FOR RICHER OR POORER
Abolishing the Fed and returning to sound money will bridge the gap between rich and poor
BY DOUG FRENCH

Doug French, associate editor of Liberty Watch: The Magazine is an executive vice president of a Nevada bank. He is the 2005 recipient of the Murray N. Rothbard Award from the Center for Libertarian Studies. Other stories by Doug French

All the rage is talk about the wide gap between rich and poor in American and what to do about it. Investment guru Marc Faber pointed out recently during the annual Barron's roundtable that just the five biggest brokerage houses on Wall Street last year paid out combined compensation and bonuses equal to the Gross Domestic Product of the country of Vietnam. 

According to left-of-center-think tank Economic Policy Institute, the richest 1 percent of Americans now has 190 times the net worth of the median household. And it is growing: the ratio was 168 in 1998 and 131 in 1983. From 1985 to 2004, the income of the wealthiest 5 percent grew 31 percent, while only growing 14 percent for middle-income people and 12 percent for those with lower incomes. 

The term "millionaire" doesn't even describe wealthy anymore. After all, there are 3 million millionaires in America and, according to Merrill Lynch, there are 35,000 people in America with a net worth exceeding $30 million. 

In other words, the rich are getting richer, and guys like Barney Frank (D-MS) and Bernie Sander (I-VT) think they know what is causing this growing wealth gulf and what should be done about it. In a press release dated Jan. 25, Sanders offered an amendment on the Senate floor to combat pervasive poverty in America as part of the Fair Minimum Wage Act of 2007. 

"Today, Mr. President," Sen. Sanders wrote, "while the middle class in America is shrinking and poverty is increasing, the people at the very top - the millionaires and billionaires - have never had it so good. That is something that we have got to address." Sanders believes increasing the minimum wage is a good start but that the government must do more. 

Barney Frank told columnist George Will that Congress should "pay a little more attention" to the seven governors of the Federal Reserve System, all of whom are confirmed by Congress. The Fed, should not be considered "above democracy," according to Frank, who believes the central bank should keep interest rates low to insure full employment. Frank also believes free trade hurts low-income people. 

In his column, Will mocks Frank with the line: "But the Fed's stunning conquest of inflation since the early 1980s is almost a sufficient explanation of subsequent prosperity." What's stunning of course is that Mr. Will actually believes the institution that creates inflation has vanquished inflation: The Federal Reserve.

It is only the reporting of inflation that has been eradicated. "Inflation Puts Up A Goose Egg" was the headline recently, but anyone who actually has to buy anything knows better. Economist John Williams knows better. He adjusts the government's inflation numbers to what they should be, taking out the hedonic adjustments and the like. His latest newsletter indicates that his adjusted Consumer Price Index (CPI) figure for December was 10 percent. The Bureau of Labor Statistics annual CPI measure currently comes to only a quarter of that. 

But while Rep. Frank worries that those scrooges at the Fed are keeping the workingman down with high interest rates, in reality the Fed serves to widen the gap between rich and poor everyday as it creates money out of nowhere. The Fed injects money into the economy through the banking system. And, although the government decided to quit keeping tabs on M-3 (or broad money-supply growth), John Williams believes it to be growing at a more-than-10 percent clip. 

When this money is injected, someone always gets the money first and others get the money last. The early receivers have more money in their possession, and for a given amount of goods available, they can divert to themselves a bigger portion of the pool of available goods than before the increase in money supply took place, explains Frank Shostak, the chief economist for Man Financial, Australia. The flip side is that fewer goods are available to those individuals who receive the money late. 

"An increase in the supply of money benefits the early receivers," wrote Murray Rothbard, "that is, the government, the banks, and their favored debtors or contractors, at the expense of the relatively fixed income groups that receive the new money late or not at all and suffer a loss in real income and wealth."

More government jerryrigging will not bridge the gap between rich and poor. Abolishing the Fed and returning to sound money will. LW