When A King Sold Bonds Under the Gold Standard This Had No Effect on the Total Money Supply; If He Spent More, Others Would Have to Spend Less

Furthermore, constrained by a commodity money standard, monarchs were unable to "monetize" their debt. When the king sold bonds to private financiers or banks, under the gold standard this had no effect on the total money supply. If the king spent more as a consequence, others would have to spend less. Accordingly, lenders were interested. in correctly assessing the risk associated with their loans, and kings typically paid interest rates substantially above those paid by commercial borrowers.

In contrast, under the gold exchange standard with only a very indirect tie of paper money to gold, and especially under a pure fiat money regime with no tie to gold at all, government deficit financing is turned into a mere banking technicality. Currently, by selling its debt to the banking system, governments can in effect create new money to pay for their debt. When the treasury department sells bonds to the commercial banking system, the banks do not pay for these bonds out of their existing money deposits; assisted by open-market purchases by the government owned central bank, they create additional demand deposits out of thin air. The banking system does not spend less as a consequence of the government spending more. Rather, the government spends more, and the banks spend (loan) as much as before. In addition, they earn an interest return on their newly acquired bond holdings. Accordingly, there is little hesitation on the part of banks to purchase government bonds even at below market interest rates, and rising government debt and increased inflation thus goes hand in hand.

—Hans-Hermann Hoppe, Democracy: The God That Failed; The Economics and Politics of Monarchy, Democracy, and Natural Order (New Brunswick, NJ: Transaction Publishers, 2011), 60n27.