The message unanimously churned out by politicians, central bankers, and
‘mainstream’ economists is that central banks are there for the ‘greater
good’. They provide the economy with sufficient money and credit, and they
fight inflation, thereby supporting output and employment growth. What is
more, central banks, are supposedly in a position to effectively fend off or
at least mitigate financial and economic crises. However, unfortunately,
nothing could be further from the truth.
Throughout history, central banks have been created, first and foremost,
to fill governments' coffers. To increase the king's or elected government's
financial means through an inflationary scheme – usually too
elaborate and too treacherous for most people to see through. Central banks
are instrumental for putting the ruler — or the ruling class — into a
position where they can plunder the people on a grand scale and, by way of redistributing
the loot, making a growing number of people financially and socially
dependent on it.
To that end, central banks have been assigned the monopoly of money
production. This has made it possible to replace commodities, or "natural
money" with unbacked paper or fiat money. Central banks provide
commercial banks with fiat central bank money, and commercial banks
are free to pyramid a multiple of fiat commercial bank money on top
of it. This is what monetary experts typically call a “fractional reserve
banking system,” which is a genuinely inflationary scheme.
Murray N. Rothbard even speaks of a cartel between the central
bank and commercial banks. In practice, the central bank acts as a cartelizing
agent: "to cartelize the private commercial banks, and to help them
inflate money and credit together, pumping in reserves to the banks, and
bailing them out if they get into trouble." The fiat money cartel, formed
between the central bank and commercial banks, has far-reaching economic and
social-political consequences.
For instance, fiat money is inflationary in the sense that it loses its
purchasing power over time; it cannot, and does not, serve as a much-needed
store of value for savers. Also, the issue of fiat money sets into motion an
artificial upswing (boom), which, however, must sooner or later flip to a
downswing (bust). What is more, fiat money makes consumers, firms, and
governments run into ever higher amounts of debt, pushing them towards a
situation of over-indebtedness.
There is an additional severe problem with central banks’ fiat money: It
affects income and wealth distribution, and it does so in a non-merit-based,
anti-free market way. To understand this, we have to consider that if and
when the quantity of money increases in an economy, the prices of different
goods will be affected at different points in time and to a different degree. In other words: A rise in the quantity of
money changes - and necessarily so - peoples' relative income and wealth
position.
The early receivers of the new money will be the beneficiaries,
for they can purchase goods at still unchanged prices with their fresh money.
As the new money is passed from hand to hand, prices are rising. The late
receivers are put at a disadvantage: They can purchase only goods at
elevated prices with their new money. In other words: The early receivers of
the new money get rich(er), the late receivers get poor(er). Needless to say,
those who do not receive any of the new money will be worst off.
In the crisis 2008/2009, for instance, it was the banking and finance
industry (“Wall Street”) that was bailed out in the first place. Central
banks printed up new money balances, injected them into banks’ balance sheets
and offered them generously with extremely low refinancing costs. In the US,
for instance, the balance sheet of the banking cartel is now way bigger than
it was before the outbreak of the crisis. The banking cartel has weathered
the crisis pretty well it has helped to bring about by issuing fiat money in
the first place.
It is misleading to think a rise in the quantity of money would be
“neutral” in the sense that it would leave peoples’ income and wealth position
unchanged. In today’s fiat money regime, the relentless increase in the fiat
money supply provided by the banking cartel does not only drive up
consumer goods prices. It also pushes up asset prices such as stock, real
estate, and housing prices. The holders of assets whose value goes up due to
inflation benefit, those holding money balances lose out: The latter’s
purchasing power is diminished.
It is difficult to pin down exactly who is a net-winner, and who is a
net-loser of the banking cartel's inflationary scheme. As a rule, however,
fiat money holders bear the brunt – especially if central banks push interest
rates to negative levels in inflation-adjusted terms; the income of
wage earners falls behind the income of those owning assets whose prices inflate.
Those getting bank credit are among the first receivers of the newly created
money and thus benefit while those who don't get bank credit are on the
losing end.
Those taking side with the “deep state”, which is financed by vast amounts
of credit provided by the banking cartel on favorable terms, enjoy secure
employment and comfortable pension packages. Firms get profitable business
from government orders. In particular, the commercial and investment banking
industry, with its privileged access to central bank credit pockets enormous
profits and pays downright obscene staff compensations.
It would be a mistake to argue that the banking cartel's fiat money scheme
works for the greater good. It benefits some — typically the few — at the
expense of others — typically the many. So it does not come as a surprise
that a growing number of people have raised the question: Does the
banking cartel make inequality worse? Of course, inequality of income
and wealth has many reasons, and as long as people are unequal in terms of
inventiveness, industriousness, talent, and perseverance, income and wealth
will be unequally distributed.
However, sound economic reasoning reveals that the banking cartel
contributes to income and wealth inequality, even to a growing gap
between the net-winners and net-losers of the fiat money scheme. This kind of
inequality cannot be convincingly justified by economic or ethical
considerations — for it is the direct outcome of the state monopolizing the
production of money, and special interest groups taking advantage of the
state’s money production monopoly to serve their purpose(s).
Public resistance against the wheelings and dealings of the banking cartel
has been held in check so far, presumably because people have been enjoying a
rise in real incomes over the past decades. What they do not see is the counterfactual:
The banking cartel has kept most peoples’ income and wealth below potential;
they could be better off, but the banking cartel has been preventing it. This
statement opens the door for a counter-argument: Without the
banking cartel and its fiat money scheme, there would have been no economic
growth at all .
This, however, represents one of the perhaps most noteworthy errors in
‘mainstream' monetary theory. To explain, money — the ultimate means of
payment — is useful only for its exchange value. A rise in its
quantity does not confer any social benefit; the economy is not
better off if the quantity of money increases. As pointed out earlier, an
increase of the money supply only benefits some at the expense of others. It
is a means to slyly strip the uninformed of their resources,
shovelling them into the coffers of the informed.
One question remains: Does a rise in the quantity of money not induce
additional economic activity? This question implies a proposition that
has no basis in sound economic theory. It is a seductive promise at best. For
it can be logically argued that there is, and can be, no constant relation
between external factors (such as a change in the quantity of money) and
human action (such as, for instance, inventing, investing, or producing); the
hypothesis “increasing the quantity of money induces growth” is thus
logically unsustainable.
So, unfortunately, this article ends with a bitter insight: Sound economic
reasoning will come to the conclusion that the fiat money scheme –
represented and upheld by the banking cartel – contributes, and
necessarily so, to income and wealth inequality within society. It is one source of widening the gap
between the rich and the poor. By all standards, fiat money must be
considered socially unjust. The same applies to the collusion
between central banks and private banks.
So what is to be done? The solution is straightforward: Establish a free
market in money, shut down central banks, dismantle the banking cartel. As
Murray Rothbard says: “[A]bolish the Federal Reserve System, and return to
the gold standard, to a monetary system where a market-produced metal, such
as gold, serves as the standard money, and not paper tickets printed by the
Federal Reserve.” Perhaps the debate about growing inequality
helps to rehabilitate our money system — something economic insights have
failed to achieve so far.
