Thomas Piketty´s book, Capital in the Twenty-First Century, on growing inequality in capitalism, has become a bestseller. Piketty offers much data claiming that inequality is rising and draws the conclusion that the state should fix that ‘problem’ with additional taxes on the rich.

It is true that the distance between the ‘super rich’ and the rest of the population has been increasing in recent decades. It has become more difficult to reach average net wealth with an average income. But maybe the most important reason for this development has been widely neglected in the debate: our monopolistic monetary system – as Andreas Marquart and I show in our new book, Warum andere auf Ihre Kosten immer reicher werden (Why others are getting rich at your expense).

In a fiat money system the costs of money production fall to virtually zero. Thus, the incentive to produce new money is almost irresistible. And all money production redistributes income and wealth, because not all economic agents receive the new money at the same time. Some people get the new money earlier, some get it later. The first receivers of the new money benefit, as they have higher cash balances and can buy at the old, still low prices. Once the first receivers spend the money, it flows to the next receivers who still profit but less than the first receivers since prices start rising. Successively the new money spreads across the economy and pushes prices upward. In the same manner as first or early receivers of the new money profit, there are late receivers that lose, because they have to watch prices increasing before their income increases, if it increases at all. The purchasing power of the later receivers of the new money is eroded.

But who are the first receivers of the new money in our fiat money system? Those who want to benefit from the new money must receive it where it is produced, namely in the banking system in form of a loan. And in order to get a loan from a bank it is helpful to be rich. Rich people owning large amounts of assets such as stocks or real estate may pledge their stocks or real estate as a guarantee for new loans. They may then use these loans to acquire even more stocks and real estate that, in consequence, keep rising in value.

Since the costs of money production are close to zero in a fiat money system, where both central banks and other banks may create money, a continuously rising money supply can be expected. Therefore, prices tend to increase steadily. In such a system, it does not make much sense to save in the form of cash, in order to buy assets such as a house later. It is rational to indebt oneself early in order to purchase a house before it is even more expensive and pay the debt back in depreciated currency. Since assets such as property, bonds or stocks may serve as a guarantee or collateral for new loans, and as such as a means to become a first receiver of new money, in our fiat monetary system asset prices tend to rise relative to prices of goods and services, i.e. wages. This is one reason why it takes ever longer to purchase an average house by saving an average income. This is also a reason why it is easier for the rich to stay rich and more difficult for the poor to become rich in our fiat money system than it would be in a commodity money world.

While the super rich, the financial industry and big business profit from their fast and direct access to the newly produced money, the working and middle classes, who tend to be late receivers, have to cope with rising housing, energy and food costs. Due to rising living costs and high taxes, it becomes ever more difficult for the working and middle classes to save and invest in financial markets.

In short, our monetary system leads to redistribution and there is a tendency for wealth and income to flow to the rich. Our monetary system is a creation of the state. We have monopolistic state money, a central planner in monetary affairs (central banks) and banks that receive special privileges from the state. Thus, Piketty’s view that markets are responsible for growing economic inequality is mistaken. Rather it is the state itself that causes increasing inequality, which it pretends to fight.