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U. S. Purchasing Power Decline by Wes Alexander

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    Without money, there would be very little exchange and the standard of living would be much lower than it is today. Without money, trade could only occur through barter. Bartering shoes for a used automobile would be difficult. It would take 200 pair of $50 shoes to purchase a $10,000 used automobile. I doubt the owner of the automobile would want or need 200 new pair of shoes.

    People invented money to store value and to facilitate the exchange of goods and services. My surplus output is transferred into money, which is then used to purchase your surplus output. Money fixes the "indivisibility" problem of trading shoes for automobiles.
    -- 05/18/03


The U.S. has had three different federally charted central banks since 1776. Arguments pro and con were advanced each time about their usefulness and role in the American economy.

The longest time period without a central bank was between 1836 and 1913. State charted banks were the norm then. They issued their own currencies and were governed by state statutes. There were some problems that led to bankruptcy failures, but none so severe as to dramatically lower our purchasing power.

In 1770 just prior to the American Revolution, the purchasing power of $100 was equivalent to $2,151 in today's money. In 1900 that same $100 was worth $2,130 in today's money. Purchasing power was relatively stable for 130 years. Each decline in purchasing power during this time period was related to war or state banking policies that allowed banks to simply print money in excess of what could be redeemed in gold or silver. Like every other business, some state banks were more responsible than others. After each downturn or banking failure, purchasing power tended to move back to its historical value.

In 1913 Congress created the Federal Reserve Bank (the Fed) and our purchasing power has been declining ever since. Declining purchasing power is also known as inflation or the expansion of money. It can be described as money losing value, thereby buying fewer goods and services. Inflation and rising prices tend to go together. Growing purchasing power is known as deflation or the contraction of money. It can be described as money increasing in value, thereby buying more goods and services. Deflation and declining prices tend to go together. Inflation and deflation can occur at the same time, but in different parts of the economy. Inflation and deflation occur naturally and are best understood in terms of the law of supply and demand. In a totally free market, inflation and deflation are short lived and self correcting.

Prior to 1913, economic swings between inflationary and deflationary periods were self correcting and you can see this in the purchasing power chart I've created. Supply and demand would regulate the swings and it was only during times of economic extremes, such as war, that self-correction took wider swings and longer time frames.

After 1930 our purchasing power began a long steady decline. This was by design. Over the last 70 years, our government has decided that slow steady inflation is good for us. The effects are best explained by Murray Rothbard.

Rothbard says that creating money out of thin air is counterfeiting. At least that's what it's called when you and I do it. Government creates money out of thin air by controlling the ratio of reserve deposits each bank is required to maintain at the Fed. This is called fractional reserve banking. These reserves consist of paper and electrons; not gold or silver. This subtle form of counterfeiting goes unnoticed and is even glorified by many since it generates new consumption. Unfortunately each new dollar injected into the system dilutes the value of every other dollar. Those favored businesses and political groups that first come in contact with this new money, have an advantage. They get to spend it before the purchasing power gets watered down. Everybody downstream simply pays higher prices.

Rothbard says that, "Governments are inherently inflationary, since inflation is a means of acquiring revenue for the State and its favored groups. The slow but certain seizure of the monetary reins has thus been used to (a) inflate the economy at a pace decided by government; and (b) bring about socialistic direction of the entire economy." He also says that inflation cannot go on forever. Eventually those of us working harder and harder to remain productive realize our standard of living is sliding backwards. Two income earners are required where only one was in the past. Even people that are dependent on government and tend to have fixed incomes, eventually wake up to the continual shrinkage of their purchasing power.

The folks in charge of our money supply are supposed to know what they are doing. Perhaps they do; perhaps they don't. Perhaps you can explain why control of our money supply is a proper function of government.

Bill Bonner of the Daily Reckoning says, "The Fed's record as an 'inflation fighter' is more deserving of a court martial than a medal. Since the Fed's founding in 1913, inflation has gained so much ground against the defending Fed that a man who kept his money in gold rather than dollar bills would have nearly 20 times as much."

The links below will help you wade through the complexity.

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