Monday July 9, 2012

Where Money Meets Morality

Nicholas Freiling is a fourth-year student of economics at Grove City College. He grew up and lives in...

If there's one political issue that puts America to sleep, it's monetary policy.

Yes, most will concede that monetary policy is important. But the fact is, between all the M1s, M3s, CPIs, PPMs, and Vt=(nT/M)s, the average person gets lost in what appears to be a hopelessly complex system of regulation and statistical modeling.

This is regrettable, considering the profound influence money has on our well-being. Even more unfortunate is the fact that many otherwise well-informed citizens "defer to the experts" for practicality's sake, believing that educated monetary officials cannot possibly propose a policy that is counterproductive, let alone immoral.

But monetary policy is no less vulnerable to moral abuse than is any other political issue. Indeed, monetary policy undergirds a huge part of human life, affects every other political decision, and has a deeply moral component that should concern any informed observer.

For example, the Old Testament—sacred to three of the world's major religions—contains commands regarding money that are essentially ignored by modern-day policymakers, liberal or conservative. Granted, many of these commands rest on implicit assumptions, but they are obvious assumptions nonetheless.

When God commands his people to use "honest scales and honest weights" (Leviticus 19:36), laments that Israel's "silver has become dross" (Isaiah 1:22), and is said to consider "diverse weights" and "false balances" an abomination (Proverbs 20:23), it becomes easy to understand money as an area of human commerce with which God's law is concerned.

This is because in ancient times, inflating the currency did not involve complex procedures like "quantitative easing" or extending credit on fractional reserve. Rather, inflation was achieved by coin-clipping or other deceptive measures designed to make phony coins appear to be real. This is aptly called "counterfeiting" today, and is not considered morally justifiable.

But while most Americans today recognize that counterfeiting is dishonest, many do not hold monetary officials responsible when they take a roundabout approach to doing the same thing. When the Federal Reserve adds a few zeros to the end of its balance sheet in order to buy Treasury bonds, they create money out of thin air. This money was not earned—it was simply contrived into existence.

Certainly some will disagree. This sort of monetary expansion, they will say, is necessary during economic recessions. I'll leave that argument to another day. But the conflict remains: How can one defend "just weights and measures" while advancing a policy that would have the money supply altered—distorting its true value—by majority vote?

But religious concerns aside, monetary inflation harms people—especially the very poor and those on a fixed income. Unfortunately, most people who are being cheated by inflation probably don't know it, believing instead that policymakers would not inflate the currency if it were not good for their constituents.

But when the government increases the money supply, every dollar you have is suddenly worth a little bit less. All that money you have been saving up over the past ten years is not worth as much as it was when you started to put it away. Saving becomes slower and more difficult.

Yes, wages will eventually adjust to account for the devalued dollar. But this takes time—a lot more time than it does for grocers to change the label on their loaves of bread or bottles of milk. And for those on a fixed income, wage increases are very rare indeed.

Needless to say, inflation equals a sort of theft by those who use the newly created money to serve their own ends, for their new purchasing power is earned at the expense of everyone else.

It should be obvious now that monetary policy is something that should concern those who profess an allegiance to a higher moral code, and especially to those who claim belief in the Judeo-Christian God. The issue is far from black-and-white, but caution—not apathy—should be our approach to this important issue.

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