December 23rd, 1913 – a day that will live in infamy. I thought I would meander from my post series on crypto matters to highlight something equally important, if not orders of magnitude more significant in the grand scheme of history.
Exactly one century ago, the Federal Reserve Act of 1913 was signed into law. The result was the establishment of America’s longest running central bank – which is the sole issuer of whatever currency a given government wants to have it’s taxes paid in. Since money is half the equation in the vast majority of economic exchanges, this basically put a largely unaccountable institution in the position of manipulating a large portion of the American economy.
In case you’re wondering what this means in practice, take a look at the following video:
Every time new money is printed (almost out of thin air), the money causes the prices of various goods and services to rise as it begins to circulate throughout the economy. The “winners” in this situation are the first people to get the freshly printed cash, because prices don’t rise until after they have spent it. These rising prices are a natural result of supply and demand – more money in circulation chasing the same amount of goods means each dollar loses purchasing power.
Unfortunately these rising prices do come at a cost, as the video above explains. The people who lose out every time the Federal Reserve increases the money supply are the people who receive the new money last – which almost always means entry-level workers who are at the bottom of the new money supply chain. The prices of almost every major good and service has already risen long before the amount of spending money they have at their disposal rises as well.
To put it bluntly, increasing the supply of fiat currency in any national economy operates like a regressive tax. This tax is basically inflation that affects the poorest people in any given situation who happen to be the last ones to have their wages adjust for the new money in circulation. It gets even worse for those who don’t have any salary whatsoever; the loose change that comes their way only looses more purchasing power due to the rising prices of everything else.
We can easily break this destructive process down into just five steps:
1. Banks and the Fed increase the money supply. Those most politically-connected are first to receive new cash.
2. These well-connected people/groups spend this money. With more available, they have increased buying power.
3. As this money circulates, prices for everything rises to adjust for the increase in total dollars in the economy.
4. The savings and purchasing power of those at the bottom is eroded since each dollar loses purchasing power.
5. Consequently, the gap between the politically-connected rich and the disenfranchised poor grows with steps 1-4.
The process by which the Federal Reserve and the banking system we currently have actually increases the money supply is something that could occupy an entire post altogether. For now I just want to spend time focusing on the effects this process has. In a couple future posts, I will continue explaining case against central banking and what needs to be changed.