Anybody watching their savings erode while trying to get into the rapidly-inflating housing market know the scrum is screwed against them, and that price inflation is very far from zero. Like it or not, one of the three main culprits is the fiat monetary system. “Getting richer at the expense of others through the use of the fiat monetary system, which represents a government monopoly and banking privileges, is unjust,” says Philipp Bagus in this guest post. “This system stays in place because people do not understand its detrimental and fatal consequences such as an unfair redistribution, business cycles, poverty, bigger government, moral decay, and so on. In order to un-do this system we must convince people of all this.”
He’s so convinced of that he just wrote a book: Blind Robbery!: How the Fed, Banks, and Government Steal Our Money, co-written with Andreas Marquart. See Karl-Friedrich Israel's full review on mises.org, who recently spoke with Dr. Bagus about the new book and how certain politically-influential groups benefit from our modern monetary system.
Philipp Bagus: Always when new money is produced, there is a redistribution in favour of those who receive the new money and spend it at the old, still low prices and to the detriment of those who receive the new money later and see prices rise faster than their income. In our fiat money system [in which unbacked paper is legally enforced as money] new money can and is produced at almost zero cost. Those actors who are in position to receive the new money first benefit. Among them are the government and the financial system.
The new money is usually introduced into the market in form of loans. Those, who receive a higher percentage of these loans profit at the cost of those who do not.
The super-rich have an advantage in this respect. They have an easier access to the new money produced by the banking system in form of loans, because they can offer collateral. They can offer real estate as a collateral for new loans using these loans to buy even more real estate or stocks pushing up prices. A poor person has more difficulties to get a loan in normal times because he does not own assets. Only in dangerous bubble times will he get easy and cheap access to loans. Thus, someone like George Soros may easily give a call to his banker and get a million dollar loan in an instant to buy more assets. A poor or even middle-class person will not get such a million dollar loan so easily, rather they will observe how asset prices are being pushed up and they keep getting relatively poorer. Thus, our fiat monetary system is one often-neglected reason for an increasing wealth inequality.
MI: As we all know, if you’re not already wealthy, it’s difficult to build wealth even if you carefully save a lot of money. What is it about our current economic system that makes this so difficult?
PB: If you save in cash today, your savings will be eroded by price inflation. Asset prices have risen relatively more than income in the past. That means that it becomes ever more difficult to buy a standard house with a standard income. The monetary system drives people to indebt themselves early in life to buy a house. The house will tend to rise in value and the debt will be eroded by price inflation. Saving in cash for 10 or 20 years in order to buy a house is not the smartest way in our monetary system that implies continual and relatively strong increases in the money supply. Things would be very different and in some sense much easier in a pure gold standard.
MI: You have suggested that without the fiat monetary system, it would be more difficult for the wealthy to stay wealthy as they do under the current system. What do you mean by this?
PB: Well, wealthy people have an easier access and a better connection to the banking system, where the new money is produced, simply because they are wealthy and have assets. Similar things apply to companies. Established and big companies that own real estate and other assets will have a relatively easier and cheaper access to new money than small newcomers. If you are wealthy and own parts of an established company with a good connection to financial markets and the banking system, you have an advantage vis-à-vis potential competitors that threaten your position due to the fiat money system. In our system in order to stay rich it has become more important to have a fast and easy access to new money, and it has become less important to be innovative and satisfy consumer wishes in better and cheaper ways. Incumbents are in a sense protected by the fiat monetary system. In a pure gold standard such an artificial protection would disappear.
MI: What would be some practical ways to start un-doing this system we have right now?
PB: This system stays in place because people do not understand its detrimental and fatal consequences such as an unfair redistribution, business cycles, poverty, bigger government, moral decay, and so on. In order to un-do this system we must convince people of all this. The problem here is that our monetary system and monetary theory is quite complex. One would have to explain it in an easy and attractive way so that everyone could understand the problem at hand. That is the reason why Andreas Marquart and I have written our new book that explains the problems of the system in a provocative and easily understandable way. So the most practical step to start un-doing the system would be to spread the message. Once we have succeeded and a critical mass shares our views on the fiat monetary system, it will fall apart on its own and will be taken over simultaneously by private alternatives.
MI: But even in a free market, won’t there be income inequality?
PB: Yes, you are right. We should distinguish between morally justified and unjustified inequality. When someone gets rich because he is productive and satisfies the wishes of people in a cheaper and better way than his competitors, we should applaud him. The resulting income inequality is justified. The problem starts if someone earns an income due to government intervention such as licenses, other regulations, or simply tax transfers. The resulting income inequality is unjustified. Getting richer at the expense of others through the use of the fiat monetary system, which represents a government monopoly and banking privileges, is unjust.
Philipp Bagus is an associate professor at Universidad Rey Juan Carlos. He is an associate scholar of the Mises Institute and was awarded the 2011 O.P. Alford III Prize in Libertarian Scholarship. He is the author of The Tragedy of the Euro and coauthor of Deep Freeze: Iceland's Economic Collapse. The Tragedy of the Euro has so far been translated and published in Greek, German, French, Slovak, Polish, Italian, Romanian, Finnish, Spanish, Portuguese, British English, Dutch, Brazilian Portuguese, Bulgarian, and Chinese. He is also co-author with Andreas Marquart of the German language book Warum andere auf Ihre Kosten immer reicher werden. Visit his website at PhilippBagus.com.
This post first appeared at the Mises Daily