Rothbard notes that the importance of money to economic activity cannot be overemphasized.

54. Murray N. Rothbard, “Taking Money Back,” http://mises.org/daily/2882.

55. Rothbard.
56. Stephan Kinsella, "Fractional-Reserve Banking, Contracts of Deposit, and the Title-Transfer Theory
of Contract." Mises Economics Blog. 13 August 2009. http://blog.mises.org/archives/010451.asp.
57. Kinsella.
58. Kinsella.
He calls it the “nerve center” of the economy.59 If we hope for an economy dominated by liberty, we

cannot ignore the monetary ethics problems raised by the key elements of modern money creation and

manipulation. Rothbard warns that if the State is able to “gain unquestioned control over the unit of all

accounts, the State will then be in a position to dominate the entire economic system, and the whole of

society.”60 Rothbard continues that the State has known the benefit of such control since the “kings of

old.”61 Oresme and the Pope's denouncement of debasement and other monetary manipulation as

contrary to God's Law shows that Rothbard is certainly correct.

The ideal of kingship in the Western tradition has its roots in the Judeo-Christian understanding

of a Just King, anointed by God62 and whose rule is marked by justice63 and compassion, especially for

the poor.64 Thomas Aquinas, in his recommendation on political rule to the King of Cyprus notes that

the purpose of government is to ensure the proper order and common good of society.65 In this view,

the government should not be a parasite upon the people; it should not steal from them; and it must be

fair in its dealings. The clear violations of these principles by the person (the Prince) who should be the

most trustworthy person in secular society was abhorrent to Oresme and others of his day.

These two views, one the libertarian, private property view espoused by Rothbard and the

Christian ethical view represented most fully by Oresme in the fourteenth century jointly condemn the

manipulation of money and conclude that there can be no justification for such acts. Such acts benefit

the State at the expense of the people. This situation is clearly unjust. However, the problem is that the

incentives it provides government to continue this injustice show both why these problems have been

so persistent, as well as how difficult it will be to uproot them from our society.

59. Rothbard, 21.

60. Rothbard, 21.
61. Rothbard, 21.
62. 1 Sam 16:13.
63. Prov 16:12.
64. Prov 29:14.
65. Thomas Aquinas, De Regno. Ad Regem Cypri, I, 1-2.