In a capitalist economy, the wealth of the rich is in the form of capital, i.e., wealth employed in the production of goods and services for sale. This wealth is the foundation both of the supply of products that people buy and of the demand for the labor that people sell. The greater the wealth of the capitalists, the higher are real wages, both because of a more abundant supply of products produced and a greater demand for the labor of wage earners. Diverting funds used to purchase capital goods and pay wages into spending for consumers goods, which is the effect of virtually all taxation that falls on the rich, and also of government borrowing, reduces both the demand for and production of capital goods and the demand for labor. In other words, it serves to hold down production, keep up prices, and hold down wages.

Consumers are not responsible for the industrial development of any country. Consumers have myriad needs and desires, which go unmet except to the extent that businessmen and capitalists find ways of supplying them through the development of new and improved products and more efficient, lower-cost methods of production. When such improvements are introduced, consumers can be expected to buy them, frequently on a very large scale. The firms and industries producing the better and/or less expensive products then expand and again and again become major components of the economic system. This, however, does not represent an increase in the overall number of jobs. For example, while the development of electric light led to major increases in employment in producing light bulbs and electric lamps and wiring, it also led to the near total wiping out of the production of candles, lanterns, and gas light, with a corresponding loss of employment in those areas. Similarly, when the automobile replaced the horse and buggy, the vast number of jobs created in the automobile industry was accompanied by a massive loss of jobs on the part of buggy builders, blacksmiths, horse breeders, harness makers, and oat growers.

More consumer spending financed by inflation, i.e., the creation of new and additional money, has the potential for increasing employment in some circumstances, but only insofar as the sellers of the consumers’ goods that are faced with the additional spending save and invest their additional sales proceeds. If they too consumed, or if the government taxed away their additional sales proceeds, there would be no increase in the spending for labor or capital goods and no increase in employment. The ability of inflation to promote employment also depends on labor unions being weak or non-existent. To the extent that unions exist and are powerful, they will take advantage of the inflation to raise money wage rates even in the midst of mass unemployment, thereby nullifying the ability of more spending for labor to increase employment.

While on the subject of inflation, it should be realized that it is inflation, particularly in the form of credit expansion, that is responsible for the perceived increase in inequality of income. New and additional loanable funds, manufactured by the banking system, with the sanction and protection of the Central Bank (in the US., the Federal Reserve), enter the capital markets and proceed to raise the prices of stocks and real estate, thereby creating capital gains on a massive scale. New and additional money and spending also serve to increase nominal profits, inasmuch as they raise sales revenues immediately but increase income-statement costs only with a more or less considerable time lag. And if the process continues, increases in income-statement costs are accompanied by still further increases in sales revenues.