Why the State Demands Control of Money
by Hans-Hermann Hoppe
Imagine you are in command of the state, defined as an
institution that possesses a territorial monopoly of ultimate decision making
in every case of conflict, including conflicts involving the state and its
agents itself, and, by implication, the right to tax, i.e., to unilaterally
determine the price that your subjects must pay you to perform the task of
ultimate decision making.
To act under these constraints — or rather, lack of
constraints — is what constitutes politics and political action, and it should
be clear from the outset that politics, then, by its very nature, always means
mischief. Not from your point of view, of course, but mischief from the point
of view of those subject to your rule as ultimate judge. Predictably, you will
use your position to enrich yourself at other people's expense.
More specifically, we can predict in particular what
your attitude and policy vis-Ã -vis money and banking will be.
Assume that you rule over a territory that has
developed beyond the stage of a primitive barter economy and where a common
medium of exchange, i.e., a money, is in use. First off, it is easy to see why
you would be particularly interested in money and monetary affairs. As state
ruler, you can in principle confiscate whatever you want and provide yourself
with an unearned income. But rather than confiscating various producer or
consumer goods, you will naturally prefer to confiscate money. Because money,
as the most easily and widely saleable and acceptable good of all, allows you
the greatest freedom to spend your income as you like, on the greatest variety
of goods. First and foremost, then, the taxes you impose on society will be
money taxes, whether on property or income. You will want to maximize your
money-tax revenues.
In this attempt, however, you will quickly encounter
some rather intractable difficulties. Eventually, your attempts to further
increase your tax income will encounter resistance in that higher tax rates
will not lead to higher but to lower tax revenue. Your income — your spending
money — declines, because producers, burdened with increasingly higher tax
rates, simply produce less.
In this situation, you only have one other option to
further increase or at least maintain your current level of spending: by
borrowing such funds. And for that you must go to banks — and hence your
special interest also in banks and the banking industry. If you borrow money
from banks, these banks will automatically take an active interest in your
future well-being. They will want you to stay in business, i.e., they want the
state to go on in its exploitation business. And since banks tend to be major
players in society, such support is certainly beneficial to you. On the other
hand, as a negative, if you borrow money from banks you are not only expected
to pay your loan back, but to pay interest on top.
The question, then, that arises for you as the ruler
is, How can I free myself of these two constraints, i.e., of tax-resistance in
the form of falling tax revenue and of the need to borrow from and pay interest
to banks?
It is not too difficult to see what the ultimate
solution to your problem is.
You can reach the desired independence of taxpayers
and tax payments and of banks, if only you establish yourself first as a
territorial monopolist of the production of money. On your territory, only you
are permitted to produce money. But that is not sufficient. Because as long as
money is a regular good that must be expensively produced, there is nothing in
it for you except expenses. More importantly, then, you must use your monopoly
position in order to lower the production cost and the quality of money as close
as possible to zero. Instead of costly quality money such as gold or silver,
you must see to it that worthless pieces of paper that can be produced at
practically zero cost will become money. (Normally, no one would accept
worthless pieces of paper as payment for anything. Pieces of paper are
acceptable as payment only insofar as they are titles to something else, i.e.,
property titles. In other words then, you must replace pieces of paper that
were titles to money with pieces of paper that are titles to nothing.)
Under competitive conditions, i.e., if everyone were
free to produce money, a money that can be produced at almost zero cost would
be produced up to a quantity where marginal revenue equals marginal cost, and
because marginal cost is zero the marginal revenue, i.e., the purchasing power
of this money, would be zero as well. Hence, the necessity to monopolize the
production of paper money, so as to restrict its supply, in order to avoid
hyperinflationary conditions and the disappearance of money from the market
altogether (and a flight into "real values") — and the more so the
cheaper the money commodity.
In a way, you have thus accomplished what all
alchemists and their sponsors wanted to achieve: you have produced something
valuable (money with purchasing power) out of something practically worthless.
What an achievement. It costs you practically nothing and you can turn around
and buy yourself something really valuable, such as a house or a Mercedes; and
you can achieve these wonders not just for yourself but also for your friends
and acquaintances, of which you discover that you have all of a sudden far more
than you used to have (including many economists, who explain why your monopoly
is really good for everyone).
What are the effects? First and foremost, more paper
money does not in the slightest affect the quantity or quality of all other,
nonmonetary goods. There exist just as many other goods around as before. This
immediately refutes the notion — apparently held by most if not all mainstream
economists — that "more" money can somehow increase "social
wealth." To believe this, as everyone proposing a so-called easy-money
policy as an efficient and "socially responsible" way out of economic
troubles apparently does, is to believe in magic: that stones — or rather paper
— can be turned into bread.
Rather, what the additional money you printed will
affect is twofold. On the one hand, money prices will be higher than they would
otherwise be, and the purchasing power per unit of money will be lower. In a
word, the result will be inflation. More importantly, however, all the while
the greater amount of money does not increase (or decrease) the total amount of
presently existing social wealth (the total quantity of all goods in society),
it redistributes the existing wealth in favor of you and your friends and
acquaintances, i.e., those who get your money first. You and your friends are
relatively enriched (own a larger part of the total social wealth) at the
expense of impoverishing others (who as a result own less).
The problem, for you and your friends, with this
institutional setup is not that it doesn't work. It works perfectly, always to
your own (and your friends') advantage and always at the expense of others. All
you have to do is to avoid hyperinflation. For in that case people would avoid
using money and flee into real values, thus robbing you of your magic wand. The
problem with your paper-money monopoly, if there is one at all, is only that
this fact will be immediately noticed also by others and recognized as the big,
criminal rip-off that it indeed is.
But this problem can be overcome, too, if, in addition
to monopolizing the production of money, you also set yourself up as a banker
and enter the banking business with the establishment of a central bank.
Because you can create paper money out of thin air,
you can also create credit out of thin air. In fact, because you can create
credit out of nothing (without any savings on your part), you can offer loans
at cheaper rates than anyone else, even at an interest rate as low as zero (or
even at a negative rate). With this ability, not only is your former dependency
on banks and the banking industry eliminated; you can, moreover, make banks
dependent on you, and you can forge a permanent alliance and complicity between
banks and state. You don't even have to become involved in the business of
investing the credit yourself. That task, and the risk involved in it, you can
safely leave to commercial banks. What you, your central bank, need to do is
only this: You create credit out of thin air and then loan this money, at
below-market interest rates, to commercial banks. Instead of you paying
interest to banks, banks now pay interest to you. And the banks in turn loan
out your newly created easy credit to their business friends at somewhat higher
but still submarket interest rates (to earn from the interest differential). In
addition, to make the banks especially keen on working with you, you may permit
the banks to create a certain amount of their own new credit (of checkbook
money) in addition and on top of the credit that you have created
(fractional-reserve banking).
What are the consequences of this monetary policy? To
a large extent they are the same as with an easy money policy: First, an easy
credit policy is also inflationary. More money is brought into circulation and
prices will be higher, and the purchasing power of money lower, than would have
been the case otherwise. Second, the credit expansion too has no effect on the
quantity or quality of all goods currently in existence. It neither increases
nor decreases their amount. More money is just this: more paper. It does not
and cannot increase social wealth by one iota. Third, easy credit also
engenders a systematic redistribution of social wealth in favor of you, the
central bank, and the commercial banks within your cartel. You receive an
interest return on money that you have created at practically zero cost out of
thin air (instead of on money costly saved out of an existing income), and so
do the banks, who earn additional interest on your costless money loans. Both
you and your banker friends thereby appropriate an "unearned income."
You and the banks are enriched at the expense of all "real" money
savers (who receive a lower interest return than they otherwise would, i.e.,
without the injection of your and the banks' cheap credit into the credit
market).
On the other hand, there also exists a fundamental
difference between an easy, print-and-spend money policy and an easy, print-and-loan
credit policy.
First off, an easy credit policy alters the production
structure — what is produced and by whom — in a highly significant way.
You, the chief of the central bank, can create credit
out of thin air. You do not have to first save money out of your money income,
i.e., cut your own expenses, and thus abstain from buying certain nonmoney
goods (as every normal person must, if he extends credit to someone). You only
have to turn on the printing press and can thus undercut any interest rate
demanded of borrowers by savers elsewhere in the market. Granting credit does
not involve any sacrifice on your part (which is why this institution is so
"nice"). If things then go well, you will be paid a positive-interest
return on your paper investment, and if they don't go well — well, as the
monopoly producer of money, you can always make up losses more easily than
anyone else: by covering your losses with even more printed paper.
Without costs and no genuine, personal risk of losses,
then, you can grant credit essentially indiscriminately, to everyone and for
any purpose, without concern for the creditworthiness of the debtor or the
soundness of his business plan. Because of your "easy" credit,
certain people (in particular investment bankers) who otherwise would not be
deemed sufficiently creditworthy, and certain projects (in particular of banks
and their main clients) that would not be considered profitable but wasteful or
too risky instead do get credit and do get funded.
Essentially, the same applies to the commercial banks
within your banking cartel. Because of their special relationship to you, as
the first recipients of your costless low-interest paper-money credit, the banks,
too, can offer loans to prospective lenders at interest rates below market
interest rates — and if things go well for them they go well; and if they
don't, they can rely on you, as the monopolistic producer of money, to bail
them out in the same way as you bail yourself out of any financial trouble: by
more paper money. Accordingly, the banks too will be less discriminating in the
selection of their clients and their business plans and more prone to funding
the "wrong" people and the "wrong" projects.
And there is a second significant difference between a
print-and-spend and a print-and-loan policy and this difference explains why
the income and wealth redistribution in your and your banker friends' favor
that is set in motion by easy credit takes the specific form of a temporal —
boom-bust — cycle, i.e., of an initial phase of seeming general prosperity (of
expected increases in future incomes and wealth) followed by a phase of
widespread impoverishment (when the prosperity of the boom period is revealed
as a widespread illusion).
This boom-bust feature is the logical — and physically
necessary — consequence of credit created out of thin air, of credit unbacked
by savings, of fiduciary credit (or however else you may call it) and of the
fact that every investment takes time and only shows later on, at some time in
the future, whether it is successful or not.
The reason for the business cycle is as elementary as
it is fundamental. Robinson Crusoe can give a loan of fish (which he has not
consumed) to Friday. Friday can convert these savings into a fishing net (he
can eat the fish while constructing the net), and with the help of the net,
then, Friday, in principle, is capable of repaying his loan to Robinson, plus
interest, and still earn a profit of additional fish for himself. But this is
physically impossible if Robinson's loan is only a paper note, denominated in
fish, but unbacked by real-fish savings, i.e., if Robinson has no fish because
he has consumed them all.
Then, and necessarily so, Friday must fail in his
investment endeavor. In a simple barter economy, of course, this becomes
immediately apparent. Friday will not accept Robinson's paper credit in the
first place (but only real, commodity credit), and because of this, the
boom-bust cycle will not get started. But in a complex monetary economy, the
fact that credit was created out of thin air is not noticeable: every credit
note looks like any other, and because of this the notes are accepted by the
takers of credit.
This does not change the fundamental fact of reality
that nothing can be produced out of nothing and that investment projects
undertaken without any real funding whatsoever (by savings) must fail, but it
explains why a boom — an increased level of investment accompanied by the expectation
of higher future income and wealth — can get started (Friday does accept the
note instead of immediately refusing it). And it explains why it then takes a
while until the physical reality reasserts itself and reveals such expectations
as illusory.
But what's a little crisis to you? Even if your path
to riches is through repeated crises, brought about by your paper-money regime
and central-bank policies, from your point of view — from the viewpoint as the
head of state and chief of the central bank — this form of print-and-loan
wealth redistribution in your own and your banker friends' favor, while less
immediate than that achieved with a simple print-and-spend policy, is still
much preferable, because it is far more difficult to see through and recognize
for what it is. Rather than coming across as a plain fraud and parasite, in
pursuing an easy-credit policy you can even pretend that you are engaged in the
selfless task of "investing in the future" (rather than spending on
present frivolities) and "healing" economic crises (rather than
causing them).
What a world we live in!
