Let There be Money – Part 4

Why The Money Monopoly is Evil

Part 4 – by Aaron Koenig

Read: Part 1 | Part 2 | Part 3


Inflation Bubble
Inflation Bubble

Inflation is defined as the increase in the money supply in an economy. It derives from the Latin word inflate, meaning, “to blow up.” When the money supply grows faster than the number of goods and services in an economy, prices usually increase. We tend to call this price increase inflation, but economically this is incorrect. When news programs report on the “inflation rate,” what they are really referring to is a price index measured by a rather arbitrarily compiled basket of goods. Due to increased productivity and the global division of labor, the prices of consumer goods in this basket should have fallen. Instead, the effect of monetary inflation keeps prices the same or only causes moderate increases. You can see the price-raising effect of monetary inflation in the ever-increasing prices of real estate and shares, which are not part of the basket, and therefore not recorded by the so-called “inflation rate.” You will hardly ever hear about real inflation, which is the growth of the money supply. For example, in the USA the money supply has grown from about 500 Billion dollars in 1971 to nearly 12,000 Billion dollars in 2015.

The Cantillon Effect

Money in Printing Machine
Money in Printing Machine

If you like this article, read and find out how Bitcoin protects you from InflationIs Bitcoin A Safe Haven in Times of Crisis? By Aaron Koenig.

Inflation leads to growing social inequality. This is caused by the Cantillon effect, named after the economist Richard Cantillon. He demonstrated that those close to the source of the newly created money – governments, banks, and big companies that are well connected to government institutions – have a huge advantage to those who receive the money later. The privileged ones can buy goods and services at the old prices before inflation takes effect. When the money trickles down to those who earn salaries or live on pensions, prices have already increased, they can buy less for their income. Additionally, their savings lose value, as the central bank maintains interest at artificially low rates. Today, the interest on savings is even lower than the official “inflation rate,” let alone the real one. Only a few people benefit from a system like this, and it is at the expense of many others. The Cantillon effect has resulted in an ever-growing gap between the super-rich and the average citizen.

The growing divide between the “1%” and the rest of us is not capitalism’s fault, as people with little of knowledge of economics claim. Quite the contrary, it is caused by our monetary system, which has nothing to do with capitalism or a free market economy. You will find the idea of a centralized monopoly on money and a state-run central bank in the Communist Manifesto by Karl Marx and Friedrich Engels. As most Marxist ideas, it has done a lot of damage. Allowing a central authority to control money and define its price makes as much sense as letting a central planning institution fix the prices for consumer goods. The Austrian School has proven that the free market should determine the price of every good, including money.

Government Debts

National Debt Clock
National Debt Clock

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“The Austrian Way” by Aaron Koenig

Series: Part 1 | Part 2Part 3 | Part 4

Since the dollar is no longer backed by gold, the purchasing powers of all major currencies have plummeted. Today it would cost 15 dollars to purchase the same amount of goods as you could buy with a single dollar in 1971 (7). At the same time, governments’ debts have skyrocketed. The US debt has grown from about $400 billion dollars in 1971 to more than $20,000 billion dollars in 2015.

This is no coincidence. Borrowing fiat money is much easier for politicians than borrowing real money backed by gold or silver. The state issues bonds, which are backed by nothing other than the government’s ability to tax people. These bonds are either sold to the central bank for freshly created money, or to wealthy people who consider them a relatively safe investment. By debasing the currency or by lowering the interest rate, the central bank can easily reduce the burden of interest on the government’s budget. In extreme cases, the debt can be wiped out by hyperinflation or a currency reform, as it happened in Germany after its lost wars.

But normally, more and more debt is piled up, which will probably never be paid back. Interest rates are being paid by tax revenues or even by taking up new loans. Every company with this kind of fiscal policy would be sued because of a delayed filing of insolvency. But rules for politicians are different. They are not accountable for the debt they cause, they simply saddle the next generation with it.

The End of the Fiat Money System

Burning Fiat Currency
Burning Fiat Currency

It is much easier for politicians to fund their promises towards their voters and sponsors by incurring debt and using the hidden tax of inflation than to risk unpopularity by officially raising taxes. But the long term damages these causes to society are substantial. A fiat money system inevitably leads to a distribution of wealth from the bottom to the top. Taxpayers and savers are gradually expropriated for the benefit of those who already have money and power.

The system of unbacked, debt-based money that has ruled the world since 1971 is harmful and evil. It is the main cause of financial crises, growing government debts, and the increasing gap between rich and poor. It should be abolished immediately. But that is not so easy. Very powerful institutions, such as banks and governments, have a vested interest to keep it alive.

There is a superior option for fighting against this system: building a new one. This new system needs to be so much better than the existing one that more and more people start using it, until one day the old system becomes obsolete. That is what Bitcoin is all about.

The Austrian Way Cover Page
The Austrian Way Cover Page

This is an excerpt of Aaron’s book A Beginner’s Guide to Bitcoin and Austrian Economics

Aaron Koenig is a contributor to the Census Blog. He is an entrepreneur, consultant, writer, and film producer, specialized in Bitcoin and Blockchain technology. Aaron is the author of the books A Beginner’s Guide to Bitcoin and Austrian Economics, Cryptocoins – Investing in Digital Currencies and The Decentral Revolution

In-House Article:

How Much Is Your Country’s Debt Impacting You?

How Inflation is Stealing Your Wealth?

Bitcoin as the New Gold Standard

In-House Articles:

What is Sound Money and Why it Matters?

Stablecoins: The Money 2.0

Let There be Money

Read: Part 1 | Part 2 | Part 3

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