No Free Lunch: Economics for a Fallen World: Third Edition, Revised

Chapter Eleven: Money, Money, Money! 260 The fraud committed by goldsmiths is no different from the historic debauchery of sovereigns. No ruler or government likes to impose taxes since, for some strange reason, the people don’t seem to like to pay them. They get angry and sometimes rebel against the rulers. So taxes are problematic. But citizens do like public works spending, and kings historically like to wage war. So how do you pay for this if you are afraid to raise taxes? When you conquer other peoples you may be able to exact tribute from them to support your empire, but that is not always an available option. So kings do what kings historically do best. First, they arrogate to themselves the exclusive privilege to coin money. They next demand tax payments in their own minted currency, and then pass legal tender laws making acceptance of their coinage a legal requirement for all citizens. Once this legal requirement was institutionalized, the temptation was just too great to pass up—mixing in just a bit of base metals with the precious metals in circulation. Sometimes kings wouldn’t just mix a little; especially brazen (and revenue desperate) sovereigns would occasionally engage in “epic” debauchery. Economists Carmine Reinhart and Ken Rogoff note that King Henry VIII debased the British pound by 83% of its silver content in just a few years. Later governments took as great as 50% debasement in a given year (Rinehart and Rogoff, This Time is Different: Eight Centuries of Financial Folly , 2009, pp. 175-179). Even earlier periods of inflation, or currency debauchery, were well known to the ancient Israelites, such that God could use currency debauchery for a spiritual illustration. In Isaiah 1:22 (see example box), God suggested to the Israelites that their silver had become dross, equating their spiritual condition with the wicked monetary practices of sovereign kings. The early goldsmiths later became what we now know as banks. They could issue additional “warehouse receipts,” (i.e., claims against the gold stock in their bank), in excess of what they had. If they issued more than the public wanted, the public could redeem for precious metals. If too many redeemed, the bank would fail (depending on the level of capital the bank had). Many banks would group together and sometimes aid against bank runs by a collaborative clearing house arrangement, but this wasn’t completely effective. First, not all banks were in the arrangement, and second, when one bank failed, depositors of other institutions might suspect theirs would fail and the contagion could spread. Most countries ultimately established a central bank to ostensibly avoid this, since the ETHICAL BEHAVIOR IS SCARCE ISAIAH 1:22 “Your silver has become dross, Your drink diluted with water.” As we note in this chapter, a “good” money will be scarce. Too much money breaks down the monetary order and takes a society back to barter. Yet sinful man is always after something for nothing, and counterfeiting has been around as long as there has been money. Governments have been at the forefront of this fraud as they have historically outlawed private production of money and arrogated to the state the right to print or coin money. Early governments often had the temptation to add base metals to the precious metal coins (dross to the silver) to allow increased spending without taxation (private mints, where allowed, had similar temptations). The Roman Empire s aw this in abundance prior to its ultimate fall. In Isaiah, God notes that ethical rebellion is often coincident with monetary mischief, as well as leaders who are only interested in a bribe and not pursuing justice for widows and orphans.