Part 3 – You don’t need a bank account to be robbed by the bank
I recommend reading Parts 1 and 2 before reading this essay
Banks continually rob us. It is a complex process which does not require you to have a bank account. Using basic economic concepts which most people can understand with a bit of thought, I hope my explanation will be easy to follow. Unless you are well versed in the subject of Austrian Economics, I strongly recommend you read Parts 1 and 2 before reading this essay.
Consider this simple example: a woman needs a loan of $100,000 to start a small business making bicycles. A bank loans the woman $100,000 @ 6% interest for one year. This is new money – it did not previously exist. The banker presses a few keys on his computer keyboard and – presto – $100,000 magically appears as a deposit in the bank account of the borrower. It takes only a few seconds to create the money. One year later the woman repays the loan, plus interest, for a total of $106,000.
Before we continue with this example, it is very important to remember that money is simply a ‘medium of exchange’. Recall from Part 1 the example of the toolmaker and the hunter. They each work hard to produce goods, then they trade ‘tools for food’ and they both benefit. As their ancient economy progresses, money evolves, but money is simply a way to make exchanges faster and more efficient, thereby freeing up more time to produce more goods, which improves the standard of living of the people in the community.
The toolmaker cannot acquire money unless he produces goods (tools). He sells tools for money (eggs) and uses the money to buy clothes from the clothing maker. The clothing maker does not receive the money unless he works hard to produce the clothes to sell to the tool maker.
Since money is just the medium of exchange, we need to look beyond the money to see that the tool maker and clothing maker are actually exchanging ‘their production.’ Because they both had to work hard to produce things, we can also say they are ‘exchanging their labour’ and this is the concept we need to grasp. Neither of them is able to receive a benefit unless they labour to produce something.
Labour – or production – is the key. Our standard of living is determined by the quantity of goods to which we have access, and real goods cannot be created out of thin air. Someone has to labour to produce them. The highest possible level of prosperity for the masses can be attained only when all exchanges consist of an ‘exchange of labour for labour’ (or an ‘exchange of production for production’). Notice (from Part 1) that the woman with the chickens was also expending labour through the caring of the chickens in order to produce eggs, which were used as money.
Let us return to our example to see what actually occurs when the woman repays the loan. She borrowed $100,000 and repaid $106,000, a difference of $6,000. Does the interest amount of $6,000 represent an ‘exchange of labour for labour’? Did the banker expend labour to produce goods which he could sell for money, thereby enabling him to loan money to the bicycle maker, in which case this would be a legitimate loan. No, he did not.
Did the banker borrow money from bank customers to make the loan – which would also be legitimate because those bank customers would have expended labour to produce goods (their jobs) in order to acquire the money which they loaned to the banker. No, the banker did not do this either.
The banker created the money out of thin air, and destroyed it when it was repaid.
Did the woman labour to produce goods which she could sell for money in order to repay the loan? Yes, she did. She produced bicycles which improved the standard of living of the people who purchased them.
When the loan was repaid, $100,000 disappeared back into thin air, but $6,000 remains as illegitimate profit for the banker which he uses to buy real goods (food, clothing etc.) in the real economy. This is not an exchange of labour for labour. The banker is stealing $6,000 worth of goods from the economy, which reduces the quantity of goods available for purchase by those who are working to produce them, thus reducing the standard of living for these people.
FIAT MONEY ENABLES THE ROBBERY
Money is not wealth! Money is the medium of exchange we use to acquire wealth. You work hard at your job to earn money, but not for money’s sake. You want the money so that you can exchange it for wealth – various goods and services which improve your standard of living. If there is nothing available to purchase, money will do you no good. The banker took goods which were produced by others, without returning, in exchange, something produced by himself. The banker’s fraudulent action of creating and destroying fiat money allows him to steal goods and services produced by others. The banker is stealing the labour of other people, a common definition of slavery.
Some economists would have us believe the banker is providing a valuable service, without which the bicycle maker could not succeed. The banker provides a huge impetus to economic production, they say. Nonsense! Anyone can loan money, but only the banker has the legal privilege to create money out of thin air. If anyone else tries to do that, they are thrown in jail for counterfeiting.
The robbery is a predictable effect of a monopolized money system coercively imposed on society by the bankster/state cartel. In contrast, a money system evolved within the marketplace (see Part 2) is non-coercive by definition and thus could not possibly match the scale of robberies within the cartel’s fiat money system. If gold was once again used as money, and legal institutions arising from either the state or the market ensured the protection of property rights through the prosecution of fraudulent bankers, such robberies by bankers would be greatly minimized.
Could these robberies be greatly minimized in a fiat money system? Certainly, but only if the current supply of fiat money is frozen. The cartel would have to stop creating money out of thin air, but since that would conflict with their raison d’etre, they will never implement such a policy.
HOW MUCH MONEY DOES THE ECONOMY NEED ?
It is important to note that a particular supply – total quantity – of money is irrelevant to societal prosperity. Any quantity will do. Remember, we do not consume money directly, it is simply a medium of exchange. When there is an increase or decrease in the supply of money, the exchange-value of money changes inversely, which simply means the prices of goods and services will adjust. As economist/historian Murray Rothbard wrote:
. . . there is no such thing as “too little” or “too much” money . . . An increase in the supply of money confers no social benefit whatever; it simply benefits some at the expense of others . . . 
This is an important point, so let’s be clear. Rothbard is not referring to a particular individual who may think he has too little money (that would be me). He is referring to the entire world. If the money supply doubled overnight, prices would eventually double, but real wealth remains unchanged. No additional goods were produced, just more money. Overall, the total amount of wealth in society does not change, but the distribution of wealth does change. As Rothbard said, some will benefit at the expense of others.
THE CARTEL WINS, NOT IN ISOLATION, BUT AT OUR EXPENSE
It stands to reason that when the cartel claims the right to create money, while forcibly denying this right to others (more on this below), the cartel will be the primary beneficiaries of this arrangement, at the expense of others. Our example of the banker’s loan to the bicycle maker illustrates the concept. The distribution of wealth was altered by fraudulent means. The banker stole $6,000 worth of goods, thereby reducing the quantity of goods available for purchase by others. Since fewer goods are now available to those who had a hand in producing them, the prices of these goods will rise, making them less affordable to the producers, who will have to do with less. The standard of living of the producers is lower because a portion of their wealth has been surreptitiously transferred to the banker in order to raise his standard of living.
If the banker was not a banker, but instead had a real job producing real goods, the standard of living in the community would be raised by his production. In this capacity, he would be adding to economic production, as opposed to his crooked banker activity where he was subtracting from economic production. Furthermore, as an honest producer he could then offer some of his earnings, as could anyone, as a loan to the bicycle maker.
Alternatively, he would be adding to economic production if he was an honest banker. In his capacity as a financial intermediary (broker) he borrows money from bank customers and lends it to business people. In this way he helps to redirect the savings of bank customers into new productive activities. Consider the $100,000 loan to the bicycle maker at 6% interest. The banker must first borrow this money from someone at, let’s say, 4% interest. After the bicycle maker repays her loan, the banker must immediately repay his loan, plus $4,000 interest. The banker keeps $2,000, a legitimate profit for a valuable service. The service performed by the honest banker is the impetus to sustainable production; sustainable because the savings exist to buy the new products. As the banker is part of the process leading to this sustainable production, it is indeed proper to say that he has added to economic production.
THE CARTEL CAUSES RECESSIONS
Here is an issue which confuses most ‘expert’ economists (but not Austrian economists). These supposed experts insist that fiat money loans from banks are a prerequisite to economic growth. We are told that without such loans, increased production, and thus greater prosperity, is impossible. We saw in our example that a fiat money loan did in fact result in an increased production of bicycles. But this is not the final result. It is true that fiat money loans can produce a booming economy, but the boom is not sustainable, and a recession is inevitable. Many companies go out of business during recessions, and our bicycle maker could easily be one of them. Sustainable production can only be achieved with our savings, not money created out of thin air.
‘Experts’ tell us that recessions are a product of the free market, while ignoring the prominent role played by central banks and commercial banks, which are not free market institutions. They deny any causal relationship between fiat-money-fueled-booms and the recessions which follow, a connection which is strongly defended by Austrian economists. If you wish to explore this topic in more detail, see my essay on recessions. For now, the short explanation is that entrepreneurs borrowed fiat money to invest in production for which they overestimated market demand – consumers do not have the savings to buy the products. The cartel’s fiat money loans – which do not originate from savings – are the cause. The overestimation of entrepreneurs, and the ensuing recession, are the effects.
SHOULD EVERYONE HAVE THE RIGHT TO CREATE MONEY ?
My statement from above: “It stands to reason that when the cartel claims the right to create money, while forcibly denying this right to others, the cartel will be the primary beneficiaries of this arrangement, at the expense of others.”
We have already addressed the immorality of fractional reserve banking, to which the state gives its blessing. Banks do not have sufficient cash reserves in their vault to support all customer deposits. This is legalized theft, made possible on such a large scale only because the state has essentially outlawed competition from any alternative medium of exchange. If various forms of money were freely competing, the ‘fiat money cartel’ would not long survive. Fractional reserve banking is immoral, but forcibly denying others the right to make money is also immoral.
Does this mean that everyone should be free to use whatever money they wish, even to create their own money? Yes, absolutely. Does that mean the world would be using thousands, or even millions, of different types of money? Absolutely not. To be sure, each one of us would be free to print our own money, but this does not obligate others to accept our money. Remember what you learned in Part 1. When people were free to use whatever money they wished, they experimented with various commodities, eventually settling on gold and silver. This was a lengthy evolutionary process.
MONEY MUST HAVE IMPUTED VALUE
Whether we are speaking of gold money or fiat money, in both cases the ubiquitous use of the money is made possible only because individuals impute value to the money. We accept the money because we are fairly certain we can spend it. Our confidence is based on historical experience – we spent some of this money yesterday, and the day before that, and we know of many other people who have successfully used this money.
Historically, confidence in the use of a particular commodity as money came from the knowledge that the commodity was in high demand for non-monetary purposes. For example, gold was widely used for jewelry. Our ancestors transitioned out of the barter system because their experiences revealed that certain commodities were in high demand. They had been accustomed to trading one commodity for another, with the result that both parties were able to enjoy the direct use of the commodity received in exchange. When they saw that a particular commodity was in high demand, they understood they could accept this commodity in exchange, not for its direct use, but for its indirect use – as a medium of exchange.
Thus, the exchange process became far more efficient, social interaction greatly enhanced, civilized society more developed. This was a natural social process. It was not initiated by any government, nor any particular individual, and not forcibly imposed by anyone. No single person or group can take credit for this evolution. It was the culmination of knowledge acquired through an incalculable number of voluntary social interactions over a lengthy period of time. As Rothbard tells us:
This process: the cumulative development of a medium of exchange on the free market – is the only way money can become established. Money cannot originate in any other way, neither by everyone suddenly deciding to create money out of useless material, nor by government calling bits of paper “money.”
Rothbard says that money cannot be established by government. However, we know that fiat money is produced by the cartel, which is certainly government driven. So is he wrong? No, he is not wrong. Rothbard’s point is that money cannot originate with government. He is absolutely correct. Gold money was a free market development. The fiat money which governments have imposed upon us was built on the back of gold money.
People had been using gold as money for centuries. Then banks developed to store this money. Then the banks started to engage in fractional reserve banking – they had insufficient gold in the vault to cover their bank notes. Then governments passed laws to sanction the theft. Then governments passed laws eliminating gold money, and in some countries even outlawing private ownership of gold. Governments extinguished the final monetary link to gold in 1971 (Part 4). That was the path to fiat money. Fiat money did not arise in a vacuum, nor could it arise in this manner. People living in a barter society could never be persuaded to use fiat money, nor could anyone have been expected to conceive of such a thing, because fiat money is not a commodity with a direct use. Thus it would have no value in the minds of our ancestors.
The devious invention of fiat money became possible only after the free market had chosen its medium of exchange. Thus, fiat money did not originate with government. Rather, it was a predictable effect of the government’s seizure and corruption of the money chosen by the market. This immoral process would not have been possible if people were not already using a commodity money to which they imputed value.
ATTEMPTS TO LEGITIMIZE IMMORAL ACTIONS
When gold was used as money, it also had other uses, such as jewelry, a few industrial applications etc. As we have already discussed, it was the high demand for a particular commodity for direct use that prompted a demand for indirect use (medium of exchange). Eventually, the evolution of money reached a point where the demand for gold for its indirect use far outstripped the demand for indirect use of all other commodities combined. Gold did not fall under the control of bankers and politicians because they wanted to steal it for its direct use, to make some nice gold watches and necklaces. It was gold’s prominent role as a medium of exchange which created the irresistible temptation for these dishonest individuals.
Who among us would not jump at the opportunity to forcibly control society’s medium of exchange? Dishonest people want to live at the expense of others, and those who were dishonest and intelligent realized they did not have to steal goods directly. They could steal them indirectly if only they could seize control of money. The cartel controls money, which means only they have legal authority to create money to steal goods and services indirectly, just as we saw with the dishonest bank loan to the bicycle maker.
We have been taught that the role of the state – supposedly – is to make and enforce laws to protect the lives and property of citizens. Cartel members have known for centuries that the crime of fiat money is plain to see for those who take the time to study the issue. Therefore, they understood centuries ago that it was imperative to find a way to justify the ongoing theft, so as to persuade the people that there was in fact no theft; that in fact the cartel’s actions were noble and served the public interest. As economist Jesus Huerta de Soto explains:
The legal doctrines aimed at justifying fractional-reserve banking . . . have not been based on pre-existing legal principles that have given rise to certain legal acts. . . . banking practices have long infringed upon basic, universal legal principles and have done so in response to specific circumstances which have conspired to make these violations possible (human avarice; inadequate regulation; governments’ financial needs; systematic intervention of the authorities . . .
As is logical, the lack of a legal basis for such a widespread practice soon prompted bankers and theorists alike to search for a fitting legal justification. Moreover, this urge was reinforced by the fact that, on almost all occasions, the government or public authorities ended up being the main beneficiary of fraudulent banking practices. Therefore it is not surprising , given the traditional symbiosis between political authorities and the intelligentsia, that the latter was driven by the former to search for legal grounds to support the practices it permitted and encouraged.
. . . no matter how “major” one considers the “discovery” that it is possible to make fraudulent use of depositors’ money or issue deposit receipts for a greater amount than is actually deposited, it is clear that these acts share the same characteristic present in all other criminal acts of misappropriation which have always been the object of doctrinal analysis by criminal law experts. The similarity between the two sets of actions is therefore so obvious that theorists could not remain impassive in the face of a legal irregularity such as this in the economy.
Hence it is not surprising that great efforts have been made to justify what appears completely unjustifiable: that it is legitimate, from the standpoint of general legal principles, to misappropriate funds deposited for safekeeping and to issue deposit receipts for more money than is actually deposited. However, the interested parties (bankers and governments, mostly) have found it so important to find an adequate theoretical justification beyond the easy solution of simply declaring legal a corrupt, criminal practice (which is what has ultimately happened, despite all the doctrinal facades and constructions), that many jurists are still at work trying to confer legal respectability on a procedure that is commonplace even now.
THE CENTRAL BANK – FRIEND OR FOE?
The key feature of modern banking is the Central Bank. Most countries have one, some countries share one. Examples – Bank of Canada, Bank of England, European Central Bank, Federal Reserve System (U.S.). All of them have a State-granted legal authority to direct the monetary policy of their respective nations, which means they have the power to control the country’s money supply – fiat money supply. They increase or decrease the supply as they see fit. They all say that this State-granted power is essential in order for them to execute their most important functions, namely (a) as lender of last resort, in order to safeguard the financial system, and (b) to preserve the value of money by keeping inflation low and stable. All of this, they claim, is in the economic interest of the public.
That is the officially stated purpose of central banks. The truth is that the central bank is the brainchild of the large commercial banks, intended to advance their own interests. These banks also have the power to control the money supply. It is a cartel. In fact, the monopoly consists of a few large banks which control the central bank, though the image conveyed to the public is that of the central bank operating as an independent entity making objective decisions in the public interest. In its supposedly independent role as “lender of last resort”, the central bank makes loans to banks and purchases securities from banks, always financed with newly created fiat money. This allows banks to take excessive risks, a significant component of which is their own propensity for creating new fiat money.
Governments facilitate such legal arrangements in exchange for loans of new fiat money when they are unable to borrow funds elsewhere and they wish to avoid taxing the public directly. (note – therefore, the public gets taxed indirectly via the inflation tax) Furthermore, it has always been clearly understood that this cozy relationship between the State and the banks depends on the State always providing bailouts funded by taxpayers when any of the large banks experience serious financial difficulty, and decide their interests are best served with a taxpayer bailout, as opposed to a central bank bailout. Sometimes, bailouts come from both entities. (note – bailouts coming from the central bank have a nasty habit of producing consequences which also fall on the backs of taxpayers) Having prearranged the bailouts, banks are thus incentivized to engage in high-risk-transactions with impunity. They keep all profits, but recoup major losses from taxpayers, with the State arranging the transfer.
During the global financial crisis of 2008 – 2010, Prime Minister Harper and Finance Minister Flaherty told Canadians that our banks did not require financial assistance, while their U.S. and European counterparts were receiving significant bailouts. Canadian banks were rock solid, the envy of the world, we were assured. However, government transparency is always a selective process and politicians are sometimes inclined to play fast and loose with the facts. Each of the large Canadian banks did in fact receive a bailout, and all of them were massive in size because all of them were in serious financial difficulty. David Macdonald, a senior economist with the Canadian Centre for Policy Alternatives, prepared a report titled “The Big Banks Big Secret: Estimating government support for Canadian banks during the financial crisis.” You can find it here.
GOVERNMENT DEPOSIT INSURANCE
Perhaps you are not concerned about insufficient cash in the bank vault because you are covered by government deposit insurance, which is administered through the CDIC in Canada, and the FDIC in the U.S. Be advised, these government institutions also have insufficient funds to cover customer deposits in the event of major bank failures. Banks and other financial institutions pay premiums to the CDIC, but the CDIC fund is equal to less than one percent of customer deposits.
It is also true that a private insurance company does not have sufficient funds to cover insurance claims if the houses of all policy holders burn to the ground. However, private insurers are experts at determining probabilities – how many houses are likely to burn down. This enables them to set premiums which are acceptable to homeowners and profitable for themselves. Both parties benefit.
Why do we need government deposit insurance? Why don’t banks have deposit insurance with private insurers? The answer – fractional reserve banking puts customer deposits at such extreme risk that it becomes an uninsurable activity for private insurers. The potential liabilities are astronomical, which means premiums cannot be set at a level which would benefit both parties. Government insurance is a misnomer – it cannot be considered insurance in the conventional sense of the word. As economist Robert Murphy wrote:
If the FDIC is such a wonderful legacy of the New Deal that rescued the banking system from itself, we have to ask: Why didn’t commercial banks take out private insurance for their deposits, just as other firms take out private insurance policies on their business assets?
The answer is what economists call “moral hazard.” Certain types of events cannot be insured against, because the very act of providing insurance on them would make them likely to occur.
Through the creation of FDIC . . . all the government has done is put taxpayers on the hook for potential liabilities that no private insurer would ever dream of assuming.
Remember, the government and banks are in business together. It is a cartel. The CDIC is a federal crown corporation established in 1967. Its purpose is the same as the FDIC in the U.S., and the same as government deposit insurance programs in other countries. The FDIC was created in 1933 in response to numerous bank runs in the U.S. Those pesky citizens wanted their money back, and something had to be done. The creation of government deposit insurance had its intended effect – bank runs virtually stopped. However, this negated the historical effect of bank runs, which was to reveal the fraudulent activities of bankers. Suddenly it became easier for banks to attract depositors, because depositors were no longer concerned about risk.
Think about it. If depositors are no longer concerned about risk, bankers take more risks. Thus, when banks incur losses, their losses are much greater. Then the government says “we must stabilize our financial system because it is vital for the health of the economy”, and they proceed to bail out the banks to cover their losses, and taxpayers pay the bill.
If a bank fails, will the CDIC honour its promise to depositors? Maybe, but who is really paying the tab? There is not enough money in the CDIC fund to cover depositors in the event of serious bank failures, which means (a) taxpayers will be on the hook for the difference via a government bailout of the CDIC, or (b) the government will have to borrow new fiat money from the central bank to cover the difference, which again leaves taxpayers on the hook for repayment of this new government debt.
In a free market, I would not deposit money in a bank if I believe the bank is poorly managed. This enforces discipline on the bank. If the bank wishes to attract depositors, it must show itself to be a professionally managed, low risk operation. Before the creation of government deposit insurance, a bank run would occur whenever the public doubted the ability of a bank to honor its liabilities. The banks needed to be watched. The public – the market – was the watchdog. This forced banks to keep more cash in the vault. To be sure, some depositors lost money, but this free market arrangement minimized the losses. The market was a great regulator, and the cartel hated it.
Thus, after the creation of government deposit insurance, banks had much less incentive to keep sufficient cash on hand to honour large scale customer withdrawals. The whole point of the CDIC was, and is, to create a false sense of security within the minds of the people, thereby minimizing the possibility of cash withdrawals. This allows banks to put customer deposits at even greater risk, at taxpayer expense.
The CDIC discourages bank runs at taxpayers’ expense, and encourages banks to make riskier loans and investments, also at taxpayers’ expense. The State’s creation of the CDIC to “protect your deposits in the event of a bank failure” is the cause. Increased risk of bank failures, and subsequent bailouts, is the effect.
The CDIC exists to protect banks from a bank run, not to protect the savings of depositors. The best possible insurance for depositors and taxpayers is for banks to hold cash reserves in their vaults equal to 100% of customer deposits. This would be easy for the government to enforce if it was genuinely interested in the protection of citizens’ property.
INFLATION PROPERLY DEFINED
The Canadian Oxford Dictionary (Second Edition 2004) definition of inflation, and my contribution in brackets, is:
(a) a general increase in prices and fall in the purchasing value of money (Price Inflation)
(b) an increase in available currency regarded as causing this (Monetary Inflation)
To facilitate our analysis, I shortened and renamed both definitions in the brackets above.
In the first definition, the dictionary refers to a general increase in prices for goods. ‘General’ increase simply means that the prices of some goods are rising, some are falling, but ‘generally speaking’, prices are rising. This is ‘Price Inflation’. The first definition also takes note of the ‘fall in the purchasing value of money.’ Makes sense, right? As prices are rising, your money will not buy as much stuff. This leads neatly into the second definition.
In the second definition, the dictionary refers to an increase in available money which is regarded as the ‘cause’ of the Price Inflation. So, an increase in available money is ‘Monetary Inflation’.
Here is what we see on the Bank of Canada’s website, displayed prominently across the top of the page:
We are Canada’s central bank. We work to preserve the value of money by keeping inflation low and stable.
A little digging through the website reveals the Bank of Canada’s definition of inflation:
Inflation: a persistent rise over time in the average price of goods and services – in the “cost of living.”
Well, it seems we have a disagreement between the Bank of Canada and the Canadian Oxford Dictionary. The inflation the Bank of Canada refers to is Price Inflation, and, conveniently, it does not point to Monetary Inflation as the source of Price Inflation – though the dictionary rightly makes this connection. The dictionary says that Price Inflation is associated with a fall in the value of money, while the Bank of Canada assures us that it can ‘preserve the value of money’ by keeping Price Inflation ‘low’.
I think we can all agree we have experienced significant price inflation during the course of our lives. Ironically, we can use the Bank of Canada’s own inflation calculator to prove the point. The calculator tracks the cost of a fixed basket of goods, including food, shelter, furniture, clothing, transportation, and recreation. A basket of goods costing $100 in 1971 ended up costing – drum roll please – $633 in 2017, a six-fold increase. The Bank of Canada is not preserving the value of money.
There are many factors which affect prices for goods and services. However, ceteris paribus, the general price level can rise only if: a) there is a decrease in the quantity of goods and services available for purchase, or b) there is an increase in the quantity of money. The Bank of Canada’s misleading definition of inflation is an attempt to hide the true cause and effect. When banks create new fiat money, it means they have increased the quantity of money in the economy, or ‘inflated’ the money supply. This is Monetary Inflation. When prices for goods and services are rising, this is Price Inflation. Monetary Inflation leads to Price Inflation. Monetary Inflation is the cause. Price Inflation is the effect.
INFLATION IS THEFT
Monetary inflation causes both prices and wages (the price of labour) to rise, but not concurrently, and not necessarily at the same rate. New money enters the economy in different ways. The government may borrow new fiat money from the bank and spend it into the economy. Examples are: government salaries, payments to contractors for building roads and bridges or a new government building, or new equipment for the military. Businesses and individuals also borrow money from banks. When new money enters the economy, prices do not increase immediately, nor at the same rate for all goods and services. The greatest benefit accrues to those who are first to receive and spend the new money, because they spend money before prices begin to rise. It is the spending of this new money which causes prices to begin to rise. The ‘first receivers’ are primarily the banks (they create the money and collect the interest), the government, and the politically well connected, including government contractors.
The next tier of beneficiaries, those who receive the new money spent by the ‘first receivers’, realize a slightly lesser benefit as they spend the money just as prices begin to rise. The new money continues to work its way through the economy in stages, with a lesser benefit to each new recipient, as prices continue to rise. It may be a few years before this new money is fully absorbed by the economy. People have seen their incomes rise at different stages of the process, but most of them were paying higher prices long before their incomes rose; and the wage/salary increase they receive often does not match the increase in the general price level. This is the immoral effect of monetary inflation by the cartel: a redistribution of wealth out of the pockets of the poor and middle class, into the pockets of the banks, politicians, and the politically well-connected. Monetary inflation is the cause. Price inflation is the effect. Legalized theft is the goal. As the great 20th century economist Ludwig von Mises wrote:
. . . a government’s plans concerning the determination of the quantity of money can never be impartial and fair to all members of society. . . . It always furthers the interests of some groups of people at the expense of other groups. It never serves what is called the commonweal or the public welfare.
When new dollars are created, all dollars are reduced in value. Price inflation must be considered a tax because it is a direct and completely predictable result of the actions of the cartel. Governments try very hard to keep this process hidden from the public. The inflation tax is the worst of all taxes, because it is undeclared by governments and undetectable to the public. G. Edward Griffin, in The Creature from Jekyll Island, a Second Look at The Federal Reserve, provides this assessment:
Here is the perfect tool for obtaining unlimited funding for politicians and endless profits for bankers. And, best of all, the little people who pay the bills for both groups have practically no idea what is being done to them.
The power to create and extinguish the nation’s money supply provides unlimited potential for personal gain. Throughout history the granting of that power has been justified as being necessary to protect the public, but the results have always been the opposite. . . . When men are entrusted with the power to control the money supply, they will eventually use that power to confiscate the wealth of their neighbours
The cartel is nothing more than a highly sophisticated version of a back-alley mugger, with one important difference. As Lysander Spooner would say, the mugger doesn’t keep coming back for more. He usually leaves you alone after the first robbery.
Image source: Adobe Stock
 Murray N. Rothbard Man, Economy, and State, with Power and Market (Scholar’s Edition, Second Edition, Ludwig von Mises Institute, 2009) p 766
Thomas Woods wrote: “Interviewed by the New York Times in early November 2008, economist James K. Galbraith claimed that perhaps 10 or 12 of the country’s 15,000 professional economists saw the economic crisis coming. Well, few of the economists Galbraith associates with may have seen it coming, but hundreds of economists who belong to Mises’ Austrian School of economic thought sure saw it. The Austrian School is a small but growing school of free-market economics whose distinguished lineage includes Mises (1881 – 1973) and Nobel Laureate Hayek (1899 – 1992). By and large the Austrians warned of the housing bubble before anyone else, and they predicted the crash the economy is enduring now. And the primary culprit, from their point of view, is the Federal Reserve.” Thomas E. Woods Jr. Meltdown, A Free-Market Look at Why the Stock Market Collapsed, the Economy Tanked, and Government Bailouts Will Make Things Worse (Regnery Publishing, Inc., 2009) p 8
 Murray N. Rothbard What Has Government Done to Our Money? and The Case for a 100 Percent Gold Dollar (Ludwig von Mises Institute, 2005) p 27
 Jesus Huerta de Soto Money, Bank Credit, and Economic Cycles (Third English edition, Ludwig von Mises Institute, 2012) pp 115 – 117. This is an excellent book by a great economist. It includes a fifty-page chapter devoted to “a critical examination of the different theoretical attempts to legally justify fractional-reserve banking.”
 Robert P. Murphy The Politically Incorrect Guide to The Great Depression and the New Deal (Regnery Publishing, Inc., 2009) pp 122 – 23
 Ludwig von Mises Human Action, A Treatise on Economics (Ludwig von Mises Institute, 1998) p 419
 G. Edward Griffin The Creature from Jekyll Island, a Second Look at The Federal Reserve, 4th ed. (American Media, 2002) pp. 183, 500
In the case of the bicycle shop loan, the banker would argue that the six thousand dollars paid in interest is the price paid for the arrangement of the loan. The banker maintains that arranging loans is the service that he sells!!! Does that not constitute fair trade???
If the banker is acting strictly as a financial intermediary, then yes, his actions are legitimate. However, if the banker is not acting as a financial intermediary, and is simply creating money out of thin air, then his actions are fraudulent.
So….. Who decides? (I am not a banker. My background is physics and now retired I am trying to catch up)
Russ, you ask “Who decides?” Please elaborate. Who decides what?
Who decides whether the banker is a legitimate financial intermediary earning an honest living or a fraudulent operator stiffing the economic system?
The government is supposed to protect the lives and property of citizens. Therefore, incidents of fraud must be settled in government courts. This is a convenient arrangement for the government because the government (not the people) is an accomplice to, and a beneficiary of, fraudulent banking activity. That is why government courts do not consider this activity to be fraudulent. I addressed this over the course of these five essays on “Money”, especially in Parts 2 and 3.
As explained in Part 2, the general public is quite capable of deciding whether banking activity is honest or fraudulent. The problem is that the government, not the general public, determines the definition of fraud. This is because the government makes and enforces laws, which is a rather recent historical development. As I have written elsewhere on this site (https://londonnews1.com/part-2-opposing-systems-of-law/):
“Think of laws made by the State (government) as being ‘top-down law-making’, or ‘authoritarian law’. Think of laws made by the people themselves as being ‘bottom-up law-making’, or ‘customary law’ (law established in recognition of evolving customs).”
Does that help to answer your question?
That answers the question in principle, but it is clear to me that the general public does not really understand the details of the financial system. Thus, the fraudulence of money creation and movement continues unabated, and that assumes that the government would deal with the fraudulence if the people demanded it! Don’t mean to be negative but it’s difficult to avoid! Let’s keep beating the drum of education!
Enjoy your writing and will continue reading. Thanks!
You are correct. With education, change becomes possible.