Argumentation:Paper money

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This list attempts to gather arguments for and against fiat money (often called paper money) and the inflationary policies accompanying it; contrasted with free market commodity money (also called natural money or hard money).

Rising prices

The production of money decreases the value of already existing units of money, therefore, money prices tend to rise.

This is true for any type of money; however, commodity money has alternative uses besides its monetary function, and it becomes cheaper for these purposes.

Fiat money, in turn, tends to be notoriously easy to produce in large amounts and has no other uses.[1]

Costs of money production

The high costs of commodity money are said to be another argument for paper money.

But are they really a problem? If a money is harder to multiply, then it has, in fact, a natural insurance against loss of purchasing power - something, that is too often seen with paper.

Fiat money causes further costs, like bureaucracies, that regulate them and large numbers of experts kept busy watching central banks and foretelling their policies.

There is nothing wrong, per se, in experimenting with a cheaper medium of money, just note, that all such experiments have failed. That may be the reason, why the proponents of fiat money never argue for competition, but want to establish it by force.[2]

Long-term price instability and associated costs

As Milton Friedman pointed out, "...other monetary economists and I took it for granted that the real resource cost of producing irredeemable paper money was negligible, consisting only of the cost of paper and printing. Experience under a universal irredeemable paper money standard makes it crystal clear that such an assumption, while it may be correct with respect to the direct cost to the government of issuing fiat money, is false for the society as a whole."

Under a commodity money, long-term interest rates displayed a remarkable stability. Long-term bonds were the investment of choice for "widows and orphans". In a fiat money regime the prices are unstable in the long term and significant costs arise as a consequence:

  • a growing "hard money" industry
  • the introduction of money market mutuals in the US, reduction of the role of commercial banks, deregulation of banking institutions and accompanying banking crises (such as the Continental Illinois, Ohio, and Maryland crises of the 1980s)
  • development of public futures markets in foreign exchange and in financial instruments to deal with price uncertainty

Friedman concluded that these costs would not have arisen if the new paper monetary regime had not led to greatly increased uncertainty about interest rates and inflation."[3]

Complete loss of value

The worst case scenario for a commodity-based money is the loss of its monetary function (due to consumer choice, laws, etc.). It would lose part of its demand and hence command a lower price on the market.

Should a paper money stop being used as money, it would lose its only function and become essentially worthless.[2]

Economic Growth

There are claims, that economic growth is only possible with a corresponding growth in the money supply - otherwise, how could be the additional goods and services bought? Simply: any given amount of goods and services can be exchanged against any amount of money. If more goods are produced, their money prices will sink.

There are of course technical limitations. Assuming a long period of robust economic growth, some forms of money (like gold coins), could possibly shrink enough to be impractical. But this is no problem on the free market - people can switch to another form of money, like silver coins. In a free market, there are strong incentives to do this change swiftly and efficiently.

Some might object, that if businesses are forced to sell for lower prices, these could be too low if compared to their costs, leading to their bankruptcy. It is forgotten, that the businessman could foresee the sinking prices and strive to lower their costs appropriately. This is standard procedure in times of stable and sinking levels of prices, as is observed in dynamically growing industries (computers, IT, etc.), where such a situation is normal.[2]

Greater growth

It is claimed, that by lowering the interest rate, paper money can help grow the economy. Offering this newly printed money as credit raises its supply thereby making more of it available for businesses. They will invest or circulate this new money and the economy will grow.

There are too many mistakes to answer in one place. For one, capitalists invest only if they can earn some concrete rate; expectations of rising prices will make them ask for more.

Will the printing of new money lower interest rates? And if so, will it create more growth?

  • If the businessmen estimate the rise in prices exactly, it won't. The only effect will be a new structure of capital and production; some will make money off it, while others will lose.
  • If the businessmen were to overestimate the expected rise in prices, the interest rates would rise, depriving many of them of credit and again, cause a different structure of capital and production, but wouldn't make things better or worse. (Really? Need some clearing up here.)
  • What if they underestimate the expected rise in prices or are unaware of it? The real interest rate will decline and business may be easily persuaded to borrow more and invest more, beginning more projects. But they won't be able to finish them (or at least not under the same conditions). The amount of capital hasn't changed and much of it will be wasted.[2]


Deflation, defined as a "sustained decrease of the price level," benefits buyers and (potentially) creates problems for sellers and debtors. Central Banks attempt to avoid deflation by creating inflation (increasing the supply of money). They do this due to the unfounded fear that falling prices lead to a fall in demand which creates a detrimental effect or downward spiral in the economy. But is this fear rooted in reality?

  • There is no conclusive historical evidence, that deflation is damaging to long-term economic growth.
  • An unexpected strong deflation can motivate people to alter their behavior, that much is true. But that does not necessarily mean a slowing down of production in general. The consumers will eventually buy the goods and services they desire, even if observing constantly sinking prices: they would like to enjoy them sooner rather than later (the fact of time preference). It can be therefore expected, that consumption during a deflation period will continue at a marginally slower rate, but the total production will actually grow: because resources unused for consumption are saved, and as such serve to increase production further. (Note: any abrupt change in the structure of consumer demand and prices will tend to have negative effects. It can be also said that a) in a free market, price changes are likely to be smoother and b) an inflationary system is not exactly immune to these shocks either.)
  • clearing debts can be harder, in a strong unexpected deflation as prices fall while nominal debt value remains the same. This can be a problem for companies going bankrupt in case of a large deflationary shock. But ultimately, the resources they control will not be lost, they will merely change hands.
  • a deflation can indeed damage the banking industry, as it complicates the clearing of debts. If one assumes a string of bankruptcies on the side of customers, a bank's liquidity may be stretched to such a degree, that it goes bankrupt itself. (Again, a 'dramatic change', no matter its cause can have negative effects.) However, it is pointed out, that the negative effects will impact industries who mostly profit from inflation, like banks and highly indebted companies. This problem will eventually adjust itself. A reduction in bank credit does not destroy any resources, it merely guides them to other applications. The dangers of deflation are not as terrible as it is claimed.[2]

Sticky prices

Let's imagine, that powerful unions were able to raise wages in such a way, that the companies were unable to employ a large part of their employees profitably, resulting in mass unemployment. A good dose of inflation could raise the price level and make them employable again, problem solved!

Well, not quite. This 'solution' assumes, that the unions fail to recognize the inflation and won't raise their demands appropriately - which, historically, they eagerly did.[2]

An example are nationalized industries.[4]

(It is not considered here, whether such union activity is possible in the free market, or requires legal privileges. The moral implications of the inflationary strategy are also not considered - it is misleading, in other words, lying; and how compatible it is with ideals as transparency and honesty in public affairs.)


Minimum wage laws cause unemployment. If they are combined with a deflation, this effect would be even stronger. This was also the case in the Great Depression. However, this is not an argument against a free market.[5]


Everyone is a holder of money to some degree.

Hoarding, or excessive holding of money is supposed to be a great danger paper money will prevent. But how can it cause damage to the economy? Any amount of money can serve for exchange. In the worst case, if a large part of the population became hoarders, they might cause a given currency to be replaced by another. (Note, that there are perfectly reasonable AND moral reasons to hold large amounts of money. Also, hoarding is subjectively defined and the only way to find out whether someone is hoarding is to analyze each case on its own. Acting against hoarding in general can complicate the lives of many.)

What if the government attempts to raise the supply of money to stop the hoarding? More money will push to create higher prices, which may motivate the 'hoarders' to hoard even more.[2]

Holding money

According to some authors, not only hoarding, but holding money in general is unproductive and detrimental to the economy. Some make a softer claim: that an (unanticipated) increase in the demand for money "pushes the economy below its potential".

Holding money is useful. Because it can be employed for the instant satisfaction of the widest range of possible needs, it provides its owner with the best possible protection against uncertainty. In the real world, there is always uncertainty. To the extent a man's perception of uncertainty increases, so will his holdings of money. This is investment into the removal of perceived uncertainty: the person will be better prepared to face an uncertain future.

Even if all or most people would attempt to increase their cash holding, the physical production structure would be unaffected. With people striving to increase the size of their cash holdings, the money prices of goods will be bid down, and the purchasing power per unit money will rise. This results in a higher purchasing power of money and lower prices of goods.[6]

Holding more money can have the very beneficial effect of increasing the degree of financial liquidity in the economic system. The higher is the degree of such financial liquidity, the less is the danger of insolvencies and bankruptcies and the greater is the security against any need for further increases in cash holdings. Therefore, increases in the demand for money for holding are self-limiting.[7]

Transfer of wealth

The positive effect of "having more money" benefits the producer of money and those getting it first; while the negative effects impact the latecomers. This redistribution of wealth may be limited to some degree (for example by doing business with those that get the money sooner), but cannot be avoided.[1]

(The question, whether the transfer of wealth is desirable, is ethical, not economical in nature.)


Stability of money appears to be a reasonable demand, In the classical meaning, it meant a stable composition of money. But to many it is the purchasing power, that should be stable. Money stable in the old way tends to have a stable purchasing power as well; and the free market allows its participants to avoid rapid fluctuations in the value of money (not that there were so many - the largest upswing in precious metals in history stayed well below regular growth rates of paper currencies).

Perhaps it is "fine tuning" of the purchasing power of money, called for by many, led by the economist Irving Fisher, that is desirable. It failed in practice; evidenced by an unprecedented fall in value and fluctuations. If so, could it be done better some day and is it desirable?

The problem is, the "purchasing power of money" doesn't and can't have a clear and impartial definition. Any choice of goods and their relations, that should represent the it, is completely arbitrary and as an average of many values may not apply any particular person - some people may experience rising prices, others a drop. Those, that create the definition of purchasing power (and have to do so every year anew) are granted a large, arbitrary power.[2]

Money as Measure

Ptolemy of Lucca argued that the alteration of coinage "would work to the people’s detriment, since money should be the measure of things . . . but the more the money or coinage is changed the more the value or the weight changes." The community would lose through alterations of the coinage because such alterations change a standard measure. This harm corresponds to the damage created by meddling with measures of length, temperature, etc. This applies to any alteration of money by the government.[8] Hayek also noted, that it upsets the reliability of accounting and will show spurious profits in excess to true gains. A wise manager could take this into account while calculating profits - but the tax authorities won't agree and will tax all the pseudo-profits. This taxation simply confiscates of some of the substance of capital, and in the case of a rapid inflation may become a very serious matter.[9]


It is often asserted, that higher money prices benefit debtors, as it lowers the relative value of their debts. This may not always be the case: if the lender's estimate of the rising prices is too high, the debtor may end up paying more on account of the expected inflation.[1]

(The question, whether the benefiting of debtors is desirable, is ethical, not economical.)

Ethical Arguments

While ethical considerations are not part of economical analysis, they are nonetheless relevant to the discussion. For several authors (Rothbard, Hülsmann) it is a major concern.


No paper currency was produced in the free market, it was always forced on its users by government decree. This curtailing of civil liberties, in particular the freedom of association and freedom of contract alone makes a strong argument against fiat money.[2]

Other Arguments

Historical impact

Mises argues[10], that the debasement of money was part of the reason why the ancient civilization of the Roman Empire has collapsed.

Oresme hints at a similar conclusion.[11]

Growth of the state

Inflation benefits the state on the expense of its population, and on the expense of lower levels of government. It is the economic driving force for the growth of the centralized state, and allows it monopolize more functions than under a natural production of money. This increases the influence on its citizens and weakens other groups.

The printing of money allows the state to act without support from the population, or against their will. To many philosophers, a government taking the property of its citizens arbitrarily is rightfully called a tyranny.[12]

Inflation pushes taxpayers into higher income brackets and so leads to unlegislated tax increases. It was estimated, that in 1973 was the U.S. government's revenue from inflation more than $25 billion[13] (compare against total receipts of that year: $359.5 billion[14]).


Paper money makes it possible to prolong war. People grow eventually tired of war and will try to resist further expenses of the state of it. The state can simply print the money and ignore the will of its citizens. This was reported to be the case in both World Wars, prolonged by months, if not years.

If everything is allowed in war (and e.g. the just war theory says otherwise), one should note there are others, less dangerous means to gather funds available.

Some might say, that a state is better informed about the war than the citizens. But isn't exactly that the role of political leaders, to inspire and inform the citizenry?[12]

Moral Hazard

Main article: Moral hazard

Forced inflation is inherently unstable as it turns moral hazard and irresponsibility into an institution. The slow decline creates a "race to the bottom" in financial institutions and leads to repeated economic crises.[12]

Moral consequences

Money is one of the primary measures of value in any society. As such, money is a central source of stability, continuity, and coherence in any community. By making money worthless, inflation threatens to undermine and dissolve all sense of value in a society. Consider what happens to our lives when we are forced to take our money purely on faith and that faith is betrayed by the government.

From an analysis of hyperinflation, several consequences are observed:[15]

  • people must concentrate more on the economic facts of life
  • government interventions lead to others, interfering with the market, but people learn to work around them
  • "flight into real goods" - the striving to quickly exchange depreciating money for real goods
  • the transfer of wealth disrupts the social order, and hard-working people can easily end up in poverty
  • a larger number of speculators
  • future becomes uncertain and unpredictable
  • authority of the older generation is discredited and power turns over to the youth
  • a rising number of substitutes and products of lower quality
  • while the rate of inflation differs, it affects every single country, and is the most pervasive economic fact of our time


  1. 1.0 1.1 1.2 Jörg Guido Hülsmann. "Ethics of Money Production", online version, Chapter 3 Money within the Market Process, referenced 2009-05-17.
  2. 2.0 2.1 2.2 2.3 2.4 2.5 2.6 2.7 2.8 Jörg Guido Hülsmann. "Ethics of Money Production", online version, Chapter 4 Utilitarian Considerations on the Production of Money, referenced 2009-05-17.
  3. Milton Friedman. "The Resource Cost of Irredeemable Paper Money", Journal of Political Economy, Vol. 94, No. 3, Part 1 (Jun., 1986), pp. 642-647, Published by: The University of Chicago Press, referenced 2013-01-17.
  4. Lord Ralph Harris. "Lord Ralph Harris", Commanding Heights, Interview conducted 2000-07-17, referenced 2009-05-19. "One of the important consequences of nationalized industries was that they were subsidized by the government because they could not be allowed to fail. A nationalized concern cannot, could not go bankrupt -- the government is the underwriter of the whole of the enterprise. When unions understood that, and could see could work with annual wage increases, the government then had to maintain a constant loosening of the monetary/fiscal control to allow prices to rise to cancel out the wage and price increases."
  5. D.W. MacKenzie. "Why We Should Worry about Deflation", Mises Institute, referenced 2009-05-19.
  6. Hans-Hermann Hoppe. "The Yield from Money Held" Reconsidered, Mises Institute, posted 2009-05-14, referenced 2009-05-17.
  7. George Reisman. "The Anatomy of Deflation", Mises Daily, August 2003, referenced 2010-03-09.
  8. Ptolemy of Lucca, On the Government of Rulers (Philadelphia: University of Pennsylvania Press, 1997), p. 134; referred to by Jörg Guido Hülsmann in "Ethics of Money Production", online version, Chapter 3 Money within the Market Process, p.73 n.20, see also Chapter 6, p.99 n.13. Referenced 2009-05-31.
  9. Friedrich Hayek. "The Austrian Theory of the Trade Cycle and other essays", "Can We Still Avoid Inflation?", p.84, referenced 2009-10-25.
  10. Ludwig von Mises. "Observations on the Causes of the Decline of Ancient Civilization", Chapter XXX. Interference with the structure of prices, Human Action, online edition, referenced 2009-05-17.
  11. Nicole Oresme, "The De Moneta of Nicholas Oresme and English Mint Documents", Chapter 18, p. 29. "If the Italians or Romans did in the end make such alterations, as appears from bad ancient money sometimes to be found in the country, this was probably the reason why their noble empire came to nothing. It appears therefore that these changes are so bad that they are essentially impermissible." Referenced 2009-05-17.
  12. 12.0 12.1 12.2 Jörg Guido Hülsmann. "Ethics of Money Production", online version, Chapter 13: The Cultural and Spiritual Legacy of Fiat Inflation, referenced 2009-07-15.
  13. Robert L. Schuettinger and Eamonn F. Butler. "Forty Centuries of Wage and Price Controls", Chapter 1 - Ancient World, p. 9-18, referenced 2009-08-14.
  14. "Table 15.1—Total Government Receipts in Absolute Amounts and as Percentages of GDP: 1948–2008", website of the Office of Management and Budget, referenced 2009-08-14.
  15. Paul A. Cantor. "Hyperinflation and Hyperreality: Thomas Mann in Light of Austrian Economics", The Review of Austrian Economics Vol.7 No.1 (1994), referenced 2010-01-25.