"First, consider the effects of inflation by which we mean the Fed’s increase in the supply of money, on the value of the dollar. By increasing the supply of money, the Federal Reserve lowers the value of every dollar that already exists. If the supply of Mickey Mantle baseball cards were suddenly to increase a million fold, each individual card would become almost valueless. The same principle applies to money: the more the Fed creates the less value each individual monetary unit possesses. When the money supply is increased, prices rise—with each new dollar now worth less than before…
“All right, some may say, prices may indeed rise, but so do wages and salaries, and therefore inflation causes no real problems on net. This misconception overlooks one of the most insidious and immoral effects of inflation: its redistribution of wealth from the poor and middle class to the politically well connected. The price increases that take place as a result of inflation do not occur all at once and to the same degree. Those who receive the new money first receive it before the prices have yet risen. They enjoy a windfall. Meanwhile, as they spend the new money, and the next wave of recipients spend it, and so on, prices begin to rise throughout the economy—well before the new money has trickled down to most people. The average person is now paying higher prices while still earning his old income, which has not yet been adjusted to account for the higher money supply. By the time the new money has made its way throughout the economy, average people have all this time been paying higher prices, and only now can begin to break even. The enrichment of the politically well connected—In other words those who get the newly created money first: government contractors, big banks and the like—comes at the direct expense of everyone else. These are known as the distribution effects, or Cantillon effects, of inflation, after economist Richard Cantillon. The average person is silently robbed through this invisible means and usually doesn’t’ understand what exactly is happening to him. And almost no one in the political establishment has an incentive to tell him.
“When the value of Americans’ savings is deliberately eroded through inflation, which is a tax, albeit a hidden one. I call it the inflation tax, a tax that is all the more insidious for being so underhanded: most Americans have no idea what causes it or why their standard of living is going down. Meanwhile, government and its favored constituencies receive their ill-gotten loot. The racket is safe as long as no one figures out what is going on.
-- Ron Paul, “The Revolution” pages 143-144
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