The State Causes the Poverty It Later Claims to Solve

How Fractional Reserves 

and Inflation 

Cause Economic Inequality

by Andreas Marquart 

[Editor’s Note: Andreas Marquart and Philipp Bagus recently released a new German-language book, Warum anderen auf Ihre Kosten immer reicher werden — und welche Rolle Staat und Papiergield dabei spielen, about “why others are getting richer at your expense,” now available from FinanzBuch publishers. Mr. Marquart spoke with us about income inequality, Thomas Piketty, and the new book.]

Mises Institute: How would you translate your new book’s title into English?

Andreas Marquant: I would like to say The State Causes the Poverty It Later Claims to Solve. This is the title of my article on mises.org last December. An even better title could be The Austrian Answer to Thomas Piketty.

MI: Your book addresses the issue of income inequality. Is income inequality a bad thing?

AM: First of all, inequality and income inequality are natural phenomena because people are different. They all have different talents and that is a reason for the division of labor. It’s also a reason people work together and it’s a basic part of any complex society. Furthermore, some people are hardworking, others are more lazy. Income inequality is the logical consequence of this. The key question is: is income inequality the result of the free market and the free decisions of voluntary interacting actors; or is income inequality the result of the expansion of fiat money and the creation of money out of thin air that benefits the privileged few at the expense of many? That is, is it the result of state intervention? If the latter, case we have a problem.

MI: When caused by state intervention, what is the primary source of the problem?

AM: The primary source is fiat money inflation and the artificial increase of the money supply by bank credit. The greater fiat money inflation is, the more unjust are the consequences. The early recipients of newly-created money are the winners. The later receivers of the new money are the losers. This is certainly true when prices are clearly increasing, but the same redistribution effect also exists when money creation takes place in a situation where prices for goods and services should be falling but are not. For example, in an economy where worker productivity is increasing, prices should be falling. But even if prices remain more or less constant, a gigantic redistribution through the money printing press may be under way as workers become more productive but see no benefit from it, thanks to inflation.

But the redistribution does not only work through its effects on the prices of goods and services. Have a look at the equity markets. The money created by the FED or the European Central Bank leads to new record-breaking prices at the equity markets. If you have a big block of shares already, you can benefit when this happens, but what if you cannot afford to buy stocks because your energy bill and food expenditures are rising continuously? And often, one very important point is forgotten: the transfer of wealth is irreversible, even if the new money disappears again.

MI: In your book you contend that “good money” is important for economic prosperity. What is good money and why is this true?

AM: Commodity money is good money because it is free-market money. The money supply would be expanded by natural and free production only, through voluntary exchange. This is the reason that in the past, precious metals such as gold and silver were used as money very often. We have good money when the government has nothing to do with the monetary system and people themselves can decide what money they want to use spontaneously and without any coercion from the state.

........

Read more: mises.org