The Impoverishment Of The Masses
Feudal and mercantilist economic systems were characterised by the lower orders of ordinary people being enslaved by, or subjected to, the commands of an elite. Beyond basic subsistence, serfs and slaves were not enabled to consume other goods, nor were they given the means to do so. Communism was hawked as handing power to the serfs, or workers, united in and by the state. But again, it meant that workers remained serfs, employed and commanded by a state set up in their name. Freedom from the bourgeoisie became subjugation by the state. Only capitalism, founded on free markets and freedom of choice for all, held the promise of freeing the masses from a life of drudgery and servitude.
This was what the industrial revolution in Britain was about, particularly after the Corn Laws were repealed, and also the basis for the opportunities offered in America for refugees from European feudalism and mercantilism. And as the benefits of this freedom became enjoyed by those that were freed, so the abolition of slavery followed. A minimalist enlightened government based on democracy guaranteed property ownership and ensured that individuals’ rights were enforceable. These were the simple conditions of free markets, the conditions where the lowest consumer is the master of the mightiest producer, who endeavours to serve him. These are the conditions that led to a dramatic improvement in living standards for everyone in only a few decades, an improvement that had proved impossible in all the history of feudalism, mercantilism, and communism. It was the unique achievement of Anglo-Saxon laissez-faire.
But empires strike back. Just as communism enslaved the workers in their own name, so democratic states in the name of capitalism find ways to bind their own electors. Freedoms taken for granted by the British and Americans were never fully adopted by more socialistic states, and even the Anglo-Saxons have been slowly compromised to the point where their democratic systems are now breaking down.
Central to the loss of freedom, the road to serfdom as Hayek put it, is the creation of myths. The myth that the state acts on behalf its people, when it always acts to protect itself. The myth that the state knows better what its electors want than the electors themselves. The myth that only the state has the impartiality to right all wrongs. The reality is the exact opposite. The state intervenes to prevent people from deciding the matters that directly concern them. The middle classes have been taxed in the name of redistribution to the poor, and the poor themselves in turn have been relieved of the value of their earnings and savings by monetary debasement, always in the interest of the common good.
There is something in the human psyche which denies economic truths. The explanation as to why free markets work is logical and simple to understand. The contrary evidence, that statist attempts to interfere with Adam Smith’s invisible hand always fail, is irrefutable. Yet the blame for failure is always laid at the door of capitalism. The few of us that persistently insist that right is not wrong and wrong is not right attempt a seemingly hopeless task of persuading the unwilling.
Of course, the spectrum of human understanding of economics is never black or white, and within it there are degrees of illumination and deception. The luminaries are mostly ignored, but it is wrong to say that all deceiving economists, who have come to believe that their science is somehow separated from the actions of individuals, are evil or conscious deceivers. Their fault is to lack dispassionate analytical capacity. Their observations are one-sided. They are confident that a proposed redistribution of wealth from the rich to the poor will help the poor, because it is a direct and visible policy. This is a favourite topic of Methodist socialism, espoused by good, caring people. What are not visible are the hidden consequences of state redistribution. The redeployment of resources from producers is wasted in unproductive bureaucracy, tying up administrators better employed in more productive activities. The ability of the wealthy to provide productive employment for the unemployed, or business for tradesmen, is also impaired through the loss of their wealth. To maximise the benefits of a free-market economy the efficient deployment of all resources is required. It is a fair bet, that all told, the hidden costs of state redistribution often exceed the benefit.
There is no area of economics where one-sided observations are more distorted than when dealing with the subject of money. The state’s desire to control the issuance of money is as old as statism itself. The granting of power to the state over money is an invitation for it to act dishonestly, and to indulge in covert theft from its own subjects.
When the state finds it has to meet an excess of payments over tax receipts, it should borrow the difference, but it is always tempted to finance the difference by issuing currency. After the First World War, both Austria and Germany attempted to discharge the balance of their national obligations in this manner, leading to a complete collapse of their currencies. In the twentieth century, some fifty-eight episodes of price hyperinflation have been listed. In all cases, it was the eventual consequence of governments financing deficits through the expansion of unbacked currency. Financing trade and budget deficits by currency debasement is commonplace, yet no mainstream economist worries about the inflation risks.
It cannot be denied that nearly everyone is impoverished in a hyperinflation, nor can it be denied that a hyperinflation of prices has monetary inflation as its source. The link between an expansion of money and an increase in the general price level is clear and has always been the unarguable conclusion of all economists, borne out by empirical evidence. Yet these same economists, while admitting to the economic destruction and impoverishment of the masses from hyperinflation take the opposite view when it comes to today’s monetary policy, claiming inflation to be beneficial. They end up contradicting themselves.
This contradiction is squared by the hope, it is no more than that, that rising prices will stimulate spending and therefore production, providing greater employment. We shall not debate this point, beyond remarking that a monetary policy that makes people poor is an odd way of stimulating an economy. What we will demonstrate instead is how and why lower rates of inflation impoverish the masses, just as a hyperinflation does, if only more slowly.
The how and why is to be found in the intertemporal price effect of an increase in the quantity of money, first described by Richard Cantillon in his Essay on the Nature of Trade in General, written in about 1730, but only rediscovered by William Stanley Jevons in 1881. Consequently, early formulations of the quantity theory of money, such as the writings of David Ricardo, restricted observations to long-run effects and missed this aspect entirely.
What has now been christened the Cantillon effect is easy to understand. In summary, the creators of new money, or bank credit for that matter, get to deploy this money before any prices rise. The businesses and individuals that first get their hands on this new money get a similar benefit, but at this point, prices for the goods and services they have bought with it begin to rise, reflecting the additional demand created by the new money. We shall term these beneficiaries the first receivers.
Obviously, when the new money infiltrates the economy, prices are more widely driven up as it is gradually absorbed. Consider now the position of those who are most remote from monetary inflation. They find their wages and savings buy less, because many prices have been driven higher. There has been in effect, a net shift in economic resources and wealth from all later receivers to equalise the total benefit obtained by the issuer and their favoured first receivers. And the further away someone is in the receiving chain from the creation of money and credit, the greater the depredation on their financial resources. This is why the poor, the unskilled, the retirees on fixed pensions and the unemployed are hit hardest by monetary inflation.
Cantillon considered the price effects of the progression of monetary inflation through the economy in the context of new mine production for gold, silver and copper, all of which were used as money in his day. He also considered the condition where a country exported surplus production, thereby importing money. Today, money is the prerogative of the state alone, so the first receivers are no longer the customers of miners and exporters, but the counterparties of the state and its licenced banks. Furthermore, any restraints on the state’s use of seigniorage is removed, and the Cantillon effect takes on a new viciousness. The creators of this money are for the most part the banks, licenced by the state to create money out of thin air in the form of bank credit. In aggregate, the banks are in turn protected from the consequences of reckless credit-creation by the state’s own central bank, acting as lender of last resort. The seigniorage of today’s financial system accrues to this duopoly, and is now both costless and infinite.
All economic activity becomes badly distorted. Large corporations and speculators find it easier to make money by positioning themselves as close as possible to this abundance rather than engage in honest trade. The wealth to be gained from being early receivers is transferred to them from the later receivers. Therefore, the modern monetary machine is little more than a device to rob the poor, as well as the lower and middle classes who are somewhere down the chain of receivers, all for the benefit of bankers, speculators, and the industrially idle.
It is the true source of social inequality. The logic of our argument, shorn of unnecessary detail, cannot be denied. One can only surmise that macroeconomists, having shed the shackles of economic realism, are wholly in thrall to the system. Remunerative employment as an economist is either in state-funded universities, or in that part of the commercial and financial system that benefits from Cantillon’s wealth transfer effect. We can see where their interest lies. This is not an accusation of personal dishonesty, more a conclusion that vested interest combines with groupthink.
The consequences of this systemically-induced ignorance are becoming increasingly obvious by the day. We have travelled through successive credit cycles, where artificial credit-induced booms have not been expunged by correcting busts. The accumulated wealth-transfer effect has at the same time resulted in a small clique of billionaires at one extreme, and an underclass of the poor at the other, many driven into debt in order to make ends meet. It is hardly surprising the masses are now rebelling against the status quo.
The modern welfare state, founded on free-market capitalism before corrupting it, is now approaching an end-point. The escalation of currency debasement, on top of extortionate taxes, is now producing insufficient returns to satisfy the state’s welfare extravagances, let alone the increasing cost of future commitments. A further acceleration in monetary inflation is seen as the only answer, and the emphasis is about to shift from monetary destruction through central bank policies, to an escalation of government deficits.
We should not forget that fifty-eight nations in the last century destroyed their currencies following the same deficit-financing policies the major nations are now contemplating. Thanks to monetary policies, there is less wealth available for the state to steal covertly by monetary debasement from increased deficits. Much of it has already gone, leaving a legacy of questionable paper values and unrepayable debt.
The truth is that governments cannot get off their spending merry-go-rounds, and are now faced with angry electorates who are aware there is something very wrong, even though they are not sure what it is. This sense of unease, that people have been conned, is finally leading to the establishment being rejected at the ballot box.
Wherever you are, the failure of your government is mirrored by the failures of other governments, all of which have abused free markets. The last act of the economic establishment will be to advise the politicians that it’s not their fault everything is going wrong. The verdict is already decided, and it is that capitalism has failed.
HEAD OF RESEARCH• GOLDMONEY
MOBILE: +44 7790 419403
Alasdair became a stockbroker in 1970 and a Member of the London Stock Exchange in 1974. His experience encompasses equity and bond markets, fund management, corporate finance and investment strategy. After 27 years in the City, Alasdair moved to Guernsey. He worked as a consultant at many offshore institutions and was an Executive Director at an offshore bank in Guernsey and Jersey.