Please note that, up to this stage in our story, prices have fallen quite dramatically. Due to massive efficiency gains, bread is now 100 times cheaper than it was initially and people have a lot of excess money to buy other stuff. In the society we live in today, however, prices almost never go down. In fact, the price of basic consumables doubles ever 10-20 years. This is the simple result of our global acceptance of a fiat paper currency standard. True, our incomes also increase accordingly, but we will soon see that this system is fundamentally flawed in numerous ways.
The new paper money system which does not require any gold backing changes the entire dynamic of our example economy. In effect, it gives the government the power to pay people immediately by simply printing money (under the gold system, they first had to collect this money through taxes). Unfortunately, as explained in a previous post, this system is simply fundamentally incompatible with human nature. In our society, money is power and the ability to print money literally gives ordinary people godly power. And yes, as the world has repeatedly demonstrated: absolute power corrupts absolutely.
Obviously, the government wastes no time in starting to make use of its new-found godly powers and begins to pay specific contractors lots of freshly printed bank notes to build the new sustainable infrastructure. For a while everything goes well. The infrastructure gets built and many contractors get very rich in the process, but there is a catch: inflation has now become a permanent feature of the economy.
It works like this. The contractors now have lots of newly created money and can use this money to buy a lot more stuff than they previously could. Because there are lots of these very rich contractors, this creates a big demand for many high-end non-essential products and services, driving prices up. This is not a problem for the rich contractors, but for all of the normal people who still earn their usual salaries, these rising prices soon become a big problem.
In fact, what the citizens do not realize is that the further you are down the line from the newly created money, the worse it is for you. For example, the lucky contractors now have a lot of new money to buy luxury items like jewellery, raising the jewellery price and allowing jewellers to make more money. The jewellers now have more money to go to the newly established Broadway show, allowing the actors to raise their prices and make more money. These actors now have more money to spend on furnishing their homes, allowing interior decorators to raise their prices and make more money. So it goes on until the farmer finally gets to raise his prices as well. Unfortunately for him, it took quite a long time for this price inflation cascade to reach him and he had to watch prices of a wide range of other things rise while his income stayed the same for a long time, meaning that he could not afford any new furniture, could hardly ever go and see his favourite Broadway show and definitely could not afford any new jewellery for his wife. In effect therefore, this inflation cascade has facilitated a totally unfair wealth transfer from those who are far from the newly printed money to those who are close to it.
Looking on the bright side, however, the money printing has now created some much needed infrastructure which leads to a much more sustainable use of resources. This infrastructure was subsidized by the unsuspecting poor and middle class forcing them to under-consume, but they simply don’t have a clue about this great scam so, as far as the government is concerned, everything is still OK. The farmers may have unwillingly paid for this new infrastructure by means of the secret inflationary transfer of purchasing power, but the infrastructure itself leads to much more sustainable and efficient production which is good for everyone. Thus, in effect, the losses of the farmer might be completely offset by the gains brought about by this new infrastructure, while the well-connected contractor wins all the way and truly cements his place among the elite. Everybody wins – some just more than others…
It is therefore clear that the godly powers of money-printing can be used for good, but unfortunately, this great power is wielded by mere mortals who are all too easily corrupted by it. Now that the government has seen the efficiency with which newly printed money can create valuable infrastructure, they are more than happy to apply this magic formula towards financing their next military exploit. They can now finance invasions which would have been faced with massive resistance from the people if it had to be financed in the old way (increased taxation on all citizens). In other words, they can fight wars that they otherwise would not have fought.
The newly printed money has the exact same effect: the well-connected contactors (now players in the military-industrial complex) get rich while poor and middle class citizens bear the brunt of the inflation cascade. There is one crucial difference though: this time, they are not subsidizing valuable infrastructure, they are subsidizing value destroying war. And as we saw before, wars make everything more expensive for everyone. So, while the well-connected individuals might still win due to their special position at the top of the inflation cascade, the poor farmer is now hit with a double whammy: the inflationary effect of war and the sharp end of the money-printing inflation cascade.
But the government does not stop there. They quickly see that they can now make totally ridiculous election promises and just pay for these promises using printed money. As politicians realize this, the promises of total government welfare get more outrageous at every election and the electorate are spoilt rotten. Welfare (funded by money-printing) soon gets so ridiculous that people lose their sense of personal responsibility and find that it is more profitable to just live off welfare than it is to work. As a result, the collective mindset of industriousness that built the society is now replaced with a crippling collective mindset of entitlement.
It is not long before this situation begins to snowball. As the inflation cascade wipes out the middle class and more and more people stop working and start collecting welfare benefits, the productive output of the society starts dropping dramatically. As a result, supply drops and prices rise even faster. And as a result of that, it soon becomes more economical to just import consumables from other, much more industrious nations and the ultimate evil is born: an entire nation gorging itself on the hard work of other nations and paying with money created out of thin air.
But this corruption is not yet complete. It gets even worse on the next page…