Inflation as Injustice
by Erik W. Matson
Debasement of a currency is much akin to taxation. It reduces the purchasing power of citizens’ money, money for which citizens previously exchanged their real goods and services. Taxation is sometimes warranted. But its warrant depends on its forthrightness and the uses to which the subsequent revenues are put. As a general maxim, taxation cannot be just if it is not recognized as legitimate by most of the political community. Shouldn’t currency debasement—or inflation—bear the same burden of having to justify itself?
The gains that a government reaps from debasing currency are unlikely to meet with public approval. In fact, the magnitude of the gains depends on whether debasement is expected. If debasement is unexpected, the government will enjoy an increase in purchasing power before overall prices rise. If debasement is expected, however, prices will rise quickly, negating potential gains in government purchasing power. In practice, this means that governments will face a constant temptation to make the debasement covert. Covert government debasement is an especially fraudulent form of exploitation and a distortion of the proper use of money.
These ideas are very old. They are the positions of the French scholastic philosopher Nicole Oresme (1325–1382), articulated in his Tractatus de origine, natura, iure et mutationibus monetarum (A treatise of the origin, nature, law, and alterations of money; hereafter referenced as Of Money). Oresme was a true polymath. He wrote on mathematics, cosmology, and natural philosophy. He is sometimes credited with developing an early mechanical theory of the physical universe. As an advisor to King Charles V (r. 1364–1380), he translated Aristotle into French and wrote accompanying commentaries. Since the rediscovery of his manuscripts in the 19th century, Oresme has been widely celebrated as one of the most sophisticated medieval monetary theorists.
In one sense, as Odd Langholm has argued in his books on scholastic theories of money, Oresme’s approach to money was unoriginal. His ideas are in keeping with earlier Latin Christian commentaries on Aristotle reaching back to Thomas Aquinas and Albert the Great. Aristotle, in Chapter IX of his Politics, described money as the product of a social compact, undertaken upon men’s recognition of the high costs of barter. Money was created to serve as a medium of exchange and a unit of account by which goods of incommensurable value could be compared. Thomas Aquinas, in his Summa Theologiae, followed Aristotle in describing money as a human invention created for “the convenience of exchange, and as a measure of things salable.” Aquinas’s teacher Albert the Great had previously affirmed Aristotle’s treatment of money as a unit of account in his commentary on Nicomachean Ethics. “Coinage makes things to be exchange equal, just as a measure makes equal things being measured by addition and subtraction.”
In the scholastic tradition, the principal ends for which money was created set the parameters of monetary ethics. To use money to acquire more money—instead of using money as a medium to exchange non-monetary goods and services for other non-monetary goods and services—is to use money for a purpose for which it was not created, and hence it is unethical. That is the core of the Aristotelian analysis and condemnation of usury. On the other hand, to debase the value of money erodes its functionality as a unit of account. That too is unethical. It is a distortion of the measure by which justice is meted out in commercial exchange. As Aquinas asserted, the representation of impure gold and silver as pure is “fraudulent and unjust.” This echoes the Biblical injunction to maintain balanced scales and right dealing.
The Latin Aristotelians assumed that political authorities have a central role to play in the minting and circulation of money—money, in their view, is a creation of the political community. But political authorities have a moral obligation to stabilize the value of the monetary unit, lest they facilitate citizens’ efforts to take advantage of one another or take advantage of their monetary prerogatives to defraud citizens themselves.
As Odd Langholm has emphasized, much that has been celebrated in Oresme is simply a rearticulation of what came before. Oresme broke new ground, however, in his repeated distinction between situations of expected and unexpected debasement, prefiguring the monetary analysis conducted in the 1970s by Robert Lucas in terms of “rational expectations.” Oresme also stands out for his insistence on framing debasement as a violation of the right of property and hence an especially egregious practice.
In Of Money, Oresme identified the three traditional ways that money might be used for gain against its natural purpose: “[1] the art of the money changer… [2] usury… [and 3] the alteration of the coinage.” Oresme argues that “the first way is contemptible, the second bad, and the third worse.” Money changing and usury are to be avoided because they involve a distorted use of money outside the bounds of its natural purpose. These activities, as Aristotle remarked, showcase a seriousness “about living, but not about living well.” But currency debasement, especially when it is unexpected—which it very often is—is much worse.
Debasement comes with very few—if any—public benefits, in contrast with money changing and usury. The government experiences a gain by making creating new money, and their immediate exchange partners receive money before its purchasing power has deteriorated. But those gains come at the expense of the general population who subsequently face higher prices at their current incomes. Unexpected debasement, moreover, distorts relative prices and introduces a period of uncertainty during which the comparative value of goods becomes difficult to assess. We should therefore by no means, Oresme declares, believe declarations that debasement is intended to serve the public good. The sovereign “might as well take my coat and say he needed it for public service.”
Oresme’s comments here, and the analysis in Of Money generally, must be understood in the context of the Hundred Years’ War, in which French kings took to debasement as a means of financing their military efforts. Perhaps especially on his mind was the crushing ransom payment the French government agreed to pay for the return of King John II after his capture in the Battle of Poitiers (1356). Far exceeding the annual revenue of France, the ransom was to be financed by a combination of extensive direct taxation and currency debasement.
Unlike usury and money changing, debasement is almost entirely furtive. It is typically carried out in a silent, unannounced fashion. For Oresme this makes it a violation of property. As money is an instrument created to facilitate the exchange of wealth, it is not the possession of the sovereign but, fundamentally, those who create and exchange wealth. “For if a man gives bodily labour in exchange for money, the money he receives is as much his as the bread or bodily labour of which he…was free to dispose.” To debase the value of the money received in exchange for labor or possessions, according to Oresme, is akin to debasing the value of labor and possession themselves. He does not mince words: “[T]his impost [debasement], levied tyrannically and fraudulently, against the interest and against the will of the whole community, [should be] termed robbery [along] with violence or fraudulent extortion.”
One does not have to sign on fully to the Aristotelian perspective that shaped Oresme’s economics and ethics to appreciate the perennial relevance of his treatment of debasement. One may imagine Oresme, were he somehow to survey the state of our current monetary affairs, asking the question Murray Rothbard asked in 1963: What has the government done to our money?
Erik Matson is a Senior Research Fellow at the Mercatus Center and Deputy Director of the Adam Smith Program at George Mason University. He additionally serves as a lecturer in political economy in the Busch School of Business at The Catholic University of America.