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How Central Banking Increased Inequality

August 16, 2017

How Central Banking Increased Inequality1422847855_a0b53f1582_z.jpg

Although today high levels of inequality in the United States remain a pressing concern for a large swath of the population, monetary policy and credit expansion are rarely mentioned as a likely source of rising wealth and income inequality. Focusing almost exclusively on consumer price inflation, many economists have overlooked the redistributive effects of money creation through other channels. One of these channels is asset price inflation and the growth of the financial sector.

The rise in income inequality over the past 30 years has to a significant extent been the product of monetary policies fueling a series of asset price bubbles. Whenever the market booms, the share of income going to those at the very top increases. When the boom goes bust, that share drops somewhat, but then it comes roaring back even higher with the next asset bubble.

The Cantillon Effect

The redistributive effects of money creation were called Cantillon effectsby Mark Blaug after the Franco-Irish economist Richard Cantillon who experienced the effect of inflation under the paper money system of John Law at the beginning of the 18th century.1 Cantillon explained that the first ones to receive the newly created money see their incomes rise whereas the last ones to receive the newly created money see their purchasing power decline as consumer price inflation comes about.

Following Cantillon and contrary to Fisher and other monetary theorists of his time, Ludwig von Mises was the first to emphasized these Cantillon effects in terms of marginal utility analysis. With an increase in the stock of money, the cash balances of the early receivers of the newly created money increase.

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“Free Stuff” Isn’t All That It’s Cracked Up to Be

April 8, 2016

“Free Stuff” Isn’t All That It’s Cracked Up to Be 

To my British and American friends who must deal with the socialist nonsense of Bernie Sanders and Jeremy Corbyn, I found this poem. It was written by Rudyard Kipling, the writer most hated by English Socialists in the 40s and an opponent to the interventionist policies implemented by the Labour Party after the second world war:

In the Carboniferous Epoch we were promised abundance for all,

By robbing selected Peter to pay for collective Paul;

But, though we had plenty of money, there was nothing our money could buy,

And the Gods of the Copybook Headings said: “iƒ you don’t ‘work you die.

This poem is not an exaggeration. At the time, it was decreed by the Control of Engagement Order that “no man between the ages of 18 and 50, or woman between the ages of 18 and 40, can change occupations at will. The Minister of Labor has the power to direct such workers to the employment he considers best for the national interest.” This Order was abolished only in March 1950.

At the time, the consequences of “democratic socialism” were disastrous: no food, no housing, no clothing, no fuel. By 1948, rations had fallen well below the wartime average. At the same date, one could read in The New Statesman, which was by no means a virulent opponent of Planning: “You may have social security, but you cannot go into a store and buy two quarts of milk.” To which an English commentator replied: “You not only cannot buy two quarts of milk. You cannot buy one. You can only get two quarts of milk on your doorstep a week. If you try to get more you are apt to land in jail.”

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Olduvai IV: Courage
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Olduvai II: Exodus
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