If We Don’t Change the Way Money Is Created, Rising Inequality and Social Disorder Are Inevitable

Everyone who wants to reduce wealth and income inequality with more regulations and taxes is missing the key dynamic: central banks’ monopoly on creating and issuing money widens wealth inequality, as those with access to newly issued money can always outbid the rest of us to buy the engines of wealth creation.

History informs us that rising wealth and income inequality generate social disorder.

Access to low-cost credit issued by central banks creates financial and political power. Those with access to low-cost credit have a monopoly as valuable as the one to create money.

I explain why in my book A Radically Beneficial World: Automation, Technology and Creating Jobs for All.

Compare the limited power of an individual with cash and the enormous power of unlimited cheap credit.

Let’s say an individual has saved $100,000 in cash. He keeps the money in the bank, which pays him less than 1% interest. Rather than earn this low rate, he decides to loan the cash to an individual who wants to buy a rental home at 4% interest.

There’s a tradeoff to earn this higher rate of interest: the saver has to accept the risk that the borrower might default on the loan, and that the home will not be worth the $100,000 the borrower owes.

The bank, on the other hand, can perform magic with the $100,000 they obtain from the central bank. The bank can issue 19 times this amount in new loans—in effect, creating $1,900,000 in new money out of thin air.

This is the magic of fractional reserve lending. The bank is only required to hold a small percentage of outstanding loans as reserves against losses. If the reserve requirement is 5%, the bank can issue $1,900,000 in new loans based on the $100,000 in cash: the bank holds assets of $2,000,000, of which 5% ($100,000) is held in cash reserves.

This is a simplified version of how money is created and issued, but it helps us understand why centrally issued and distributed money concentrates wealth in the hands of those with access to the centrally issued credit and those who have the privilege of leveraging every $1 of cash into $19 newly created dollars that earn interest.

Imagine if we each had a relatively modest $1 million line of credit at 0.25% interest from a central bank that we could use to issue loans of $19 million. Let’s say we issued $19 million in home loans at an annual interest rate of 4%. The gross revenue (before expenses) of our leveraged $1 million would be $760,000 annually –let’s assume we net $600,000 per year after annual expenses of $160,000. (Recall that the interest due on the $1 million line of credit is a paltry $2,500 annually).

Median income for workers in the U.S. is around $30,000 annually. Thus a modest $1 million line of credit at 0.25% interest from the central bank would enable us to net 20 years of a typical worker’s earnings every single year. This is just a modest example of pyramiding wealth.

Next let’s say we each get a $1 billion line of credit which we leverage into $19 billion in loans earning 4%. Now our net annual income is $600 million, the equivalent income of 20,000 workers. We did nothing to improve productivity, nor did we produce any goods or services. We simply used the power of central banking and fractional reserve lending to skim $600 million in financial rents from those actually producing goods and services.

Note that we are not uniquely evil or avaricious in maximizing our private gain from the central bank system; we’re simply responding rationally to the system’s incentives.

The system concentrates wealth and subverts democracy not because participants are different from the rest of us but because they are acting rationally within a perverse, exploitive system. Would you turn down $600,000 a year? How about $600 million a year?

It makes no sense for banks and financiers not to maximize their gains in this system. Those who fail to maximize their gains will be fired.

I hope you understand by now that the current system of issuing money and credit benefits the few at the expense of the many. The vast privilege and the equally vast inequality it generates is the only possible output of the system.

This inequality cannot be reformed away; it is intrinsic to centrally issued money and private banking with access to central bank credit.

The problem isn’t fiat money; it’s centrally issued money/credit that is distributed to the few at the expense of the many. If we want to limit the subversion of democracy and reduce wealth inequality, we must decentralize and democratize the issuance and distribution of money.

In the current system, money isn’t created to reward increasing productivity. It is created to increase the wealth and power of the privileged.

If we want to connect the creation and distribution of money/credit with productivity, we must issue new money directly to those creating value and boosting productivity, bypassing the privileged few in central and private banks.

By concentrating wealth and power, centrally issued and distributed money doesn’t just subvert democracy. It also optimizes inequality, monopoly, cronyism, stagnation, social immobility and systemic instability.

The status quo “solution” is Universal Basic Income (UBI), a form of subsistence designed to quell the righteous urge to throw off the monetary yoke of the privileged financial Elites. If scraping by as a debt-serf on UBI is the New American Dream, we need a new economic/social system. 

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  • WillDippel

    Here is an article that looks at one group that is behind the global movement to end cash:


    The concept of a cash-free society is being sold to us on the premise improving economic well-being and inclusiveness.

    • Nexusfast123

      Massive ‘cumulative catastrophe’ is built up the more we go digital. The notion that the Internet will always ‘be up’ is absurd beyond belief. Take it down and commerce stops. That would happen now even without digital enslavement.

  • Zartan

    People ,really, need to understand how the economy works.

    1. Credits ( invented by the Roman Empire) are only a way to make Citizens Slaves.
    2. Money is Just printed. Faith is the only thing that backs US Currency.
    3. Anyone who loses faith in the USD money printing machine will be droned, assassinated, or their nation Sacked.

    And, if the Whole World gets uppity, Nuclear War.

    Nobody is going to ask Questions. Everyone is a Slave.

    Wake up and Smell the Coffee!

    • Nexusfast123

      World gets uppity we all die. Even the numb nuts in the bunkers will eventually die off.

      • Zartan

        Those who control this world (1-percent, or so) have Deep Bunkers and think they will survive a nuclear war. The Powers that control this world ensure their succession. This is why you cannot get a president who does anything much different than the last. All goes according to thier plans, or all life ends. I would say, they own this world, and the people refuse to do anything about it. Bakers will never die, because they ensure their plans and successions for generations. Bankers are Eternal. God will have to deal with them, like it or not, because nothing will change.

  • jadan

    Can’t do a thing about inequality without democracy. You start with a government elected by majority vote of the people, then you have this government exercise its sovereign duty to issue money and regulate it per Article 1 Section 8 of the US Constitution. There are many very smart people who can write the algorithms to run an equitable monetary system, but there are also a very few people representing the 1% who will employ huge money and ruthless tactics to prevent the democratic takeover of the current private monetary system. But you don’t believe in government, Smith. so your solutions can never work.

  • TimeToWakeUPAmerica

    “If We Don’t Change the Way Money Is Created, Rising Inequality and Social Disorder Are Inevitable”? You can say that again!

    “There are none so enslaved as those who falsely believe that they are free” – Goethe

    Read _ALBION & ZION UNITED_, by Veronika Kuzniar.

  • Nexusfast123

    The Federal reserve needs to go and a public bank created – bankers are removed from money creation and the debt system terminated. Monetary policy can be moved the US Treasury. The big banks broken up and the ‘fancy’ financial instruments closed down. Only after this could you consider the merits of UBI and other innovations.

  • Steven

    Smith’s technique is to get just close enough to ‘the truth’ / reality / the way things really work to make you think he might be on to something. Then, as jadan notes, he goes off on another government-hating tirade. A REAL economist, the late Hyman Minsky, wrote “Any unit (i.e. anyone who can get credit – Steven) can create money. The problem is getting it accepted.” That’s what banks do for you and I – but MUCH MUCH more for Wall Street and national governments, especially that of the U.S.

    That’s the real evil of the Fed – helping the oligarchs and their wholly owned governments insure the money created for them (on credit as their nominal debt) get ‘accepted’. When the banks can no longer pay their debts to depositors because they have ‘loaned’ (actually created ‘out of thin air’ – reserve requirements are a joke) their (actually those of financial speculators and governments that find it more politically expedient to borrow than tax the few people who have any money left to tax these days) bad debts are simply passed along to ‘the peoples’ governments.

  • John Congdon

    Charlie, I’m in agreement with much of what you say,there’s a couple details that are off such as the central bank does not issue original credits to a bank, the bank is capitalized by its owners/stockholders and the fractional reserve on that capitalization. After that it comes from bank accounts as they are deposited in different banks.The plan to give a UBI requires legislation and I don’t know that that will happen anytime soon. The root problem is not the central bank system, rather who controls it. The control is in the hands of the banks and in the bought politicians. I believe that there is a way around all that which can be done privately. It simply requires a degree of cooperation among an initially very small segment of the population, such as 200 people, to implement it. If sounds intriguing you can reply to this post and we could get into contact as it can also be a way to initiate something like a UBI.