Monday, May 19, 2014

Income Inequality and Fractional Reserve Banking

Today’s Mises Daily is an interview with Andreas Marquart on the subject of “why others are getting richer at your expense.”  In the interview, Mr. Marquart addresses the subject of income inequality.

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…. 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.

The key question, as offered by Marquart, is a false choice; he offers the choice: is income inequality due to the free market or to fiat money, only subsequently redefined as “state intervention”?  The counter position of the free market is not “fiat money,” but the entire edifice of the crony capitalism system we live under today (“state intervention”), of which monopoly money via central banking is the most significantly distorting feature.  But fiat money, in and of itself, is a phenomenon that has and can occur in a free market as well.

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.

With this qualifier included – “when caused by state intervention” – I agree fully. 

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.

This is incorrect.  Free-market money is good money because it is free-market money.  Often, but not always, the market has chosen a commodity-backed money to serve its purpose.  However, I find no reason offered in free-market theory to suggest that a directed money can be more stable than a market-derived money, honed by the competition of the market.

The only way to achieve and maintain 100%-backed commodity money is to order it and maintain it via force.  There is no other way, when the subject is understood within the framework of my above-referenced post.  How can this be more “good” than money derived by and enforced via free-market mechanisms?  Does central planning work for money and credit?

AM: 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.

Again, we agree completely.  The disagreement comes in the proper extension of this statement.

Whatever the faults of a truly free market in money and credit, one thing is clear – and both Mises and Rothbard concur: a free-market offers the best regulation of inflation. 

I find no reason to invent rules when the market is perfectly capable of providing regulation.  Let the market police credit expansion, and the soundest money of all will result – a free-market derived system for money and credit.


  1. But there is no free market in money.

    Governments allow private FRBs to expand credit(create money). When the loans go bad, governments step in to bail out the banks by one means or another.

    FRBs have a stranglehold on the money supply in all nations that I am aware of

    1. The stranglehold is due to the monopoly; the stranglehold is due to the government backing; the stranglehold is due to the fact that both parties (bankers and government actors) benefit.

      The stranglehold is not due to FRB (as that term is commonly used).

    2. On the question of stranglehold, let me say the US government is the biggest enforcer that the bankers have.

      Back in 2010 Ireland went bankrupt as a result of its entire private banking sector going bust. The Irish finance minister wanted to default on some of the banker debt. Tim Geithner vetoed that proposal and insisted the debts be paid in full by Irish taxpayers.

  2. Regardless of whether a bank deposit is considered legally/contractually a specific deposit, a general deposit, or a "gift" to the bank, people expect "their" money to be on-demand from banks at any time. I don't think most people would deposit money in a bank that, in turn, contracts with them to maybe give them money back in the future. While I don't think such a contract would be fraudulent, it would be equivalent to making a gamble with 1) unknown odds and 2) only getting back as much as one puts in, at most.

    1. Are you suggesting we should ignore contracts? Or that someone should step in to prevent another from doing something stupid?

  3. ...

    What makes you think that I'm suggesting either of those things?

    1. Perhaps I misapplied / misinterpreted your use of the term “expect.” I should have asked for clarification, instead of making an assumption; therefore, I will ask now.