It had been a long time since much of anything had happened in the Steady States of Equilibria, the good old SSofE. Then a certain citizen, Entrepreneurial by name, had the idea for an economically useful device which he duly patented. He would need a factory to produce this device but, the Steady States being at the time optimal, there was no way to enforce a temporarily diversion of the population’s energies toward the expenditures with which to build a factory for production of Entrepreneurial’s new gizmo.
So Entrepreneurial sought out the banker Exnihilo, who agreed that the former’s invention would indeed ease the burden of labor in certain sectors of the SSofE, thereby increasing the general welfare. Exnihilo created an asset for himself in the form of an offsetting accounting entry to a deposit into Entrepreneurial’s checking account. As the new factory was taking form, Entrepreneurial’s balance declined while balances increased for those who worked on the factory and supplied materials for its construction.
Entrepreneurial’s spending of the money created for him necessarily bid-up prices for the goods and services required to create his factory. As is always the case, the new money spent into circulation caused an inflationary transient in the SSofE. This was something of a hardship to the population at large: higher prices forced the average citizen to scale back his consumption of goods and services so as to make these goods and services available to build Entrepreneurial’s factory. Higher prices had temporarily forced a diversion of existing assets from immediate consumption toward creation of a new physical asset on the expectation that this asset would be net benefit to the SSofE.
Now it came to pass that the factory was completed. The money created by Exnihilo for Entrepreneurial’s use had passed into the accounts of those who had built his factory, and these accounts constituted new, enforceable claims against Exnihilo’s assets. Fortunately for all, the factory was a success. Its profits not only provided Entrepreneurial with a passive income, there was enough left over to service his debt to Exnihilo. Since the asset Exnihilo had created for himself was earning an income, it could be sold as an annuity if such were ever necessary to honor the claims of those who had supplied the labor and materials that went into constructing Entrepreneurial’s factory.
These financial successes only reflected counterparts in the enhanced corporeal realities into which the SSofE had settled. Entrepreneurial’s new device ultimately meant that the SSofE’s general population could now consume somewhat more than they had before while expending somewhat less effort — even while providing a new flow of profits to Entrepreneurial. The SSofE, having retained its composition as a uniformly civil and industrious people throughout the disruptive period, saw their good fortune given the widest distribution through the action of their free markets. Eventually all concluded that their transition had been worth the period of stress thrust upon them by creating new money for first use by the proprietor of a new enterprise.
Entrepreneurial then proved to be an unusually prudent man who wished for his success to pass on to his posterity unencumbered. He therefore contented himself with less passive income from his profits in order to pay Exnihilo more than what he owed in interest on his original loan, thereby gradually reducing his principal obligation to zero. This had no effect on the new, improved physical stasis of SSofE; but redemption of Entrepreneurial’s debt annihilated the money that had been created for him, to the end of deflating SSofE’s currency — less money being needed simply because none now flowed from Entrepreneurial to Exnihilo.
Moral: Creating money ex nihilo is like counterfeiting in that it gives advantage to whoever is granted first use of the money. Diluting the value of money in the pockets of a population does indeed harm them in the present moment, and can only be justified if advantage is specifically granted so as to achieve a general betterment of future circumstances. An economy at its optimal equilibrium is analogous to a person standing fully erect in that neither can jump to a higher level: both must gather their energies into a crouch in order to attain something higher.