If one looks at the current paper money system and its negative social and social-political effects, the question must arise: where are the protests by the supporters and protectors of social justice? Why don’t we hear calls to protest from politicians and social commentators, from the heads of social welfare agencies and leading religious leaders, who all promote the general welfare as their mission?
Presumably, the answer is that many have only a weak understanding of the role of money in an economy with a division of labor, and for that reason, the consequences of today’s paper money system are being widely overlooked.
The current system of fractional reserve banking and central banking stands in stark opposition to a market economy monetary regime in which the market participants could decide themselves, without state pressure or coercion, what money they want to use, and in which it would not be possible for anyone to expand the money supply because they simply choose to do so.
The expansion of the money supply, made possible through central banks and fractional reserve banking, is in reality what allows inflation, and thus, declining income in real terms. In The Theory of Money and Credit Ludwig von Mises wrote:
The most important of the causes of a diminution in the value of money of which we have to take account is an increase in the stock of money while the demand for it remains the same, or falls off, or, if it increases, at least increases less than the stock. ... A lower subjective valuation of money is then passed on from person to person because those who come into possession of an additional quantity of money are inclined to consent to pay higher prices than before.[1]When there are price increases caused by an expansion of the money supply, the prices of various goods and
