Chapter 17: Inflation and Corruption
Updated: 1/13/20
Christian Economics: Teacher's Edition
Your silver has become dross, your best wine mixed with water (Isaiah 1:22).
This passage is an aspect of point four of the biblical covenant: judgment. The addition of debased metal to silver ingots was a way to deceive people who sold goods and services to silversmiths and other sellers of silver. The sellers of goods and services initially overestimated the value of the debased silver. Then producers of wine imitated the silversmiths. This made the accurate imputation of economic value more difficult for consumers. This was a form of theft: point three. But this form of theft rested on a form of deception that distorted economic value.
Sometime around 740 B.C., the prophet Isaiah came before the southern kingdom of Judah (Isaiah 1:1) with a covenant lawsuit. The nation was corrupt: bottom to top.
Hear, O heavens, and give ear, O earth; for the Lord has spoken: “Children have I reared and brought up, but they have rebelled against me. The ox knows its owner, and the donkey its master's crib, but Israel does not know, my people do not understand.” Ah, sinful nation, a people laden with iniquity, offspring of evildoers, children who deal corruptly! They have forsaken the Lord, they have despised the Holy One of Israel, they are utterly estranged (Isaiah 1:2–4).
The sin of monetary inflation was one of those listed by the prophet. Silver had become dross. What did this mean? Silver was being debased by the silversmiths. The practice of smelting was widely known in the ancient Near East. It is mentioned in the Bible (Deuteronomy 4:20; Isaiah 48:10; cf. Daniel 3:19–20). In Isaiah 1, smelting is used as a metaphor of God’s cleansing Israel of evil.
Therefore the Lord declares, the Lord of hosts, the Mighty One of Israel: “Ah, I will get relief from my enemies and avenge myself on my foes. I will turn my hand against you and will smelt away your dross as with lye and remove all your alloy. And I will restore your judges as at the first, and your counselors as at the beginning. Afterward you shall be called the city of righteousness, the faithful city” (Isaiah 1:24–26).
Isaiah used debased silver and watered-down wine as metaphors of ethical corruption. This does not mean that there was no debased silver or watered-down wine in Israel. On the contrary, their presence was widespread and well known, which is why the accusation would be understood. The people used debased silver in exchange. They drank watered-down wine. This lent credibility to his accusation of ethical debasement in the city. It was part of his overall assessment of corruption.
How the faithful city has become a whore, she who was full of justice! Righteousness lodged in her, but now murderers. Your silver has become dross, your best wine mixed with water. Your princes are rebels and companions of thieves. Everyone loves a bribe and runs after gifts. They do not bring justice to the fatherless, and the widow's cause does not come to them (Isaiah 1:21–24).
These were literal practices. They were not solely metaphorical.
What were the smelters doing? They were taking a less expensive common molten metal and mixing it into the liquid silver. The increased production of silver-looking bars initially did not look different from previous silver bars. The smelters then spent the silver bars into circulation by purchasing goods and services. They purchased these valuable items at the pre-debasement purchasing power of silver bars. They preyed on the ignorance of non-specialists, who would not recognize the fact that the bars contained a reduced quantity of valuable metal than before. This was theft. The Mosaic law identified this practice as corruption. “You shall do no wrong in judgment, in measures of length or weight or quantity. You shall have just balances, just weights, a just ephah, and a just hin: I am the Lord your God, who brought you out of the land of Egypt” (Leviticus 19:35–36).
The initial profit from this theft would have been minimal. The bars were still mainly silver. But, over time, the percentage of the base metal was increased. This deterioration became visible. The result of this increase in the money supply was predictable: rising prices. People bid more for goods and services because they had a greater number of silver bars with which to bid.
In response, winemakers imitated the smelters. They added water to the wine. They sold the same quantity of wine for the same number of silver bars as before. Prices did not rise. Supply and demand balanced at the old exchange ratio. The quality of the silver bars and the quality of the wine declined together. The debasement of the silver bars was initially based on deception. But this deception could not be concealed when it became greater: more base metal poured into the silver solution. After this, the rest of the economy succumbed. Either prices rose for a product or else quality declined (deception).
Isaiah’s point was ethical. The corruption of their morals was the cause, but this corruption was not contained within the confines men’s imaginations. Imaginations became actions. Opportunities were exploited. The moral corruption spread into the general society. This became evident in the economy. The entry point of this corruption was debased currency. Debased silver was representative of national corruption, but it also extended the corruption. It was a metaphor, but it was more than a metaphor: it was a cause.
Money in a developed economy is the common factor in most transactions. Prices are registered in the currency unit. Because it was the crucial common factor in the economy, any tampering with the money supply had ripple effects throughout the entire economy. If the civil authorities refused to impose common weights and measures on sellers, then only the market could impose negative sanctions. This is what the market in Judah was doing. It was imposing negative sanctions on buyers who were using a debased currency unit: reduced quality of consumer goods. Other sellers matched the corruption of the smelters, which had been validated by the buyers when they did not protest the adulteration of the currency. Analytically, the moral corruption was universal: smelters, consumers, and sellers. Everyone was trying to steal himself rich. Isaiah warned of God’s negative sanctions ahead if they did not repent.
Buyers possess money, which is the most marketable commodity. This is the economic basis of their superiority over sellers. This is sometimes called consumer sovereignty, but this terminology is misleading. Sovereignty is a legal category. Buyers and sellers possess sovereignty: legal ownership. Economic superiority is best understood as customer authority. Customers own what sellers want to buy: money. To gain ownership of money, sellers must supply buyers with whatever buyers want at prices and terms of sale that buyers are willing and able to pay.
The silversmiths or smelters possessed the raw materials out of which money was made in the ancient Near East: silver and a hardening alloy. Second, they possessed the knowledge of how to manufacture silver bars. Third, they initially possessed the people’s trust. Fourth, they had access to markets in which their output could be voluntarily exchanged for goods and services.
As the initial sellers of money, they possessed the greatest market-based authority in the economy. They were the supreme buyers.
They were corrupt. Because of their highly specialized knowledge of the manufacture of silver bars, they could deceive buyers of money, i.e., sellers of goods. Because they oversaw the starting point of the money economy, smelters had great responsibility. They had the power to deceive the buyers of money. This high degree of economic authority, which was due to specialized knowledge, is why God holds producers responsible for not tampering with standards (Leviticus 19:35–36). Because money is the starting point of exchange in an advanced division of labor economy, and also because money is the central institutional arrangement in a money economy, smelters possessed the highest degree of economic authority in ancient Israel. In modern times, central bankers possess this degree of authority. This authority is implemented by commercial bankers, but a central bank is in charge in each nation.
The national civil government grants a legal monopoly to its central bank. Thus, in the modern economy, the civil government possesses supreme legal authority and also supreme economic authority. Its agent is the central bank. Yet, operationally speaking, central bankers possess greater economic knowledge and therefore greater authority than politicians. The judicial supremacy of the state over the national central bank is a politically convenient fiction in most nations.
The supreme buyers in Isaiah’s day were morally corrupt. They were thieves. They decided to break the law of honest weights and measures. The civil authorities, who were equally corrupt, allowed this. The public at some point discovered the deception. Sellers then decided to protect themselves. They also violated the laws. They debased their goods by lowering quality.
The supply of money kept increasing. The supply of goods did, too, but not the same quality of goods as had prevailed before the monetary inflation produced by smelters. Thus, buyers of goods lost access to a price system that conveyed accurate information. Why was this? Because the unit of account that had served buyers and sellers as a source of accurate information regarding supply and demand had been debased. The information that the array of prices conveyed was no longer as accurate as it had been under the older, pre-debasement regime.
The money was spent into circulation by the smelters. Initially, it was purchased by sellers of goods and services at pre-debasement prices. This benefitted dishonest smelters. They grew richer at no extra cost. The other smelters followed the example of the dishonest smelters when it became obvious that the civil authorities were not going to prosecute the dishonest smelters.
Because the debased money was released into the economy at specific points of sale, those sellers who gained early access to the new money possessed an advantage. They could turn around and buy whatever they wanted at yesterday’s prices. The general public had not yet figured out that there had been an increase in the money supply. Other sellers did not perceive that there would be higher bids as the newly created money spread through the economy. Buyers would be able to bid higher because they had more monetary units with which to bid.
This led to a redistribution of wealth: to those users of debased money who got access to the money early and immediately spent it from those who got access late, or those who got access early and hoarded it rather than spent it. They sold assets at pre-debasement prices, but then faced rising prices for the money they now possessed. Their money bought less. They became the economic victims of debasement. This time delay in the spread of debased money through the economy was first discussed by Ludwig von Mises in his 1912 book, The Theory of Money and Credit.
The post-debasement array of prices initially concealed the new conditions of the supply of money and the demand for money. Then rising prices undermined the decisions of those sellers who had sold at prices that were too low. This means that prices no longer conveyed accurate information about both supply and demand for a growing percentage of goods and services. This loss of accurate information at these new prices produced a net loss of wealth for most participants in the economy. (Note: if this statement is accurate, then it is analytically possible to make interpersonal comparisons of subjective utility. This ability is officially denied, but never adhered to in practice, by defenders of methodological individualism’s concept of 100% subjectively imputed economic value. This is the Achilles’ heel of all forms of philosophical nominalism: the logical inability of the nominalist to make philosophically consistent value judgments for collectives. Christian philosophy is neither nominalist nor realist. It is covenantalist: judicial. It rests on the concept of a Trinitarian God—simultaneously one and many—who imputes value and meaning to every aspect of life. Men, who are made in God’s image, have the ability to think God’s thoughts after Him in a creaturely fashion. This insight makes Christian economics different from secular economics.)
Sellers initially found ready buyers at pre-debasement prices. They could sell whatever they had brought to market. This was because there was now more money in the economy, not because buyers (other than smelters) had gained access to the new money by increasing the production of goods and services. There was no new wealth in the economy. There was only more money. There would soon be new conditions of supply and demand for money. But this would be the result of debased money, not greater productivity.
Sellers were happy that they had been able to sell all of their output at the prevailing, pre-debasement array of prices. As sellers, they responded predictably. Some sellers continued to produce the same quantity of goods and services. Some sellers increased production to take advantage of strong monetary demand. An economic boom began. But there was an inherent problem with this boom. It was based on the strong monetary demand for goods at pre-debasement prices. These prices could not be maintained if there were no further injections of debased money. Sellers who had expanded output on the assumption that this increased demand would not raise prices had made a mistake. The array of ignorance-based prices had sent out false signals: “There is more demand based on rising productivity.” If the debasement continued, these false signals would soon result in losses for producers who had bought producer goods in order to increase output. The price of producer goods would soon rise in response to increased demand from producers who were being misled by the array of prices. The price of consumer goods would fall: reduced inflation-based demand.
If there was not a further issuance of debased money, the artificial economic boom would turn into a crash. Sellers would experience losses. They had overpaid for producer goods. But if smelters continued to issue debased money, prices would become less accurate, and the boom might continue, but only at the risk of a far worse crash when monetary inflation finally ceased. This chain of events was first discussed by Mises in The Theory of Money and Credit. It is referred to as the Austrian theory of the business cycle.
In this chain of developments, there would be some winners. They would go into debt at the beginning of the inflation process. They would buy assets that appreciate in inflationary times: real estate, precious metals, capital equipment, and raw materials. Then they would then sell these assets at the end of the boom, reverting back to money. Then, in the crash, they would be able to buy low-cost income-producing assets that generate passive income. But there are very few people who are this alert to the business cycle and its investment effects.
In the modern world, something in the range of 14 billion pencils were sold each year in the 1980s, according to Henry Petroski’s 1989 book, The Pencil (p. 331). This same figure is still the common estimate today, possibly because no one has gone to the trouble of collecting better data. Petroski also estimated that there were 125 manufacturing process required to produce one pencil. This is indicative of a highly sophisticated system of production for what appears to be a simple product. Prices guide decision-makers in every stage of production. The pencil market is affected by an incalculable array of prices and exchange relationships among people involved at every stage of production. That was Leonard Read’s point in 1958.
When central banks, in conjunction with commercial banks, add new digital money to the money supply, this creates distortions in economic information. These distortions mislead buyers and sellers. This is less true of pencils. The pencil is an old technology that extends back to the late sixteenth century. Buyers and sellers of pencils can make reasonable estimates of what the supply and demand for pencils will be in the following months or year. Pencils are simple products. The manufacturers of pencils in any economically developed nation are few, and they have been in the business for decades. Surprises are few. Innovations are rare. A pencil is so cheap that few people cut back on their purchase of pencils in a recession. They cut back instead on their purchase of more expensive consumer goods. This is not the situation facing most manufacturers. For most manufactured goods, the markets are much younger, and the degree of concentration in the industry is less. The complexity of production is high for a product like an automobile. Some products are highly sensitive to the ups and downs of the economy. Pencils are not. Profits are low. So are losses.
Moral corruption has multiple outlets: in law enforcement, economic production, and family relations. In economic life, the most pervasive form of corruption is concealed theft. This is practiced by producers, who possess specialized information on the details of production. Here, quality can be cut without initially being perceived by buyers. The supreme specialist in weight-tampering is the producer of money. His tampering affects the entire economy.
The smelters in Judah were thieves. They debased the currency. They sold alloy-debased silver at the price of pre-debased silver. This made them richer, but it made others poorer. The more alloy they added, the more obvious the corruption. Then other sellers of goods responded in kind. They reduced the quality of their output. Prices may not have changed much, but quality did. Other producers imitated the smelters. Corruption and deception spread. Watered-down wine became the metaphor of this universal debasement.
It is no different in modern times. Nations no longer use silver coins because the inflationary digital currency systems long ago drove silver coins into hoards. Silver coins are worth more for their silver content than they are worth as money. This took place in the United States, beginning in the fall of 1963. I had bought silver coins all summer. I knew this would happen. I understood Gresham’s law: “Bad money drives out good money.” Why? Because there are price controls on all forms of money inside a nation. Here is a universal rule: when there are government-imposed price controls, there will be shortages of the artificially undervalued goods. In late 1963, this meant silver coins. The government said that a dime was worth ten cents. But the silver in a dime was worth more than ten cents. Silver coins therefore disappeared into hoards. Why give up ownership of something worth 15 cents in order to buy something worth ten cents? All over the world in the late 1960s, silver coins went out of circulation. Millions of consumers got even with the central banks that were defrauding the public. Central banks were debasing the currency. In 1964 in the United States, the government went far beyond the corruption of the smelters in Isaiah’s day. The mint ceased issuing 90% silver coins. It issued 100% base metal coins with a thin layer of shiny, silver-looking metallic coating. The coins were all alloy, no silver. The debasement of the silver coinage was complete. The moral debasement had only just begun.
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