Those in power talk about inflation as if it’s a natural occurrence.
They’d have you believe that there’s no more sense in blaming government leaders for a bout of inflation than in blaming them for rainy weather on the weekend. This is nonsense.
The White House and Congress deserve to be blamed for inflation, because the amount of money the federal government spends determines the amount of money that the Federal Reserve creates, and that in turn determines how much inflation occurs.
The more money there is, the more inflation there will be.
When private individuals create money, they may face imprisonment for the crime of counterfeiting. Private counterfeiting is recognized as a form of theft: Counterfeit bills that are accepted and put into circulation increase the money supply and cause everyone’s dollars to be worth a little less.
When the government and the Federal Reserve expand the money supply, it has the same inflationary effect, only on a much larger scale and without the risk of imprisonment.
Inflation is a backdoor way for the government to tax people without them knowing they’re being taxed. Lawmakers can go on claiming that they never raised taxes on the middle class, even as their out-of-control spending shaves off more and more of everyone’s purchasing power.
Inflation is the most dishonest form of taxation, and it has a long history.
Early on, the Roman Empire used real money—silver and gold coins that were near 100% in purity. During its rise, Rome gained riches from conquests, including silver and gold mines, that kept the Roman treasury awash in money.
Over time, Rome relied more and more on taxes collected from its many provinces. But the tax collections didn’t satisfy the emperors’ appetite to spend, so they resorted to debasing the currency. Over the course of 100 to 150 years, the Roman denarius went from being almost pure silver to having almost no silver. It was replaced by inferior metals. Rome shortchanged its obligations and watered down the people’s purchasing power.
Rome’s currency debasement acted as an enormous stealth tax, and sadly, the resulting lack of reliable money ultimately destabilized the Roman economy. The freefalling value of its money left Rome weak and accelerated the downfall of the once great empire.
Paper money is more susceptible to devaluation than metal money. There are countless historical examples of countries that have created so much money that it became worthless—the United States included.
During the Revolutionary War and before the establishment of the Constitution, the Continental Congress issued so much money that the continental currency collapsed.
Following that episode, though, for most of the nation’s history, our paper money was backed by silver, gold, or both.
The Constitution gave Congress the power to coin money and regulate its value. Congress in 1792 defined a dollar in statute as 371.25 grains of pure silver, which is what was contained in a silver dollar at the time.
Paper dollars acted as IOUs that could be redeemed at the U.S. mint for silver or gold at a fixed rate.
Throughout history, when dollars have been convertible to a specific amount of gold or silver, little to no inflation has occurred. Convertibility of the dollar for gold and silver forced the government to live within its means.
But during most major wars (and the Great Depression), the U.S. government temporarily suspended or weakened the convertibility of dollars, using inflation as a deliberate tool to help finance the war efforts without the knowledge of most Americans.
Finally, President Richard Nixon broke the last vestiges of the gold standard during the Vietnam War in 1971.
Since then, America’s money has been backed by nothing, and the government has been quietly but steadily printing money in the background, subtly taking away more and more of Americans’ purchasing power to pay for its ever-expanding fiscal obligations.
All that money creation adds up over time, and the purchasing power of the dollar has steadily eroded. From the 1950s until 1971, $35 bought one ounce of gold. Today you’d need $2,740 to buy an ounce of gold.
Overspending and inflation have been problems ever since the U.S. abandoned gold.
The extreme federal spending and money creation of the past four and a half years stoked the recent bout of unusually high inflation that has throttled American families since 2021.
But even in periods of relative calm, Americans are expected to accept a 2% annual inflation tax as normal. Pay no attention to the man behind the curtain who is skimming a little off the top!
It doesn’t have to be this way.
If the government would get back to living within its means, Americans’ money could hold its value and the American people could live a little better.
