The Golden Revolution, Revisited: Chapter 4

This Insight is the sixth in the serial publication of the new, Revisited edition of my book, The Golden Revolution (John Wiley and Sons, 2012). (The first instalment can be found here.) The book is being published by Goldmoney and will also appear as a special series of Goldmoney Insights over the coming months. This instalment comprises the fourth chapter of Section I.

View the Entire Research Piece as a PDF here.

The Non-Neutrality of Money and "Cantillion Effects"

“Every change in the money relation alters…the conditions of the individual members of society. Some become richer, some poorer. Each change in the money relation takes its own course and produces its own particular effects...”


While we have discussed how a capitalistic system, in of itself, certainly allows for a degree of “natural” economic inequality—that arising from voluntary exchange mixed with varying rates of productivity and the resulting evolution of the distribution of capital—we have also showed how even major technological innovations may temporarily but don’t necessarily exacerbate this natural inequality. They can in fact reduce it. There arises confusion, however, when an economic system is not purely capitalist but contains within it elements that artificially distort the otherwise voluntary exchange of labor and capital and thus the natural distribution of wealth and income. Depending on how it is conducted, one of these can be monetary policy. Nearly all contemporary Austrian economists, including those associated with the Mises Institute at the University of Auburn in Alabama, believe strongly that modern monetary policies, in particular those of the US Federal Reserve, are fueling economic inequality due to the associated “Cantillon effects.” Indeed, many Austrian economists specifically predicted that the bank bailouts and unconventional monetary policies initiated in 2008–09 and subsequently continued long thereafter would exacerbate inequality and, so far at least, they appear to have been precisely right. (This should give the mainstream critics of the Austrian Economic School some pause, especially those who have argued otherwise, including those who implemented the policies in the first place.)

Cantillon effects are the distortions created by artificial money injections into the economy. Unlike today’s economic mainstream, which generally dismisses that which it cannot purport to model precisely, Cantillon’s work on monetary economics focused on the highly complex “non-neutrality” of money, that is, that new money does not enter the economy simultaneously and proportionately in all sectors or at all stages of production, trade, and consumption. Rather, money tends to impact only one or several economic sectors at first, where it raises capital goods (i.e. asset) prices, and/ or the price level for closely associated goods and services. Only later, as that money circulates into the broader economy, does it begin to affect the price level in other areas, including consumption goods, eventually permeating the economy as a whole, thereby finally raising the general price level that is the primary—in some cases only—focus of today’s economic mainstream. By that time, however, the damage is done. Inequality has increased and economic calculation has been distorted, perhaps dangerously so. Malinvestments have been made. Indeed, trying to steer the economy while looking only at the one, very last aspect of what money creation does to the economy is akin to driving while looking through the rear-view mirror. It is reckless and yet it is precisely what modern, activist central banking is all about.

Now, it might be presumed that, once the permeation is complete, that all prices will have adjusted uniformly higher, as the Monetarists are wont to assume would occur with the mythological “helicopter drop” of money popularized by Milton Friedman. According to Austrian School economists, however, this is far from the case in actual practice. Ludwig von Mises describes the potential for Cantillon effects to affect the distribution of incomes and wealth thus:

Is it possible to think of a state of affairs in which changes in the purchasing power 3 of money occur at the same time and to the same extent regarding all commodities and services and in proportion to the changes effected in either the demand for or the supply of money? In other words, is it possible to think of neutral money within the frame of an economic system which does not correspond to the imaginary construction of an evenly rotating economy? Is it possible to answer [this question] categorically in the negative?

The answer…must obviously be in the negative. He who wants to answer it in the positive must assume that a deus ex machina approaches every individual at the same instant, increases or decreases his cash holding by multiplying it by n, and tells him henceforth he must multiply by n all price data which he employs in his appraisements and calculations. This cannot happen without a miracle.

Every change in the money relation alters…the conditions of the individual members of society. Some become richer, some poorer. Each change in the money relation takes its own course and produces its own particular effects…

With the real universe of action and unceasing change, with the economic system which cannot be rigid, neither neutrality of money nor stability of its purchasing power are compatible. A world of the kind which the necessary requirements of neutral and stable money presuppose would be a world without action.

All plans to render money neutral and stable are contradictory. Money is an element of action and consequently of change. Changes in the money relation, i.e. in the relation of the demand for and the supply of money, affect the exchange ratio between money on the one hand and [goods and services] on the other hand. These changes do not affect at the same time and to the same extent the prices of the various commodities and services. They consequently affect the wealth of the various members of society in a different way. [Emphasis added]1

Let’s now look in more detail at the compelling evidence that in the US, measures of inequality (e.g. the Gini coefficient) ceased their multidecade decline in the 1970s, following the depegging of the dollar to gold, and began a clear multidecade increase beginning in that decade.

A Gini coefficient is a ratio that measures the dispersion in income (i.e. inequality) relative to a perfectly equal distribution. It does so by calculating the incremental, cumulative share of income earned by the population as a whole, from the bottom on up. A perfectly equal distribution would result in a 45-degree line. In practice, due to inequality, the line is in fact curved and lies beneath the diagonal, as illustrated below:

Gini coefficient diagram

Specifically, the Gini coefficient measures the ratio of area B to areas B+A. As inequality declines, B rises toward “1”—the “line of equality.” As inequality increases, B falls towards zero. By implication, the more convex (curved) the line, the more unequal the distribution of income.

In the chart below, we plot the history of the Gini coefficient for the US and several other countries. Note the gentle decline in the US coefficient into the 1970s and subsequent reversal. Note also how most countries on this chart do not simply follow a similar pattern.

Historical Gini coefficients countries

Let’s now look specifically at the US, including the more recent history, as provided by US Census data:

US Gini coefficient

Note that while the trend reversal was not obvious at first, it subsequently accelerated in the early 1980s and, with the notable exception of a blip higher in the early 1990s, it has continued to rise at a relatively steady rate thereafter. The brief declines in the coefficient in 1973–4, 1995, and 2008 were due primarily to sharp declines in the stock markets, affecting primarily the top 5 percent of households.

The evidence presented above is circumstantial, to be sure. There is just no scientific way to isolate the monetary from the other variables in the complex system of a modern economy and determine with certainty whether and to what extent the rise of activist, inflationist monetary policies have contributed to growing economic inequality. But that there is a link has become increasingly evident post-2008 and is thus becoming rather difficult to ignore, even by those mainstream economists who, for the most part, have always denied the Cantillon–Austrian contention that money was not essentially neutral and thus that activist monetary policy would in practice favor the relatively wealthy holders of capital assets rather than the rank and file workers of a modern economy.


Although the possible role of Federal Reserve monetary policies in contributing to inequality remains a fringe topic within the economics profession to be sure, it has not gone entirely unnoticed by the mainstream. William Cohan, a former Wall Street executive who has written several books on investing, holds that the Fed’s quantitative easing:

[A]dds to the problem of income inequality by making the rich richer and the poor poorer. By intentionally driving down interest rates to low levels, it allows people who can get access to cheap money on a regular basis to benefit in extraordinary ways.2

Even a former Federal Reserve governor, Kevin Warsh, has expressed this opinion on multiple occasions, in one instance characterizing modern Federal Reserve policy as “reverse Robin Hood…making the well to do even more well to do.”3

Mr. Warsh also participated in a symposium hosted by the influential Washington, DC, think tank, the Brookings Institution, to debate “Did the Fed’s quantitative easing make inequality worse?” Papers presented included “Gauging the impact of the Fed on inequality during the Great Recession”; “Regional heterogeneity and monetary policy”; and “Distributional effects of monetary policy.”4

One of the co-authors of a paper above, Andreas Huster, is on the research staff of the New York Federal Reserve. In November 2015, the New York Fed published his paper exploring how the policy of quantitative easing affected regions within the United States. Among other things it observed that “recent unconventional monetary policy had less of a beneficial effect for the areas of the country that were doing relatively poorly at the time the policy was announced.”5 The paper stops short of concluding that this is necessarily a problem—regional wealth differences are entirely normal in a large country such as the United States—but the plain observation is nevertheless that Fed policies have exacerbated rather than mitigated these regional differences in recent years. (That the NY Fed would publish a paper on this rather controversial topic was noticed by the influential World Economic Forum (WEF), which holds an eponymous annual conference in Davos in Switzerland and is considered by many to be one of the most influential annual gatherings of the global economic policy elite.)6

Nor is the US the only country to present increasingly compelling evidence that money injections can exacerbate inequality. The Bank of Japan, for example, has observed that, following a prolonged period of a stable Gini coefficient for that country, there has been an increase during the past fifteen years or so during which monetary policy has been characterized by aggressive quantitative easing and other unconventional monetary policy measures.7

Most recently, in late 2016, even the prime minister of the UK, Theresa May, claimed that the Bank of England’s policy of quantitative easing was exacerbating inequality and that perhaps the Bank should no longer be fully independent of the government. Her chancellor, Phillip Hammond, subsequently made similar remarks. Prominent MP and member of the Treasury Select Committee, Steve Baker, has been banging the drum for monetary reform for some time and even co-sponsored a Commons debate on the topic earlier in 2016.

One doesn’t tend to find much evidence of anything, however compelling, if one is trained not to look. That the debate on whether monetary policies can have distributional effects is now entering the mainstream is highly significant. This strongly suggests that the evidence, previously overlooked, is increasingly widespread and thus difficult to ignore. For those mainstream economists who have been trained within a 8 paradigm that regards monetary effects on the economy to be essentially neutral, this is a loud wake-up call.


Under pressure from the shifting terms of debate above and now increasingly on the defensive, current and former central bankers are being forced to respond to the criticism. Among others, former Federal Reserve chairman Ben Bernanke, now scholar-in-residence at the Brookings Institution, has weighed in on the topic. Recall that as discussed above the Brookings Institution recently hosted a forum on the possible monetary policy effects on inequality, although Mr. Bernanke was not in attendance. In his blog entry on the topic, Mr. Bernanke offers several reasons why we should not believe that monetary policy is a material source of inequality. The first reason is that:

[W]idening inequality is a very long-term trend, one that has been decades in the making. The degree of inequality we see today is primarily the result of deep structural changes in our economy that have taken place over many years, including globalization, technological progress, demographic trends, and institutional change in the labor market and elsewhere. By comparison to the influence of these long-term factors, the effects of monetary policy on inequality are almost certainly modest and transient.8

As we have observed above, widening inequality is indeed a “very long-term trend,” one that got going in the 1970s, once President Nixon untethered Federal Reserve monetary policy from the constraints of the gold-backed Bretton-Woods system. Mr. Bernanke chooses not to ignore completely this highly relevant historical coincidence rather than attempt to dismiss it. It could be he is not even aware of it, although I find that possibility unlikely. He does, however, cite a range of factors that he claims are primarily responsible, such as technological progress and globalization.

Of course, technological progress and globalization did not only begin even a few decades ago. They have been part and parcel of economic progress for many generations, including the astonishingly rapid progress of the Industrial Revolution and rise of the middle-class discussed earlier. How then does Mr. Bernanke explain that, as we also observed above, the Gini coefficients for many countries were stable or even falling during the decades leading up to the 1970s, when notable technologies such as telecommunications, chemicals, air transport, and huge advances in health care took place? When global trade expanded rapidly? How can he be so “certain” he is correct when the data do not, at first glance, support his “very long-term” claim but in fact contradict it?

Mr. Bernanke’s second major point in his blog post is that:

[M]onetary policy, if properly managed, promotes greater economic stability and prosperity for the economy as a whole, by mitigating the effects of recessions on the labor market and keeping inflation low and stable. Even if it were true that the aggregate economic gains from effective monetary policies are unequally distributed, that would not be a reason to forego such policies. Rather, the right response is to rely on other types of policies to address distributional concerns directly, such as fiscal policy (taxes and government spending programs) and policies aimed at improving workers’ skills. Policies designed to affect the distribution of wealth and income are, appropriately, the province of elected officials, not the Fed. Alternatively, if fiscal policymakers took more of the responsibility for promoting economic recovery and job creation, monetary policy could be less aggressive.9

Having first presented a historical argument without supporting and possibly outright contradictory evidence, Mr. Bernanke now makes an even bolder claim that monetary policy promotes economic stability. As we observed in previous chapters, with reference to the Great Depression and, more recently, 2008, the evidence suggests the opposite is true. The Federal Reserve has made major mistakes in the past and, having apparently not learned the correct lessons, might well be repeating these again while you read this book. Zero interest rates and quantitative easing have created huge asset bubbles and imbalances, which more and more observers are concerned threaten the financial system with yet another major crisis in the future.

Rather than consider for one moment that Federal Reserve policy might be complicit in these crises of the past and quite probably the future, Mr. Bernanke then proceeds to conveniently pass the buck to those directly responsible for fiscal policy, namely politicians. For example, he implies that redistributional (e.g. progressive) taxation might be able to address inequality.

Progressive taxation might indeed have an impact, but has Mr. Bernanke considered why that should even be necessary in the first place? If the rising asset prices associated with inflationary monetary policies weren’t exacerbating inequality in the first instance, why would fiscal policy need to be involved at all? Indeed, without inflationary monetary policies—a de facto form of regressive taxation falling primarily on the poor and working class via Cantillon effects—perhaps the overall tax burden on the economy could be lower, something that many economists would argue would support growth in general. And if growth in general were supported in this way, then there would be less of a case to make that monetary policy need be expansionary or activist at all.

Bernanke’s argument here thus reduces to something of a logical tautology that can be shown as such when viewed in reverse order. In any case, by offering it up in the way he does, he is engaging in a conveniently self-serving pass-the-buck exercise, that monetary policy is probably irrelevant to rising inequality and only fiscal policy can have any meaningful impact in addressing it.

Mr. Bernanke makes some additional, highly erroneous claims, for example that debtors in the economy tend to be poorer than creditors and so should benefit disproportionately more from low interest rates. But as we well know, the poor have only limited access to credit, frequently at punitive interest rates. The profits on such lending accrue to leveraged financial institutions, huge borrowers in their own right, yet ones that borrow at a fraction of the cost of their indebted customers. Rather than showing us a case for the relative neutrality of monetary policy, Bernanke has here inadvertently identified a precise mechanism whereby artificially low interest rates and quantitative easing indeed exacerbate inequality.

Mr. Bernanke has thus laid out a case for the relative irrelevance of monetary policy in the inequality debate. In doing so, he makes several bold, associated claims, but, for whatever reason, he chooses not to support them with appropriate, compelling evidence. Why not is left to the reader to ponder. On other points, he inadvertently undermines his own argument. One is left with the impression that his treatment of the issue is merely an impulsive, haphazard response to mounting criticism, not only from the fringes but increasingly from the economic policy mainstream, hence the reason why he felt it necessary to respond at all. His response, as it happened, generated some prominent responses of its own. For example, the prestigious free-market think tank the CATO Institute published a somewhat academic paper debunking Bernanke’s arguments, which included the following:

This view of QE rests on shaky theoretical foundations. It requires us to 11 accept an understanding of the term structure of interest rates that has been widely discredited in the economic literature and to make several implausible assumptions about the behavior of investors.

The theory underlying the program is also difficult to justify empirically; in fact, there is virtually no credible evidence that QE led to persistent reductions in long-term yields via the channels identified by the Fed. The fact that QE was not accompanied by any substantial increase in bank lending further undermines the possibility that it stimulated economic activity.

Quantitative easing did have unintended consequences, however. Income was redistributed away from people on fixed incomes and toward better-off investors, while pension funds were forced to hold securities with greater default risk. Other problems may yet materialize: the distorted markets and excessive risk-taking encouraged by QE could lead to renewed economic instability, and the huge increase in the monetary base that QE entailed could cause inflation if the Fed loses control of excess bank reserves.10

Bernanke’s article also illustrates that Marx was almost certainly right about certain things if wrong about the natural tendency of capitalism toward inequality. Marx was a pioneering sociologist, describing in great detail how the social “superstructure” of higher education and media would be used by the capitalists to mask or to justify rising inequality, thereby keeping the workers docile, not prone to rebel. He also introduced the concept of a “petty bourgeoisie”—the middle class, if you will—being carefully won over by the capitalists because the more capable and harder working of them would be able to enjoy in more prosaic form some elements of the capitalist lifestyle. But whereas for Marx the capitalist needn’t work at all to enjoy the high life—merely collect rent on capital goods and property—the middle class had to work hard all right and perhaps save for years before being able to enjoy some high living during weekends or while on vacation or in retirement. Nevertheless, according to Marx, this was enough to get the “petty bourgeoisie” to buy into a system that was fundamentally stacked against them and their higher socioeconomic aspirations. Bernanke’s selfserving defenses and justifications for helping to perpetuate the myth that monetary policy is neutral is a highly apposite example of a co-opted intelligentsia unwittingly reinforcing this nefarious social dynamic.

As a result of Bernanke’s and other central bankers’ rampant inflationism in monetary policy since the 1970s and especially post-2008, the “petty bourgeoisie” needs to borrow more and more to keep up with the elite, for example to purchase a home. The only way to maintain a middle-class lifestyle is to go into debt and hope that asset prices just keep on rising. But this is the basis for neither a stable economy nor society. Asset boom and bust isn’t just economically destructive. It is socially destructive too. When only the most reckless, lucky speculators able to time the boom and bust correctly can keep up with the economic elite, something is deeply wrong. Hard work, savings, and thrift make for a far more robust society, or anti-fragile one, as investor, academic, and author Nassim Nicholas Taleb argues in his book of that name. Instead, we now observe arguably the most fragile social and political fabric since the mid-nineteenth century, when empires began to crumble in Europe and the Civil War erupted in the US. While hardly a prediction, sadly I would not be at all surprised if the inflationismfueled trend toward rising inequality led to rising social disorder over the coming years. This represents the darkest phase of the monetary cycle of history but, as with all such cycles, the restoration of sound money provides the basis for a restoration of social order generally and, eventually, renewed economic and social advancement.

1 Ludwig von Mises, Human Action (Indianapolis: The Liberty Fund) 2007, p. 416–7.

2 “How Quantitative Easing Added to the Nation’s Inequality Problem,” New York Times, 22 October 2014. Link here:

3 This statement was made in an interview on CNBC television, linked here: video=3000287822

4 A link to this event is here:

5 November 2015. Link here:

6 “Are Central Banks Making Inequality Worse?” World Economic Forum Agenda, 9 November 2015.

7 “Bank of Japan Survey Data Reveals Signs of Growing Inequality in Japan,” Bloomberg News,

8 “Monetary policy and inequality,” Brookings Institution blog, 1 June 2015.


10 CATO Institute, Policy Analysis, no. 783 by David Thornton, pa783.pdf

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