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What’s killing our economy? Money.

A version of this article was previously published in The Independent.  We publish it here with the author’s permission.

I subscribe to George Orwell’s view that “On the whole human beings want to be good, but not too good, and not quite all the time.” But if man is “mostly good”, I ask myself, why is it so easy to look around at the world and find so much to be troubled by?

Wars, waste, famine in one part of the world, obesity in another, excess consumption, a financial system that’s out of control – and so on.

My particular bête noire is the unequal distribution of wealth. There are all sorts of manifestations.

Across generations – for the first time in history my and the next generation is poorer than its parents. Yet, with man advancing, surely this shouldn’t be so? Most people in London under the age of 30 don’t believe they’ll ever own a house – that’s awful.

We see it across nations. The richest 400 people in the world have assets equivalent to the poorest 140 million, runs one statistic. In fact, it’s worse than that as, thanks to their debt, many in the West now have a negative net worth.

We see it within nations. The wealthiest one per cent of Americans pocket one-quarter of the country’s income. Through property, bank accounts, investments and art, they control as much as half of total US wealth. That share of wealth has doubled in the past four decades.

We even see it within institutions with the high-flying City boss who earns 1,000 times more than some lowly cashier in the same bank.

If man is, as Orwell says, “mostly good” how has the distribution of wealth become so skewed?

In my book, I argue that it’s our systems that are at fault. Yet they are so big and entrenched, there’s nothing much anyone can do to change them, beyond superficial reform. The biggest villain of all is our system of money.

Many people spend a lot of time thinking about how to make more money. But not many people think about how our system money actually works.

It’s a system that has been in operation globally for just 40 years – since the US finally departed the gold standard in 1971. The Bank Of England calls it “fiduciary money”, others “fiat currency”. Under this system, money is the issuance of governments. It’s not backed by anything tangible except the law. Banks have the power to create money through lending.

In 1971, I could have taken my son to the FA Cup Final for £2 (now over £100). The Mars Bar I bought him at half-time would be 2p (now 60p). The beer I bought myself would be 11p (now £5 a pint at Wembley). The gallon of petrol I needed to get me there and back would be 33p (now £7). And the house we went home to would be something like 2% of the price it is now.

Average earnings have increased too, but not by the same multiples. They have risen from around £1,500-2,000 per annum to about £25,000 today. The differential has been covered up by more debt, longer working hours, more women in the workplace and so on.

Yet through the 100 years of economic growth of the 19th century, prices actually fell according the wholesale price index, and wages rose.

Why does everything – except mass-produced goods – relentlessly rise in price? It’s this system of fiduciary money. There is almost no limit to how much can be created. And the more money there is, the more diluted its purchasing power becomes, and the higher prices will rise.

Some benefit hugely from this system: those who control it, and those who are at or near its point of issuance. Governments and banks, in other words. As well as enjoying a monopoly, they have the power to create money (whether by printing or through lending) and to charge interest on it. They also get to buy assets with their share of the newly minted money, before prices rise to reflect the new money in circulation.

Meanwhile the rest of us find that our savings or wages buy less and less, so we have to take on debt, and then pay interest on that debt, to be able to buy the things that we, or our parents, were once able to afford to buy outright.

There is a constant transfer of wealth and it compounds over time. The few benefit at the expense of the many. This is why the state and financial sectors have grown so disproportionately large.

It’s led to the horrendous gap between the so-called 1% (the super-rich) and everyone else. It’s responsible for this gap in the wealth between generations. It’s why we have a culture based on debt and spending, rather than saving and investment.

And it will only get worse as this transfer-of-wealth cycle repeats and repeats.

My book is called Life After The State. In it you’ll discover:

  • How this system of money came about
  • Case studies – the hidden, destructive effects of the system.
  • How government spending and subsidy actually cause poverty, rather than prevent it.
  • How to reform it

As my book is about change, I’ve decided to publish it with Unbound, which is changing the traditional publishing model. You can find out more and pre-order my book here.

Changing the way money works is simple. It’s not electorally unpalatable. And it would make a huge, dramatic improvement in all of our lives. Read Life After The State and you’ll see why.

 

5 comments to What’s killing our economy? Money.

  • There is so much nonsense in Dominic Frisby’s article I don’t know where to start.

    For example he claims that, “Some benefit hugely from” the present monetary system. And apparently it’s “those who control it”. So Mervyn King and other members of the Monetary Policy Committee are all billionaires? And as to the control that commercial banks exercise, I didn’t know they made any more profit relative to turnover than before the Gold standard was abolished.

    His next paragraph is a peach. He claims, “Meanwhile the rest of us find that our savings or wages buy less and less, so we have to take on debt, and then pay interest on that debt, to be able to buy the things that we, or our parents, were once able to afford to buy outright.”

    Nope: disappointing as this might be for Dominic Frisby, the fact is that real living standards have increased by leaps and bounds since the gold standard was abandoned. And I’m not claiming that is an argument against the gold standard. I’m just pointing to a historical fact, namely that living standards have improved massively over the last sixty years or so.

    • mrg mrg

      “So Mervyn King and other members of the Monetary Policy Committee are all billionaires? “

      King isn’t in ultimate control. His independence is purely notional. He was appointed by the government, and he has every incentive to keep them happy.

      “disappointing as this might be for Dominic Frisby, the fact is that real living standards have increased by leaps and bounds since the gold standard was abandoned”

      It certainly runs counter to accepted wisdom (which statists left and right are all too keen to promote), but it’s undeniably true that house prices (which aren’t included directly in inflation measures) have skyrocketed, and I expect that our comfortable lifestyles owe as much to reduced savings as increased real incomes.

      Of course, those in middle class public sector positions may enjoying a comfortable life and looking forward to a comfortable pension …

  • Paul Marks Paul Marks

    The “Independent” is owned by an ex KGB officer (and he certainly does not run this newspaper to make money – so he must have some other motive) – so I am not automatically accept all the figures here (such as “25% of income goes to the top 1%” – although that is lot closer to the truth than the normal claim of the “Occupy” crowd that “most” income goes to the “top 1%”).

    But, for the sake of arguement, let us assume that all figures in this article are correct.

    What of it?

    So some people are very rich and some people (such as me) are very poor. What is the moral content of that? I do not believe there is any moral content in that – not on its own.

    However, a Richard Cantillon point may be being made here – i.e. that some (some) of this inequality may be artificial (caused by credit money expansion).

    That may well be so – after all it is no acciedent that Latin America (where so many nations have followed policies of monetary expansion, “cheap money” policies, for so long) is known for exteme income inequality.

    However, we must be clear what getting rid of the Federal Reserve (and the Bank of England and …..) actually means.

    Certainly Wall Street (and so on) would collapse – as the financial world is like a vast junkie totally dependent on “fixes” of credit money from the Central Banks.

    However, this would also effect the “real economy” far away from Wall Street and the City of London (and so on).

    There would be a terrible Depression (that can not be avoided now) and we must be honest about this.

    And even out of the other side of the Depression……

    It would not be world of “easy credit” and “lower interest rates” (as the “Occupy” type readers of the Independent newsaper hope).

    On the contrary – credit would be far tought (not easy) and interest rates (based on what REAL SAVERS required to give up their income) would be far HIGHER (not lower) than they are now.

    It would be a tough world – of thrift, hard work and self denial.

    But, at least, there would not be fewer “Wall Street fatcats” and so on.

    Although that is rather cold comfort.

  • As to Mr. Frisby’s idea to change the way money works suggests either a misunderstanding of what is money (per se, it cannot change the way it works) or he intends some sort of redefinition of credit.

    Mr. Musgrave. I go down Maslow’s heirarchy and see see every item, in terms of standard of living, has degraded since going off the gold standard. That is a measurable fact. It is doubtful it had anything to do with the gold standard because our problem is not a gold standard, but credit standards. Just because some cracker named Dicky left the gold standard does not mean the role gold as money enforces on man has changed. The problem is credit, not gold or money.

    And Mr. Marks: “It would be a tough world – of thrift, hard work and self denial.” But now we have shortages instead of thrift, no work instead of hard work, and self-delusion instead of self-denial. Corrections are coming no matter what.

  • Paul Marks Paul Marks

    Mr Spiers – agreed, the bust is comming. The only choice is whether to face it square in the face, or to continue to crawl around like junkies in the gutter begging for another “fix” of credit-money.

    mrg:

    I believe that the Governor of the Bank of England, and the other Central Bank and government types around the world, are quite sincere – they are NOT the pawns of naughty Super Rich Bad Guys.

    However, I also believe them to be mistaken – utterly and completely mistaken.

    The present threat to the world is not the “influence of the super rich” (or some other such thing), it is bad principles. Principles that have been taught at schools and universities for many years.

    And it goes back beyond J.M. Keynes.

    For example, in American economics in the early years of the 20th century there was a dispute between Irving Fisher and Frank Fetter – and American economics (not the-influence-of-the-super-rich) choose the wrong road (Irving not Frank).

    Even in modern times this mistake is continued – even by supposed foes of folly.

    For example the infamous claim by Milton Friedman that Irving Fisher was “the greatest American economist of the 20th century”.

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