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The Real Reason for Income Inequality: 7 Ways the Federal Reserve Has Worsened Economic Inequality

Updated on February 24, 2017

Many conservative economists have criticized the Federal Reserve for its contribution in worsening economic inequality, having the effect of creating benefits for the first recipients – hedge funds and commercial banks, enriching the elite at the expense of the middle and lower class. Some have even described the Federal Reserve act as “the biggest scam in the world,” so as to emphasize its detrimental effect on expanding income inequality due to its effects on inflation.

The Federal Reserve act was passed in December 23, 1913; it was drafted on a private island by five of the richest men, representing a quarter of the entire wealth in the world, and owning the largest banks. The act created a central banking system with the power to print money out of nothing. Many are critical of the blatant conflict of interest in drafting the bill.

Yet Liberal news like the Boston Globe blames the rise of income inequality on a higher demand of college degrees, implying that in order to lessen income inequality more Americans should take out student loans to go to college; the truth of the matter is that amidst inflation, this only has the effect of putting society in greater debt; the consequences of student debt are never-ending, since you can’t declare bankruptcy on student loans, most become enslaved to insurmountable debt.

Here are 7 ways that the Federal Reserve has contributed to income inequality in the U.S.

1.) Causes Inflation, affecting the poor/middle class the most

The Federal Reserve effects income inequality from its effects on inflation – the rate at which the general level of prices for goods and services is rising and consequently, the purchasing power of currency is falling. With the Federal Reserve pumping so much fabricated money into our economy, without the actual backing of any real intrinsic value or any goods and services, the value of the money goes down, thus middle class Americans who try to save up are constantly punished for doing so; in other words, inflation is a tax, and those who barely have enough to support themselves will be the ones most burdened by it.

More importantly, small businesses are constantly hurt because of the Federal Reserve’s effect of booms and busts, thus the middle-class suffers, while the banks profit by giving out loans – student loans, home loans, credit cards, etc. Banks give out loans at a low interest to encourage more individuals to take them out, causing more spending to occur, yet when inflation hits, causing economic busts from all the money being poured in by the Fed, the ‘people’ stop spending as much as they did before, thus harming the entrepreneurs who took out loans for their businesses during an economic boom, their chances of succeeding are hindered due to these abrupt economic busts. This is why Income inequality continues to grow; the wealthiest are becoming disproportionately wealthier at an ever increasing rate, according to the Mises institute, the wealthiest 1 percent held 8 percent of the economic pie in 1975 but now hold over 20 percent.

2.) The debt keeps on increasing, burdening the lower and middle class

Since the U.S. currency is not officially backed up by anything intrinsic, with the Federal Reserve’s power to print money, we are 20.1 trillion dollars in debt, the biggest debt of any nation in the world. Government spends without any consequences of having to worry about paying it off within their lifetime since the costs are simply left to future generation to burden through taxes; the middle and lower class are the ones who get burdened by this the most, they have to pay for taxes on spending which was done decades prior, hindering on their savings.

3.) Banks are “too big to fail”

It’s clear that commercial Banks are the main beneficiary of the Federal Reserve; since the creation of fiat currency, the Federal Reserve has helped banks become larger, gaining more power over the monetary system. Commercial banks are bailed out during economic recessions while the rest lose their assets, big banks receive trillions of dollars from the Federal Reserve to not fall; during the economic recession of 2008, an audit of the Fed’s emergency lending program verified that over $16 trillion was allocated to banks internationally.

4.) The Federal Reserve has contributed to economic recessions

Many economists point to the Federal Reserve’s contribution to economic recessions, showing that there is a causal relationship between the Federal Reserve printing out more money and the fall of the economy. Since the 1950’s there's been 10 economic recessions.

5.) Inflation increases the price of food

The Federal Reserve and fiat currency perpetuates inflation, thus the average prices of food keeps on increasing, affecting the lower class the most, the ones who can barely afford food in the first place; when the prices of fruits or vegetables rise they are force to buy less of it; this list shows how grocery store items have increased between 2002 and 2012.

6.) The Gold Standard is much more stable

The Gold Standard maintains a much more stable economy than the Federal Reserve does. Prior to the Federal Reserve, recessions were less frequent and not as long, unemployment and disparity between the rich and the poor was less as well.

7.) The Federal Reserve no longer limits governments from engaging in war

Due to the creation of the Federal Reserve, war bonds are sold at a very rapid pace; since the Federal Reserve can simply print the money out of thin air, the treasury consistently sells war bonds and simply adds the debt for future generation to pay, this being part of the reason why the budget deficit is so high.

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    • My Esoteric profile image

      My Esoteric 5 months ago from Keystone Heights, FL

      An interesting hypothesis, Marcelo, but unfortunately very wrong. Briefly:

      1. "The Federal Reserve act was passed in December 23, 1913; it was drafted on a private island by five of the richest men, " What is correct about this is the date and the private island "Jekyell". In fact, the Fed was created in reaction to the Panic of 1907 and J.P Morgan's version of a private TARP. The meeting you refer to was led by Senator Aldrich and A. P. Andrew (Assistant Secretary of the Treasury Department) who did meet with the movers-and-shakers of the era. What was passed in 1913 was a much altered version of the recommendations they produced. For more detail see Panic of 1907 in https://hubpages.com/politics/A-Short-History-of-S...

      2. "Since the U.S. currency is not officially backed up by anything intrinsic, with the Federal Reserve’s power to print money, we are 20.1 trillion dollars in debt," - First, the size of the debt has nothing to do with income inequality and second, the debt was run up by, in order, the Bush tax cut, the War in Iraq, the direct consequences of the 2008 Great Recession, and finally, the necessary action by Obama to prevent a Great Depression.

      3. "The Federal Reserve effects income inequality from its effects on inflation " - However, income inequality began increasing after the Reagan era tax cuts for the wealthy. Inflation from Apr 1991 - today is less than 5% annually while inequality increased dramatically.

      4. "It’s clear that commercial Banks are the main beneficiary of the Federal Reserve; " - No, not really. The cause of that was Congress deregulating the financial industry, the major event being the repeal of Glass-Stegall.

      5. "The Federal Reserve has contributed to economic recessions". It was partly responsible for the recession in 1918 and 1929 (through inaction). It was partly responsible in 2008 because Greenspan wrongly thought things were working as they should, which he later admitted was wrong

      I'll address the rest later.