Money debasement is one type of exploitation against which the book of James, chapter 5, verse 3, in the Holy Bible, warns the rich: “Your gold and silver have corroded, and their corrosion will be evidence against you and will eat your flesh like fire.” Gold and silver were the money of that age, and one unique attribute that makes them ideal for being money, ethical money, is that, as long as they are 99.9 per cent pure, they never truly corrode.
So James condemned business owners who debased money by adding impurities to it in order to pay their workers. Kings were notorious for that. They added cheaper metals like tin to their gold and silver to generate more money for themselves without having to work for it or to tax for it, and then they passed that “new money” to unsuspecting people. The equivalent of that process today is money creation, an increase in money supply out of nothing.
By knowingly exchanging fake and impure coins for goods and services from honest and hardworking people, the king has defrauded them. He has broken the moral law and violated the laws of God, namely the eighth commandment – you shall not steal. Money debasement is the practice of fraud and stealing.
Nowadays, we are not paid in gold and silver, but instead in paper money which is a much greater concern. The government controls our money in the same way the dishonest king did: the central bank creates base money out of thin air, just through a click on a keyboard adding several zeros to the government bank account. With devalued money, the state can finance any costly prestige project that it wants. It needs only print the money.
However, contrary to the mercantilist-Keynesian vision, the production of money is not a cause of the wealth of nations, but rather a cause of inflation. While inflation is commonly defined as a rise in prices, its etymological root actually refers to an expansion of money supply which results notably from state interventions.
In Mauritius, the monetisation of budget deficits, combined with the dalliance of the MIC with cashstrained companies, has led to extremely high growth rates of the money stock. One would expect the Bank of Mauritius to explain its thinking in terms of the quantity theory of money which relates trends in money growth to changes in inflation and nominal GDP. When Governor Harvesh Seegolam took office in March 2020, the monetary base, which consists of the actual quantity of money (the banking reserves and currency held by the public), amounted to Rs 126.4 billion. Since then, it has more than doubled to reach Rs 263.6 billion by December 2021. As the annual growth rate of the monetary base in that month was still very high at 35.4%, there are reasons to be, yes, obsessed by inflation, as against Gerald Lincoln’s conviction that “l’inflation ne doit pas devenir une obsession.”
Firstly, when the money stock expands, individual prices do not increase at the same time and in the same proportion, but at different points of time and in different proportions. This is known as the “Cantillon effect”, named after the French economist Richard Cantillon who described it at the start of the 18th century. Production of money leads to a redistribution of income and to significant wealth inequalities: the first users of the monetary units produced can exchange them before the price level goes up, but producers who use the new units later will have to pay higher purchase prices before they can sell.
Secondly, the inflation of the money supply stimulates growth and employment only in the short term, but at the cost of capital consumption, which will hurt real output and real wages in the long run. Production of money gives rise to a kind of institutionalised irresponsibility called “moral hazard.” It gets all market participants used to the interventions of the central bank as the lender of first resort, and they neglect their own precautions. The financial system therefore weakens while the inflationary expansion of money and credit accentuates the financialization of the economy.
Thirdly, the production of money is for the central bank a source of income, a seigniorage, which is the difference between the value of money and the cost of producing a currency, i.e. the amount of resources the state obtains from the issuance of fiat money. Based on the IMF definition of seigniorage (the annual change in reserve money divided by nominal GDP), it can be said that the Mauritian government collected 15 cents for every rupee of output in 2021.
One main reason why the Roman Empire fell into the hands of the Christians around 320 A.D. is that the pagan emperors had destroyed the Roman coinage system. Nobody trusted the money, so nobody trusted the state. In modern times, when a society finds that its rulers have debased the currency unit, people’s support of government goes down. In Inflationistan, politicians would do better to serve God rather than to marvel at the wonders of debased money.