Inflation – The Dollar – Government – The Fed – And You

The order of those five entities is of no importance, except for “you.” I placed “you” last because that is where you and I are in in this equation.

Dead last.

I will not go into a lot of detail here; my purpose is to remind you of things you already know. To know where we are, we must know the path we took. We are lost, in more ways than one. As in most cases, it was not just one bad mistake, but a series of well-intentioned (maybe) acts on the part of the government. And we know there is a road paved with good intentions, not a road on which I wanted to travel.

Our founders understood that our republic would require self-discipline and fiscal responsibility.

Each state borrowed heavily to finance the revolution. With taxes only designed to pay for the bare essentials, something had to change. Our first Treasury Secretary, Alexander Hamilton, convinced Congress to pay off the debt held by the States from the Revolution. “A national debt, if it is not excessive,” he argued, “will be to us a national blessing.” His meaning in this was that the interest paid would build a positive reputation by paying the interest on the debt, as long as it was kept at a modest level.

Hamilton was at odds with Thomas Jefferson over this plan. Hamilton wanted to keep the debt controllable because he understood the danger. “Arrears of interest, continually accruing, will be as continual a monument, either of inability, or of ill faith and will not cease to have an evil influence on public credit.” Jefferson wanted strict limits on how much the federal government could borrow and for how long. Hamilton won the argument.

Hamilton’s vision was for a commercial republic that would gain in wealth and power. His plan worked. Hamilton sold federal bonds and consolidated the national debt. The government made timely interest payments and built a good credit reputation. The value of bonds increased. Of course, spending had to be cut, but by 1793 the federal government showed its first budget surplus. Federal debt was about $77 million at the time.

James Madison worried that a massive debt would cripple future generations and would threaten the promise, “to secure the Blessings of Liberty to ourselves and our Posterity” as stated in the preamble to the Constitution. “There is not a more important and fundamental principle in legislation,” James Madison said in a 1790 speech, “than that the ways and means ought always to face the public engagements; that our appropriations should ever go hand in hand with our promises.”

Under the Jefferson presidency, an effort was made to pay down the debt; it was paid down to $45 million. The War of 1812 combined with the Louisiana Purchase, however, increased the debt from $45.2 million on January 1, 1812, to $119.2 million in 1815.

Under Andrew Jackson, the debt was essentially paid off by selling land holdings and cutting spending.  Jackson stated, “When you get in debt, you become a slave.”

It did not last long. A deep depression and a series of wars forced legislators to borrow once again to fulfill the promise of keeping the homeland secured.

In 1913, Congress authorized the formation of the Federal Reserve to give the nation a monetary and financial system that was safer and more flexible. Remember that road paved with good intentions?

During WWI, Congress authorized long-term bonds. However, they included borrowing limits so the debt would not go out of control. That limit was raised during WWII allowing debt to reach $300 billion. Historically, large deficits were frowned upon during peacetime and efforts were always made to pay down the debt, at least until relatively recently. Except for during WWII, the US ratio of debt to GDP (Gross Domestic Product) was nearly always under 50% until the end of the George W Bush Administration. The latest report is now 104.7%.

George Washington warned lawmakers in 1793, “No pecuniary consideration is more urgent than the regular redemption and discharge of the public debt: on none can delay be more injurious, or an economy of time more valuable.”

We, as a people, have accepted debt on a personal level, so we are less likely to hold our political leaders to a standard we aren’t willing to hold ourselves to. With a national debt approaching $20 trillion and unfunded liabilities (promises of future payments made by government) nearly $105 trillion, only a fool believes there is no cost or concern for us as individuals – or that there is no danger.

Capitalism operates on a very simple principle- supply and demand. A free people can determine a need and meet the demand with a supply of goods and services. It is simple-  when the market is flooded with supply, demand decreases along with prices. When supply dries up, prices go up. Money, the dollar, is a product in and of itself. When there is more, it has less value, and likewise, if the supply is tight, its value goes up.

There is a natural cycle that takes time to run. The Fed was created to ease that cycle. Historically, we can look at recessions and depressions. There have been 47 since 1790. As you look at this list, I do not see any change in trend, except maybe the severity. In 1933, FDR prohibited the private ownership of gold and set the price at $20.67, increasing that to $35 per ounce. This was done so the government controlled the value of gold, and thus the dollar, rather than the free market and the people. This value was held until 1971, when Nixon announced the US would no longer convert dollars to gold, ending the gold standard. 

Inflation is bad for us and good for government, in the sense that inflation allows the government to repay its debt with dollars that cost less. Of course, for us, it takes more dollars to buy things. 

What has government meddling with money done for us, rather to us?

Interest Rates Increasing from Flickr via Wylio

© 2012 Chris ButterworthFlickr | CC-BY-SA

Let’s look at inflation starting with $100 in 1790. The U.S. dollar saw inflation at an average rate of 0.04% per year between 1790 and 1913. $100 in the year 1790 was worth $104.82 in 1913. The Fed was established in 1913. The U.S. dollar saw inflation at an average rate of 2.53% per year between 1913 and 1973. $104.82 in the year 1913 was worth $470.10 in 1973. The U.S. dollar saw inflation at an average rate of 3.92% per year between 1973 and 2017. $470.10 in the year 1973 was worth $2,555.41 in 2017. (Figures on inflation from

As I write this, I just heard the stock market went over 20,000. The fundamentals of the true value of the businesses versus reality are completely upside down. While we concern ourselves with issues that are certainly pressing and important, this issue threatens to bury us in a hole so deep our extraction may not be possible.

Remember the issue of supply and demand? According to CNBC in a report last June, there was over $12 trillion “printed” after 2008 (Over $4 trillion in the US alone) and interest rates at zero and even negative in some cases. What has all that extra supply done to the value?

Up until 1964, our coin money was actual precious metal, silver for dimes, quarters, half dollars and dollars. A silver dollar was just that, a dollar worth of silver. Minimum wage in 1965 was $1.25, so for an hour of work you would be paid five quarters of silver, they were actually 90% silver with copper added for strength and durability. As of today, the melt value of a silver quarter is $3.07. Those five quarters are worth $15.35 today. (Values from

This danger is real, and is not as simple as I have outlined here.

There are many variables, especially with a worldwide economy. To fix the problem will cause a serious economic decline, but to not fix it will cause one that is much worse. The vast majority of the people are oblivious to the danger ahead, and the politicians are either whistling past the graveyard, or they are willfully ignorant.

There are those who will say the debt is not important, that it never needs to be repaid. Well, you do at least have to pay the interest. If you default, your ability to borrow in the future disappears. As interest rates go up, and they will, they have to, so does that amount to service the debt. In 2015 the US paid $255 billion in interest. The Treasury has been paying .01% interest on 3-month T-Bills and 2.98% on ten-year notes. The historical average for these is 3.3% and 5.2% respectively. And remember, for that average, there are times it is much higher. (Financial Times, CBO, US Treasury, Pew Research)

At average interest rates, our interest payment would approach $1 trillion dollars. We are on an unsustainable path, yet there is talk of even more deficit spending in the coming years to “create jobs and spur the economy.”

“Problems cannot be solved with the same mindset that created them.”? Albert Einstein.

In her book, ‘Sudden Death,’ Rita Mae Brown said, “Insanity is doing the same thing over and over again and expecting different results.” What we’re doing is insanity.

The people who created our problem neither can, nor will solve this. No state alone or the people can fix this by nullification or interposition. Go to today and find out how to get involved.

Photo Credit: “Laundering Dollar Bills,” © 2011 Images MoneyFlickr | CC-BY

Written by Michael Murphy The Voice of Reason

The Voice of Reason

1 Responses

Agreed! Convention of States is our answer.


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