During 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.