There is growing discontent over Capitalism as our economic system of choice. A 2016 Harvard Survey showed that 51% of Americans aged 18 to 29 no longer support capitalism, and more recent surveys suggest that number is growing. This is further supported by the rise of Bernie Sanders, and more recently Alexandria Ocasio-Cortez, who openly promote “Democratic Socialism” and blame Capitalism for growing inequality over the last 30-40 years.

But is “capitalism” really the problem? Let’s start by defining terms:

Capitalism is based on the principle that every individual owns their own labor, which they can freely trade for goods and services. Through this free exchange of labor, entrepreneurs are incentivized to produce goods and services that other people want and are willing to pay for, at a price higher than the cost of production. The excess value is their “capital” which they can use to invest further into their business, another business, or simply spend on something nice for themselves.

Socialism is based on the principle that the products of an individual’s labor are owned by the community. Any excess value an individual creates is to be shared, at least to some extent, with the community. This disincentivizes entrepreneurship as the sacrifice of starting a business is unjustified when the benefits accrue to other people.

Not surprisingly, innovation throughout history has emerged almost exclusively from economies that have embraced capitalism while socialist economies haven’t fared so well: Nazi Germany, Cuba, Russia, North Korea and Venezuela for example.

So what explains the growing partiality to a system that is all but a proven failure, over one that has given us virtually all the modern luxuries we enjoy today? Inequality. Since the early 1970s, inflation-adjusted wages for the poor and middle-class have barely risen, while the cost of living has skyrocketed. Meanwhile, the “capitalists” have been getting richer and richer, accruing almost all the benefits of growth during the same period.

The popular conclusion from this is that Capitalism is no longer working, or somehow to blame for the widening wealth gap, and that the way forward is to raise taxes on the rich and give everyone free healthcare, education, and a basic income irrespective of their contribution to society. In other words, Socialism.

But what if all this inequality was caused not by Capitalism, but by the monetary system itself? In Part 1, I described an alternative monetary system, the Quasi-Gold Standard, that I argue would eliminate many of the systemic risks of our current financial system. In Part 2, I described the current financial system and why it’s systematically unstable as it needs perpetual growth to endure (growth, which by the way is driven by innovation, innovation that would be all but quashed under Socialism). Now let’s contrast the Quasi-Gold Standard with our current monetary system, The Dollar Standard, and demonstrate how the latter is not only unstable, but also a significant driver of inequality:

When new credit is created, it dilutes the value (purchasing power) of all existing credit, but this doesn’t happen instantaneously, nor does it occur uniformly across all goods and services. For example, suppose “1% Jack” takes out a billion-dollar loan: The Bank simply credits Jacks’ checking account with a billion dollars, and debits Jack’s loan account for the same amount. Market prices haven’t changed at this point, so Jack gets to buy whatever he likes with his “new money” and he does so at “old prices”.

This gives Jack a “first mover” spending advantage. As Jack spends his credit, prices are driven up, increasing the cost of goods and services for everyone else. Ah, but Jack owes interest on his billion dollars so surely that nullifies his first mover spending advantage? Well that depends on what Jack spends his credit on… If he invests in a new business, he retains the first mover spending advantage (through the acquisition of business assets at old prices) and to the extent that the business’s operating revenue exceeds the interest burden, that advantage remains his. This may also benefit society at large if Jack’s new business increases competition or productivity, thereby lowering the cost of whatever goods or services his business offers.

But what if Jack’s business is a flop and doesn’t generate enough revenue to repay the loan? Well, through expensive lawyers and financial advisers, Jack would’ve set up a creative corporate structure that allows him to declare the company bankrupt and walk away. If his lawyers and financial advisers were really expensive, he may even be able to get a new loan the next day to try again. Meanwhile, the burden of Jack’s failure is borne by society: shareholders suffer the losses of a bank’s poor performance, depositors may lose their credit in a more severe scenario where the bank itself fails to remain solvent, and in the extreme case taxpayers fund the bailout of the banking system if the bank’s failure spreads to other banks.

Through this example, we see how the 1% accrues the lion’s share of benefits generated by credit creation, while society bears the cost. This isn’t the fault of “Capitalism”, it’s simply the natural outcome of the current monetary system.

Now let’s take a look at a different scenario: What if Jack buys shares in an existing business (or businesses), and the seller uses the proceeds to buy shares also, and that seller does the same? Recycling credit this way through the financial system doesn’t increase competition or productivity. It doesn’t employ new workers. It simply drives up the price of financial assets. Similarly, if Jack bought property, and the sellers used the proceeds to also buy property and so on, this would drive up the price of… Property.

No goods produced, no services provided, no value created. Yet the price of these assets goes up on the back of some guy in a bank typing ‘1’ followed by nine ‘0’s on his computer. This is of course great for people who own healthy stock and property portfolios, but guess what? They only represent half the population: the top half. And as their “wealth” increases, they’re incentivized to leverage up and buy more stocks and property, pushing prices even higher and encouraging more of the same until… POP! The bubble bursts, wiping out the bottom 40% of the top half (e.g. the middle class), and widening the wealth gap further.

Bloody Capitalists! No. Again this has nothing to do with Capitalism, it’s simply the natural outcome of the current monetary system. A system that doesn’t just enable faux wealth to be created, it encourages it, and in doing so inevitably causes asset bubbles and financial crises.

Under a Quasi-Gold Standard, the government is the sole and exclusive issuer of “public” credit. In order to increase the credit supply by a billion dollars, the government would issue 100 bucks to each and every citizen (assuming a population of 10 million) via the national distributed ledger. In doing so, the nominal benefit of credit creation is distributed equally across the population, and the marginal benefit accrues to those who need it most (the poor).

If 1% Jack wanted to borrow $1 billion under the Quasi-Gold Standard, he’d need to borrow it from the existing pool of credit as there’d be no “banks” to create it out of thin air. This would naturally give rise to a vibrant industry of fund and investment managers competing for “excess credit” and hungry for investment opportunities to maximize risk-weighted returns. The amount of credit available for borrowing, and the rate at which it could be borrowed, would be driven by the government’s rate of credit creation:

Let’s say the billion dollars created in the above scenario represented a 5% increase in the credit supply, and that the government had been consistently increasing the credit supply by 5% annually for some time. Individuals with excess credit they didn’t need for immediate consumption could either save it (buy gold) or invest it. Given the expected rate of currency creation, it would only make sense to invest if the expected return on investment is greater than 5%.

If market returns were significantly higher than 5% individuals may even elect to redeem savings (sell gold) for additional investment funds. This would eventually cause the government to increase the rate of credit creation to facilitate investment demand. Likewise, if market returns were lower than 5%, individuals would buy gold to save (preserve the purchasing power of their credit) and the outflow of gold would eventually cause the government to decrease their rate of credit creation. As such, the Quasi-Gold Standard is self-stabilizing by nature.

When the government’s rate of credit creation (and therefore the funds available for investment) is constrained by the market rather than unconstrained by a banking system armed with the ability to issue an unlimited supply of credit, the propensity for asset bubbles to emerge is eliminated. And with the elimination asset bubbles, we eliminate a key driver of the wealth gap.

Furthermore, the alignment of credit availability to market demand in this manner ensures that credit is channeled to the most productive investments, virtually eliminating malinvestment. In a competitive market, Jack simply wouldn’t be able to borrow a billion dollars to buy stocks and property, inflating values in these asset classes. He’d need a business plan demonstrating sufficient value can be created to repay the loan at prevailing market rates.

This brings us to another key driver of inequality: scale. Under our current monetary system, banks favor lending large amounts to borrowers with sizable asset portfolios. Meanwhile, unsecured borrowers are driven to loan sharks and other extortionately high-interest lenders. Under the Quasi-Gold Standard, no such discrimination occurs – rates are market-driven as competition for credit drives investment managers to allocate receipts to whatever yields the highest risk-weighted returns.

This would favor smaller loans to riskier but higher yielding individuals and SME’s over big loans to lower risk, low yielding large organizations. The extent to which this would “level the playing-field” between the rich and poor should not be underestimated. The increasing wealth divide can largely be attributed to the fact that unprecedented credit has been disseminated top-down through the economy over the last 30-40 years.

It’s no coincidence that inequality has risen ever since the dollar standard came into effect. Unlimited credit creation facilitated by an increasingly electronic banking system has gifted an enormously unfair advantage to those with assets. But it’s not the so-called “capitalists” who are the problem, it’s the monetary system itself.