Enters the State: Fiat Inflation through Legal Privileges–JÖRG GUIDO HÜLSMANN

Chapter 7 of The Ethics of Money Production
Enters the State: Fiat Inflation through
Legal Privileges


It is well known that the history of institutions cannot be
adequately understood without considering the economic
constraints and incentives of the protagonists. This holds
true especially in the case of monetary institutions. The

emergence of our present-day institutions in this field—central

banks, paper money, and so on—must be seen in the context
of government finance. Governments at nearly all times and
places have been the main beneficiaries of inflation. Rather
than protecting society from it, therefore, all of them have
sooner or later given in to the temptation of using inflation for
their own purposes. First they stopped combating it. Then
they facilitated it, encouraged it, and finally promoted it with
all their powers. They have obstructed and suppressed the
production of money on the free market, set up institutions
that were designed for perennial inflation, and constantly
remodeled these institutions to increase their inflationary
potential.1 In all such cases, in which governments create

inflation or increase it beyond the level it would otherwise
have reached, there is fiat inflation.

Governments inflate the money supply because they gain
revenue from inflation. As we have pointed out, additional
money benefits the first owners at the expense of all other
money owners. Therefore, if government or its agents are the
ones who bring about the extension of the money supply, they
stand ready to gain from it, and they gain at the expense of the
other citizens. In the fourteenth century, Nicholas Oresme [SEE BELOW]
argued that this fact was at the root of the frequent monetary
interventions of the princes:
I am of the opinion that the main and final cause why the
prince pretends to the power of altering the coinage is the
profit or gain which he can get from it; it would otherwise
be vain to make so many and so great changes. . . . Besides,
the amount of the prince’s profit is necessarily that of the
community’s loss.2
The times have changed and the techniques of inflation
have changed with them. But governments still intervene in

the production of money and money certificates in order to
obtain additional income. The difference between our time
and the age of Oresme is that present-day governments have
received absolution from the scientific authorities of our day.
Many princes blushed when they were caught debasing the
currency of the country. But modern presidents, prime ministers,

and chancellors can keep a straight face and justify
inflation with the alleged need to stabilize the price level and
to finance growth. All the recognized experts say so.3 And it
betrays a lack of courtesy to point out that “recognition” of an
expert means that he is on the government’s payroll.

Inflation can certainly also exist in a hypothetical society
in which the government does not in the slightest way interfere

with the production of money. The crucial point is that in
such a case there are no legitimized institutions of inflation.
Being a criminal activity, inflation has to flee the light of day
and lingers only at the edges of such a society. As long as the
citizens are free to produce and use the best money available,
therefore, sound money prevails, whereas debased money
and fractional reserves lead a fringe existence. Inflation can
then cause occasional harm for individuals, but it cannot
spread far and last long. Only the government has the power
to make inflation a widespread, large-scale, and permanent
phenomenon, because only the government has the power to
systematically prevent the citizens from spontaneously adopting the best possible monies and money certificates. Unfortunately, as we shall see, this is exactly what governments have done in the past. The resulting damage has been immense, not
only in terms of material wealth, but also in terms of the moral
and spiritual development of the western world. We will
therefore analyze the inflation that springs from government
fiat in some detail.

Notice at present that the gain that the government and its
allies derive from fiat inflation can most adequately be called
“institutional usury,” as Dempsey has pointed out.


1See George Selgin and Lawrence White, “A Fiscal Theory of Government’s Role in Money,” Economic Inquiry 37 (1999). Selgin and White
make exception only for fractional-reserve banking, which in their eyes

is a market institution. See idem, “How Would the Invisible Hand Handle Money?” Journal of Economic Literature 32, no. 4 (1994). This latter
opinion not only stands on weak theoretical ground, but also flies into
the face of the entire historical record of fractional-reserve banks, which
have been promoted either directly through government interventions,
or indirectly through banks and other monetary institutions that had
special legal protection and support from tax money. See the detailed
discussion in Jesús Huerta de Soto, Money, Bank Credit, and Economic
Cycles (Auburn, Ala.: Ludwig von Mises Institute, 2006), chap. 8, sect. 4,
pp. 675–714.

2Oresme, “Treatise,” Nicholas Oresme, “Treatise on the Origin, Nature,
Law, and Alterations of Money,” in Charles Johnson, ed., The De Moneta
of Nicholas Oresme and English Mint Documents (London: Thomas Nelson
and Sons, 1956), chap. 15, p. 24. See also Juan de Mariana, (1609)“A Treatise on the Alteration of Money,” Markets and Morality, vol. 5, no. 2
(2002), chap. 13. Is it necessary to point out that profiting from the community’s loss involves necessarily a flagrant violation of distributive
justice, which justice is based on the sanctity of private property? See on
this Leo XIII, Rerum Novarum, §33, 46.

3Contemporary textbooks and research articles of a non-Austrian inspiration argue that monetary policy (according to our definition: inflation)
is beneficial or at least can be beneficial if properly handled. The arguments brought forth in these works are in most cases variants of the theories that we discussed in chapter 4. See for example Frederic S.
Mishkin, The Economics of Money, Banking, and Financial Markets, 7th ed.
(New York: Addison Wesley, 2003); Manfred Borchert, Geld und Kredit
(Munich: Oldenbourg, 2001); Christian Ottavj, Monnaie et financement de
l’économie, 2nd ed. (Paris: Hachette, 1999). For Austrian critiques of the
idea that inflation can be beneficial, see the works by Mises, Rothbard,
Sennholz, Reisman, Salin, and Huerta de Soto that we quoted in the

The Ethics of Money Production, pp. 103-106, JÖRG GUIDO HÜLSMANN


Nicholas Oresme and the First Monetary Treatise


Nicholas Oresme–The History of Economic Thought Website


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