Government Watch

Inflation in American History

cash-moneyDuring the 125 years that America existed as a Republic without a central bank (1789 to 1914), there was only one serious bout of inflation, and that was in the War Between the States, when President Lincoln printed “Greenbacks,” unbacked by gold or silver, and the Confederate states printed their own currency.

America’s worst experience with inflation came during the War of Independence, when the Continental Congress printed the “Continental,” a paper currency backed by their “faith and good intentions” only.  It wasn’t exactly “paper” money – it was more like pasteboard – but since it was not backed by gold or silver, merchants demanded more Continentals for the same amount of goods.  Before long, General Washington complained that “a wagonload of currency will hardly purchase a wagonload of provisions.”

By the end of the Revolutionary War, the Continental was worthless.  Because of this experience, the phrase “not worth a Continental” became a common way to describe anything that offered no real value.

With this experience fresh in their minds, the drafters of the U.S. Constitution wrote gold and silver into our nation’s founding document: “No State shall… make any Thing but gold and silver Coin a tender in Payment of Debts” (Article I, Section 10).  This is why the first American coins, under the Coinage Act of 1792, were composed of gold and silver, with only the 1-cent and half-cent coins to be made of copper.

Hyperinflation has plagued the World for Centuries

Throughout history, nations have fallen into “hyperinflation” (triple-digit price growth) whenever they over-print paper money as a short-term solution to their spending addictions.  Economist Steve Henke identified 55 such episodes in the 20th century alone, mostly occurring after World War I and II in Europe and after the end of the Cold War in the early 1990s.  It would be difficult to print some of the inflation rates since they run into the trillions of percent in extreme cases.  In 2007-08, the Zimbabwe dollar was inflated so rapidly that prices grew by 79,600,000,000%, with prices doubling every day at the bitter end.

Here are some examples of inflation after the world’s three greatest wars of the 20th Century:

After World War I, prices in Germany grew by 29,500% per month during October, 1923, leading to Hitler’s first power grab in Munich in November.  Prices rose by the hour and savers were wiped out.  Germany is the most famous example, but prices also rose 275% per month in Poland (in October, 1923).

After World War II, prices in Hungary rose at a 207% DAILY rate by July of 1946.  Prices doubled every 15 hours.  The monthly increase in prices in July of 1946 reached 41,900,000,000,000,000%.

After the Cold War, prices exploded in the previously price-controlled Soviet satellites.  The Cold War officially ended 25 years ago this week.  On Monday, November 19, 1990, the leaders of NATO and the Warsaw Pact agreed to stand down and cut back their arsenals.  There was a brief attempted coup in Russia the following August (1991), but after that freedom blossomed and prices returned to reality:

  • Russia’s prices rose 245% per month in January, 1992
  • Ukraine’s prices rose 285% in January, 1992.
  • Bosnian prices rose 322% in June, 1992.
  • Armenian prices rose 438% in November, 1993
  • Turkmenistan prices rose 429% in November, 1993

In the former Yugoslavia, prices rose at an astonishing 313,000,000% in January, 1994.  That was the last gasp of the death of the controlled currencies and price-fixing schemes of the old Soviet orbit.

Throughout history, gold has been a price stabilizer and a ‘truth serum” for overspending governments.

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Jerry Pinson
5 years ago

We need to go back under the Gold Standard. Paper Bills must be backed by Gold.

Michael H Smith
5 years ago

The article is not about “crises” but about inflation! Show me how gold did not keep the value of mony from inflating? And how about war—the number one cause of inflation? Had the U. S. forced to make defeated foreign enemies pay us for settling their differences war would end. Except our own soon Second Civil war over government caused economic and monetary collapse. And don’t forget cultural collapse caused by the “war” on the economy and the culture called the Welfare and Regulatory State.

Chris
5 years ago

Gold isn’t the answer. First of all the US had plenty of economic crises during the period the currency was backed with gold and silver. Some were even caused by it. JP Morgan had to bail out the US government at one point (it was such an event Nixon feared). The US did have a central bank, created by Alexander Hamilton and dismantled by Andrew Jackson (which contributed to starting a decade long depression).

The collapse of the Roman empire was in part caused by the fact they didn’t invent a non-gold/silver currency. They literally shipped tons of the stuff to India and China along the silk and spice roads, in return for *consumables*. Sound familiar? It left Europe without enough gold to sustain a robust economy for centuries (the so-called Dark Ages).

The problem with using gold or any single resource is availability. A country’s currency *must* grow to keep pace with economic growth. Its not a one to one ratio as banks create money by lending out depositors money, but an ever increasing supply is needed if you are to have a growing population and/or economy. You don’t want the mere fact that gold mines are under producing (or over producing) to have a negative impact on your economy. We shouldn’t have to limit the rate of economic growth to the rate that mines can produce gold, it makes no sense.

The reason we have inflation is because people like seeing their paycheck go up more than they dislike seeing increasing prices. They really dislike seeing their paycheck shrink even if that means lower prices (deflation caused by a shortage of whatever backs your currency). Inflation benefits borrowers and the US has tons and tons of those, including the government itself. That’s why we have inflation. (There was even a political movement in the late 1800s that *wanted* inflation, mostly driven by farmers who routinely borrowed money).

If you want to encourage savings, change tax policy to encourage it instead of punishing it (e.g. Fair Tax). If you want a stable currency stop government deficits *AND* balance the trade deficit. No country can sustain a huge trade deficit without some impact on its currency or economy. The US kind of gets away with it because of its global reserve status, so instead of a devaluing currency (which would balance the trade deficit), it creates a chain of asset bubbles to bring that money home through “investments” (which are then reset when the bubble pops so those investment dollars don’t have to be repaid). Being on a gold standard with a trade deficit just means a flight of US gold reserves as central banks exchange their dollars for the government’s gold (re: the silk and spice roads).

PaulE
5 years ago

You close out your article with “Throughout history, gold has been a price stabilizer and a ‘truth serum” for overspending governments.” That is the very reason why no politician, of either party, would ever fully commit to putting the United States back on either the gold standard or pegging it to any other hard asset. I don’t care what any of them may say otherwise as they campaign around the country, because none of them would seriously follow through afterwards. They all understand the ramifications such a move would have on the country now that we have run up so much debt relative to the amount of gold the government has on hand. Such a move would bring about a financial day of reckoning for Americans that would rival Germany after WWI. Most Americans today have no tolerance for any sort of discomfort and this would be out and out non-stop pain. Without the ability of the government to endlessly borrow or spend at will with no immediate consequences, which is why they de-linked the dollar from gold in the first place, most Americans would quickly see the value of the dollar and their individual buying power collapse. The usual results from hyper-inflation would quickly ensue and most Americans would be clamoring for the government to reverse course as they watched their standard of living nosedive. Any such reversal would quickly signal our international creditors that we don’t have the ability to pay back the money owed and would actually accelerate our financial decline. International creditors would all be lining up to “cash in” their U.S. Treasury and bond notes for physical gold, which would quickly deplete what gold the federal government has on hand. That would then lead to a repeat of what FDR did and start a government confiscation of privately owned gold as the federal government looked to shore up its coffers and tried to keep the international creditors at bay.

By the way, I think the Nixon was an idiot for taking us off the gold standard. It was the last vestige of being able to hold the federal government to living within its means. Pegging the dollar to a physical asset kept the value of the dollar relatively stable for decades and imposed a spending limit on the government least they try to raise taxes to pay for their latest must have program or social engineering solution. Once that asset-linked restraint was removed, the government was free to spend and borrow with abandon, knowing they could put off actually paying their debts as long as the American people and international creditor nations believed “backed by the full faith and credit of the United States” meant they stood of a good chance of getting their money back at some point. Now of course that prospect is far from ensured and it’s basically just a meaningless phrase. While the idea of a gold backed dollar is excellent and we should have never gotten off it in the first place, we have unfortunately gone way past the time we could return to such a sane monetary policy without inflicting a massive amount of pain on the American people.

Dick Rens
5 years ago

In 1970’s people said inflation can’t be stopped. It didn’t take long for the Reagan administration to stop it, with good fiscal responsibility.

Dave Pitruzzello
5 years ago

I couldn’t say it better than David B just did….He’s 100% correct !

David Breidenbach
5 years ago

The US needs to pin their currency to gold and silver. This would bring stability to our dollar and prices of goods would stabilize. High inflation would be a memory of the past.
As a nation, savings accounts would come back and we would actually have more and stable buying power.

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