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Affluent Christian Investor | December 1, 2020

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The Federal Reserve Has Failed And Inflation Is Destructive

The Federal Reserve headquarters in Washington, DC

Prior to the establishment of the Federal Reserve, federal debt remained very low – typically 10 percent to zero – and only surging upward during wartime.  But since the establishment of the Federal Reserve, federal debt has surged and never returned to pre-Federal Reserve levels.   While these two events do not indicate a correlation on their own, together they do point to a behavioral trend of the federal government.  In fact, just after the establishment of the Federal Reserve, WWI resulted in a significant surge rising debt up to nearly 40 percent of GDP.  During post-WWI years, the debt began dropping and under the Harding and Coolidge administrations it continued to drop, but with and since the massive interventions of the administrations of Hoover and Roosevelt, compounded by WWII, the debt to GDP ratio has perpetually remained high.  This is always economically destructive.[1]

For nearly 250 years, from 1665 to 1913, price inflation on the aggregate did not exist; the prices of goods and services remained stable and flat for two and a half centuries[2] – longer than the existence of the United States has.  See Figure 1, U.S. Price Levels from 1665 to 2001.  Viewing the aggregate or a commodity price index[3] helps to give a clear, although not perfectly precise, view of economic changes over a long range of time.  Economics and history scholar McCusker explain, “A commodity price index is a statistical tool designed to accomplish comparisons of real money values over time by filtering out the impact of any differences in the value of money itself.”[4]

The same pattern of the Consumer Price Index is also verified by Harvard researchers Carmen Reinhart and Kenneth Rogoff in their 2013 analysis of the Federal Reserve and history of prices in the United States from 1775 through the 2010s.[5]  Reinhart and Rogoff note that in the Federal Reserve Act of 1913 “there is no mention of a price stability mandate in the original version of the legislation.   Indeed, the word inflation does not appear at all in the document.  A full employment macroeconomic goal is not even remotely alluded to.”[6]  In reference to their data and Figure 1 below, created from a compilation of McCusker’s data , Reinhart and Rogoff divulge that “In 1913 prices were only about 20 percent higher than in 1775 and around 40 percent lower than in 1813, during the War of 1812…it is clear that the evolution of the prices level in the United States…”

…is dominated by the abandonment of the gold standard in 1933 and the adoption of fiat money subsequently.  One hundred years after its [the Federal Reserve] creation, consumer prices are about 24 times higher than what they were in 1913.[7]

Reinhart and Rogoff ultimately conclude, as do so many other economist noted in my analysis, that “it is safe to conclude that the early Federal Reserve failed miserably at meeting its initial mandate of financial stability.”[8]  In fact, the Federal Reserve has been a complete failure and fallen out of its legislative parameter, and most destructive of all destroyed a massive amount of wealth, which is unadulterated tyranny.

It was only after government intervention that inflation began – and continues with a vengeance.   “Since the price of money would admittedly fluctuate on the free market,” noted economist Murray Rothbard, “freedom must be overruled by government management to insure stability.”[9]  This type of central planning is inherit to try to stabilize prices, but this intervention actually accomplishes the very opposite – inflation, which destroys wealth, property value, and individual freedom and prosperity.  According to economic researcher Robert Sahr’s[10] study, U.S. price levels have increased over 24 times since 1913.[11]  McCusker, Sahr and Figure 1 illustrate that inflation is unnecessary and happens extensively when the government interferes with the free-market.

Figure 1: U.S. Price Levels from 1665 to 2001[12].

Sahr also notes that “[e]ven relatively low levels of inflation produce, cumulatively, large changes over time.”[13]  Sahr also shows that Gross Domestic Product, GDP, has steadily increased since 1830, and accelerated during the latter part of the Industrial Revolution.  The only significant drops occurred during increased government intervention, specifically the 1930s and 1970s.[14]  “The composition of the national government budget has changed sharply during the second half of the twentieth century.[15]  This, of course, has dramatically increased federal spending as a percent of GDP, which is economically foolish and wealth destructive.[16]  Dr. George Selgin, of the University of Georgia writes, “As productivity grew, prices would fall.  If past estimates of aggregate productivity growth rates are any guide, a secular decline in prices of between one and three per cent per year (depending on how productivity is measured) could be expected in ‘normal’ times.”[17]

[1] Congressional Budget Office, July 2010, “Historical Data on Federal Debt Held by the Public,” (Washington DC: Congress of the United States), Graph, Federal Debt Held by the Public, 1790 to 2000, [http://www.cbo.gov/sites/default/files/cbofiles/ftpdocs/117xx/doc11766/2010_08_05_federaldebt.pdf].

[2] John J. McCusker, 2001, How Much is that in Real Money? A Historical Commodity Price Index for Use as a Deflator of Money Values in the Economy of the United States,” (Worcester, MA: American Antiquarian Society), pp. 49-60, Table A-1, A Historical Price Index.

[3] For an in-depth discussion of the value, development, and use of the commodity prices index see John J. McCusker, 2001, How Much is that in Real Money? A Historical Commodity Price Index for Use as a Deflator of Money Values in the Economy of the United States,” (Worcester, MA: American Antiquarian Society), pp. 13-40.

[4] John J. McCusker, 2001, How Much is that in Real Money? A Historical Commodity Price Index for Use as a Deflator of Money Values in the Economy of the United States,” (Worcester, MA: American Antiquarian Society), p. 16.

[5] Carmen M. Reinhart and Kenneth S. Rogoff, 2013, “Shifting Mandates:  The Federal Reserve’s First Centennial,” American Economic Review:  Papers & proceedings 2013, Vol. 103, No. 3, pp. 48-54, see Figure 1 on page 48.

[6] Carmen M. Reinhart and Kenneth S. Rogoff, 2013, “Shifting Mandates:  The Federal Reserve’s First Centennial,” American Economic Review:  Papers & proceedings 2013, Vol. 103, No. 3, p. 48.

[7] Carmen M. Reinhart and Kenneth S. Rogoff, 2013, “Shifting Mandates:  The Federal Reserve’s First Centennial,” American Economic Review:  Papers & proceedings 2013, Vol. 103, No. 3, p. 48.

[8] Carmen M. Reinhart and Kenneth S. Rogoff, 2013, “Shifting Mandates:  The Federal Reserve’s First Centennial,” American Economic Review:  Papers & proceedings 2013, Vol. 103, No. 3, p. 49.

[9] Murray N. Rothbard, 2010 (originally published in 1963), What Has Government Done to Our Money? (Auburn, AL: Ludwig von Mises Institute), p. 31, (emphasis added).

[10] Robert Sahr is an Associate Professor of Political Communications, Presidents and Policy at Oregon State University.

[11] Robert Sahr, 2003, “US Price Levels 1665 to estimated 2013, with 2002 = 100,” Summary of US Price Level and Inflation Data, 1665-estimated 2013, (Corvallis, OR: Political Science Department, Oregon State University), [http://oregonstate.edu/cla/polisci/sites/default/files/faculty-research/sahr/inflation-conversion/pdf/sumprice.pdf].  Dr. Sahr adapts McCusker’s data from How Much is that in Real Money? and CPI data from the Bureau of Labor Statistics, and sets 2002 as the baseline equal to 100.  His price level index from 1665 to 1913 ranges approximately between 4 and 6 (other than the war periods) and after 1913 raises to approximately 127 by 2013 – a 24.4 times increase.

[12] Adapted from John J. McCusker, 2001, How Much is that in Real Money? A Historical Commodity Price Index for Use as a Deflator of Money Values in the Economy of the United States,” (Worcester, MA: American Antiquarian Society), pp. 49-60, Table A-1, A Historical Price Index.

[13] Robert Sahr, April 2004, “Using Inflation-Adjusted Dollars in Analyzing political Developments,” PSOnline, Vol. 37, Issue 2, (Washington D.C.: The American Political Science Association), p. 273, [http://journals.cambridge.org/action/displayAbstract?fromPage=online&aid=214764&fulltextType=RA&fileId=S1049096504004226].

[14] Robert Sahr, April 2004, “Using Inflation-Adjusted Dollars in Analyzing political Developments,” PSOnline, Vol. 37, Issue 2, (Washington D.C.: The American Political Science Association), p. 275, [http://journals.cambridge.org/action/displayAbstract?fromPage=online&aid=214764&fulltextType=RA&fileId=S1049096504004226].

[15] Robert Sahr, April 2004, “Using Inflation-Adjusted Dollars in Analyzing political Developments,” PSOnline, Vol. 37, Issue 2, (Washington D.C.: The American Political Science Association), p. 276, [http://journals.cambridge.org/action/displayAbstract?fromPage=online&aid=214764&fulltextType=RA&fileId=S1049096504004226].

[16] While the United States has not experienced hyperinflation, there are concerns with the combination of the current levels of spending, non-market driven interest rates, the massive influx of currency and credit (Quantitative Easing (QE)) 1, 2 and 3 as of the end of the year 2012), and levels of debt and long-term liabilities, which could lead to hyperinflation.  For a detailed analysis of historical episodes of hyperinflation see Steve H. Hanke and Nicholas Krus, Working Paper: August 15, 2012, “World Hyperinflations,” (Washington, D.C.: Cato Institute), [http://www.cato.org/sites/cato.org/files/pubs/pdf/WorkingPaper-8.pdf].

[17] George Selgin, 1997, Less Than Zero:  The Case for a Falling Price Level in a Growing Economy, “Hobart Paper 132,” (London, England: The Institute of Economic Affairs), p. 64.

 

 

 

Originally published on Townhall Finance.

 

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