A quick look at this 1928 advertisement – when the cost of one stamp was one penny, the labor for a vehicle tune-up was one dollar, and labor charge to overhaul an engine and transmission was about $25 – only goes to prove the case for the dollar debasement that Austrian School economists have been making for decades. Currency debasement is simply a consequence of monetary inflation. The Universal Law of Cause and Effect states that every Effect has a specific and predictable Cause, and that every Cause or Action has a specific and predictable Effect. As such, the Expansion of money supply is the Cause that has a specific, predictable, and proven Effect known as Currency Debasement.
So, what is Inflation after all? In simple Austrian School terms, inflation is the constant increase in the money supply in circulation which leads to a constant decrease in purchasing power. Such event (cause) can and it does, in fact exist before its effects are seen. Make no mistake, inflation and price increases are not the same thing, one is cause and the other is effect. The increase in the money supply occurs first, it represents the Cause. The price increase occurs later, it represents the Effect.
The conventional wisdom may be that the price increase should be less relevant to the overall well-being of society because wages also increase thus a balance between the two is achieved. But Murray Rothbard and other known Austrian School intellectuals were quick to point out that it is those first in line to receive the newly created money who are the winners, because they get to spend this money before everyone else. In other words, those who are first getting their hands on it get to spend it before the increase in prices takes effect. By the time the rest of the people receive it – 99% of the population – the prices of goods and services have already gone up.
Money inflation (expansion) always precedes price inflation (increase). Price increase always precedes wage increase and the balance between them does not adjust immediately. History teaches us that timing could be months or years, depending on the level of inflation and other factors that are of political nature. A factory worker or a retail sales clerk are never first in line to receive the newly printed money. A businessman or an engineer are still part of the 99% receiving the newly created money after price increases take effect. So who are the first in line then? Wall Street traders and CEOs, politicians, top banking and big corporations officials, to name a few. And let’s not forget the government itself that gets this money first and spends it on its very own expansion (new agencies, new laws, etc.), on infrastructure, social welfare programs, and wars.
The effect of the inequality in distribution of the newly created money thus indeed allows the rich to get richer and the poor to get poorer. Most recently the topic of “Wealth Inequality” has become hot not only on the politicians’ agenda but also on the Federal Reserve Chairman’s agenda. Mr. Bernanke sympathizes with the OWS movement and all those dissatisfied with the current state of our economy. He claims that income disparity between the rich and the poor has been widening in the past thirty years and that “the Fed is doing everything it can to create more jobs and to narrow the gap between the wealthy and the poor.”
It is rather ironic that the same people who claim to help are in fact the ones that hurt us the most. While most people believe it is congress and/or the president that control a nation’s money supply, in real life it is the Central Bank that does. In the USA congress has given such authority to the Federal Reserve – a non U.S. government agency – back in 1913. Indeed, the top officials of the private corporation, the Fed, have the authority to create and contract the supply of US dollars as they deem needed. But creating money does not create jobs nor it creates prosperity, as most people are inclined to think. It creates larger disparity between the rich and the rest of the population. The new jobs created through the government’s new infrastructure programs take capital and resources away from other areas of the economy where such capital and resources could be used more efficiently.
Now that we know that the Central Bank’s money policy – primarily evidenced by money expansion – does not, in aggregate, create employment and does not narrow the gap between the wealthy and the poor let’s revisit what its effects are. It helps create economic distortions in form of boom/bust cycles such as the most recent real estate bubble – artificial prosperity during the boom and bankruptcy after the bust. But while the average Joe and Jill and the average small business go bankrupt there is a small selective corporate breed exempt from such economic laws. We have seen such discriminating event most recently in 2008 – even though it’s not a new phenomenon and it’s been practiced for many decades – when the new bailout money went to prop up existing Wall Street failed businesses. Keeping alive failing institutions (Fannie/Freddie, AIG, BOA, etc.) keeps unemployment at high levels, allows companies and people to work without productivity, and keeps the economy from healing. Economic healing is a necessary “evil” similar to a man going through a healing process after being sick. When the Fed expands the money supply, thus creating inflation, it creates inequality by funneling money to Wall Street and government friends. In the end society does not benefit from such monetary policy, a policy that Ron Paul has been consistent in his efforts to change but without much help from his fellow congressmen.
While we are kept busy with irrelevant news, we are in effect being distracted from figuring out what really is going on with the matters that should be important to us. Monetary expansion, government expansion, government’s debt and its inability to function on a tight budget, unnecessary bailouts, and foreign wars are being replaced with news of the latest movie stars’ drama or the most recent national threat to our liberties from foreign lands. It is, after all, much more entertaining to read about the intricacies of Angelina Jolie’s marriage to Brad Pitt than to understand the “boring” events at the Fed. In the meantime we’re assured the little man’s voice is heard and action is being taken to solve his problem. So far, it’s Smoke and Mirrors and the forgotten man is again…still forgotten. If you want to do something about it but feel that you are too small to make a difference you may consider joining the Ron Paul revolution.