If you’ve been on the website nerdwallet.com, there truly is a lot of good and interesting stuff there. From helping you compare credit card offers to researching banks and their lending options, it even has useful information to explore insurance companies and their wide-ranging, complicated products. With a focus on finance, the aim is to make a little money off helping you and me with our own.
As such, they’ve added a handy calculator to calculate inflation because of its harmful effects on that money. This isn’t meant to be a commercial for the site’s business, its owners aren’t paying me anything to write about what they do, rather what nerdwallet is doing here provides a great example for getting into more serious fundamental truths.
You’ve probably heard that the US dollar has lost around 97% of its value since 1913, give or take a few percentage points depending upon the exact source for price changes. This is a standard line thrown around throughout discourse about the topic of inflation and money in general.
The year 1913 is by no means an accident, either. Though the Federal Reserve didn’t begin operations until early 1914, the law which authorized them was passed the year prior, becoming effective that December 23. Either way, 1913 is an intentional allusion to the Fed’s creation.
Contrary to perception, price stability wasn’t directly on the agenda. The Federal Reserve Act itself says, “Provided for the establishment of Federal Reserve Banks, to furnish an elastic currency, to afford means of rediscounting commercial paper, to establish a more effective supervision of banking in the United States, and for other purposes.”
It’s the “other purposes” from which much devious popular imagining derives.
From the start elasticity was intended to be the means by which to achieve price stability therefore economic stability. By furnishing elastic currency it was hoped this public utility might replicate and improve upon the ad hoc private system which had saved the country from a worse fate after the 1907 panic (yes, JP Morgan but more so regional clearinghouse associations).
America’s 19th century economy was plagued by repeated monetary injury, the dreaded deflationary devastation provoked by bank runs which deprived the system of liquidity forcing liquidations of loans, goods, anything that might be able to secure useful medium of exchange when it grew more difficult to get any. Prices dropped, production fell, too, leaving millions to suffer sudden unemployment and destitution.
What the clearinghouses had done right in the autumn of 1907 was to supply quasi-currency in just enough volume to keep most solvent banks (and trusts, too, at least those admitted to the Chicago clearinghouse) open and operating, thereby keeping the economy relatively stocked with liquid medium. The Federal Reserve’s first purpose was to do the same, but do it better by nationalizing (through those twelve branches) and to a degree standardizing the process (which still being attentive to exclusively regional factors).
It was, of course, an utter disaster. Serious consumer price inflation occurred during the World War I years, a depression in 1920 which cleared up much on its own (perhaps the Fed’s only genuine success story, if only because it stayed largely out of the way), the unsteady Roaring Twenties which at least Milton Friedman called the “high tide” of the central bank’s early years before the greatest and most unforgivable monetary and macroeconomic failure known to man.
The Great Collapse.
No wonder common folks soured very quickly on the whole “furnish elastic currency” concept. In the smoldering aftermath, FDR’s radical regime sought radical solutions to get out of that deep hole, devaluing the dollar and effectively delinking US currency for US citizens from any commodity value. It was now just worthless paper.
Or was it?
This is the whole point of the money comparison beginning with 1913. For quite a lot of people, the experiment with fiat began at that point with the Fed and then took on new life once the obligation to deliver gold was removed, which is why pretty near everyone’s inflation calculation references nineteen’s thirteen.
If I enter $5 in nerdwallet’s inflation calculator, it tells me that something which might have cost $5 in 1913 would today set me back $154.27 (and then asks me if I want to “beat inflation” with either a high-yield savings account or some investment). Doing some quick arithmetic of my own, that works out to 96.759% of the dollar’s value having been destroyed over those fiat-laden eleven decades.
You can input any amount and any year, start or end, to make the same comparison. Beside the fact everyone in the world is talking about inflation, what is this really telling us? The site provides you with a narrative guide:
“Say a movie ticket cost $5 in 2000, and in 2020, that same movie ticket costs $10. This doesn't mean $5 would grow to $10. It means that your $5 — if you stuck it under a mattress for 10 years — would only buy you half of a ticket in 2020.”
Assuming your grandmother, maybe great grandmother (for any young ‘uns, perhaps great-great grandmother) stuck a fiver under her mattress way back when and then bequeathed that little piece of government paper to her individual descendants leading to you, it would today only buy you 1/30.854th of what it had originally.
It is by simple, rational consideration a thoroughly crappy deal.
But what always follows is a non sequitur: because stored dollars are a thoroughly crappy deal, from this we need to scrap the entire monetary framework fiat first.
Might as well end the Fed, too.
While I am in favor of the latter, it is for very different reasons that have to do with putting every last piece of mattress money in its proper context.
Currency by itself is not meant to be a store of value. The fiat which might have ended up under any bed or buried in someone’s backyard could have retained some if only by being convertible into real money – gold.
This isn’t an argument for the gold standard, either, though this is typically where proponents of one take the conversation. Intrinsically worthless fiat (understanding how many in modern times view gold as intrinsically worthless, too, since you can’t eat or burn it) is not meant to be stockpiled. There is no value in it, other than convertibility, therefore it is from the very beginning foolhardy to think about storing for any longer than the short maybe intermediate term.
Currency is meant to be used.
To see what I mean, realize that as inflation has indeed eroded the purchasing power by whatever amount, we needn’t be exact, over whatever long timescale (start with 1965, it makes the same case), and yet while the dollar was being eaten away every last form of living standard here and around much of the world skyrocketed in a way and to a degree human imagination could scarcely have imagined beforehand.
Even counting the last fifteen years when those have stagnated and reversed in some places to some degree, we all aren’t just better off, the vast majority of us have become so absurdly better off we can’t even conceive of general subsistence let alone having personal experience with it. Not just us, our parents and probably grandparents, too.
Yet, all the while the storage value of the dollar has indeed been unequivocally demolished.
But not by the Fed. No, no, no. See, the actual currency the same vast majority uses right now is private commercial bank virtual money. When FDR violated the “gold clause”, he didn’t establish then and forever public monopoly on money, the President instead unleashed the full capacity of private non-physical bank money – which then quickly and easily spread around the post-war world (the eurodollar era).
Let’s be perfectly clear: that money did not conjure then deliver this planetwide prosperity. That’s not what money is nor how it would ever work. No, human innovation in technology and its application, that was the real invisible hand. However, it would never have been able to reach its fullest extent without the fluid, dare I say elastic medium behind it all keeping things running and more often than not within tolerable boundaries.
Those were obviously and famously breached on a few occasions, starting with October 1929. Another around 1965 if then and for seventeen years after outside the opposite limit. Finally, August 9, 2007.
This private, virtual commercial bank form of currency has no storage value nor any such purpose. Its entire utility – and this is incalculably valuable – derives from actual and repeated use. As a system, then, such massive value is only realized in the aggregate across all its levels and capacities which benefit from elasticity, fluidity, thus maximum efficiency.
You aren’t meant to store these away even as savings, virtual or not, rather turn them into other kinds of savings such as real economy goods or financial economy assets which do (you hope) have some value. A true medium, the virtual eurodollar allows anyone temporarily possessing them (electronically) to mediate between all those uses without having to experience major frictions or barriers.
You can buy groceries from easily selling some stock investment, or store your digital currency in one of the high-yield accounts their provider is paying nerdwallet to put in front of you after you get done mathematically confirming the literal demise of the dollar’s storage value.
A true medium.
As one, though, it has to function within rather wide tolerances. Should it not, all financial and economic hell tends to break loose. The problem here isn’t fiat or private money, it is, as always, the elasticity of it.
It is also here where the Federal Reserve is – as it has been from its very beginning – completely useless. A central bank in name only, it was supposed to be the monitor and regulator for the nation’s (and international, not that anyone at the Fed knows or acknowledges this de facto reality) virtual currency yet it does nothing of the sort.
Instead, having long since been given economic mandates by default such as full employment and price stability, policymakers there don’t even know where to begin; so, they stare at the incoming CPI (PCE Deflator, as they prefer) and match it to the highly flawed unemployment rate if to make subjective, biased assumptions about how elastic the private currency system might be following their own efforts to manipulate the emotions of the private commercial bank agents who actually provide it.
When it works, it doesn’t just work well it transforms the whole world and so many – not everyone – in it. Rising tide and all that.
Focusing on the Fed having destroyed the dollar isn’t just wrong on the facts, it misses the real monetary point by a country mile. Instead, imagine what a more stable, less imperfect medium might be able to accomplish, realizing already what the frequently unstable, highly imperfect eurodollar medium already did.
Robert Owen and Carter Glass knew what needed to be furnished when they “wrote” what became the Federal Reserve Act. They did choose the wrong way to go about achieving it. In doing so, in between the catastrophe and heartache of the Great Depression and the yet-to-be-fully-tallied costs of the current Silent Depression (right on, Emil!), a happy sort of planetwide monetary accident unfolded which more than proved the point.
All we need to do is improve upon that point. Let’s destroy the dollar all over again
