appeared to confirm that a fiat currency was inherently subject to excess."
That last phrase that Jim underlined struck a chord and inspired me to go back and take a look at some of the data and attempt to put it into graphical form. It is one thing to state something that those of us who have read Edward Griffin's masterful work, "The Creature from Jekyll Island," have been all too familiar with. It is another thing to actually see the carnage that central bankers, in this particular case, the Federal Reserve, have managed to inflict upon the U. S. Dollar.
In this regards, I constructed the following charts to demonstrate just how devastating this, "Excess", that the U.S Dollar has been subjected to by the Fed. To do so, I consulted the data at the University of Michigan Documents Center where the following annotation is listed:
"The Bureau of Labor Statistics began calculating the Consumer Price Index in 1913. Estimates dating back to 1800 appear in Historical Statistics of the United States to 1970, Table E135-166. The base year is 1967. Because the base year of the CPI changes, we have also downloaded the most current data from the Bureau of Labor Statistics web site available as of March 1999. Since July 1998, historic CPI data is only calculated using the 1982-84 base year. It is available on a monthly basis since 1913 at ftp://ftp.bls.gov/pub/special.requests/cpi/cpiai.txt"
To illustrate this, let's first look at a chart of the CPI going back to the year 1800 that Greenspan mentioned. Please keep in mind that the figures prior to 1913 are estimates since the BLS CPI data did not actually begin to be collected until 1913. However, for analysis purposes they are more than sufficient and are routinely used in calculations of this nature.
Notice that for a span of well over 100 years, beginning at the year 1800, prices were relatively stable as Greenspan remarked in his speech. The War of 1812 and its aftermath and then the Civil War of 1861-1865 saw prices rise as is to be expected during a time of war and instability. Other than those exceptions, with a bit of a bump here and there, prices were relatively stable for a long and protracted period of our nation's history. Beginning in 1916 however things began to change; the U.S. was heading into a wartime economy as a result of WWI and so it was not all that unexpected that prices would be on the rise. That does not explain completely the price rise however (more on that later). They peaked in 1920 after the war's end and then headed downward during the Roaring 20's until they fell off a cliff in 1929 at the beginning of the Great Depression. Those next few years illustrate the effect of the deflationary pressures that marked those years. From that point on, beginning in 1933, prices have embarked on a near parabolic rise, particularly since the end of WWII, and have not looked back. Isn't it interesting that the time frame in which Roosevelt took us off the domestic gold standard marks the period of a relentless march northward in the CPI?
We can summarize the data from the chart by stating that since 1916, prices have had an uninterrupted rise with the exception of the period immediately preceding and during the Great Depression. It should come as no coincidence that the Federal Reserve was created by the Federal Reserve Act of December 1913. It was approximately 20 years thereafter that the domestic gold standard was suspended and the assault on the U S Dollar began in earnest. This debasement would result in the destruction of its value along with the plundering of the savings of the American citizen. The Fed wasted no time in exploding the money supply to finance WWI beginning in 1917 and since that time has continued its alchemy of transmuting debt into money especially after being unshackled from the restraints imposed upon it by the gold standard. From 1971 the slope of the curve becomes almost parabolic. Again, no coincidence, Nixon closed the international gold window that year and the Fed was now completely free to create money to its heart's desire.
To understand just how unbelievably destructive this process has been, let's put things into perspective. We will use two dates - the year 1913 and the year 2004 where this particular data set ends. If you had purchased $1000.00 worth of items in 1913, those same items would have cost you an amazing 18,992.55 today in 2004! To say it another way, in the year 2004, it would take $18.99 to buy what cost $1.00 in 1913! If I did my math correctly, that means that as of this year, 2004, a dollar held since 1913 is now worth a grand total of .053. FIVE cents! Staggering is it not?
Following is another chart of the CPI. There is a difference however. As I mentioned above by underlining the phrase:
Since July 1998, historic CPI data is only calculated using the 1982-84 base year.
The previous data used as a base year, the year 1967. Unfortunately, I am not clever enough to understand the formulation necessary to convert the data using the 1982-1984 years as base zero to the 1967 base. Thus I am unable to provide the correct CPI figures for the years prior to 1913. However, for our purposes the data is still sufficient to establish the point I am trying to convey.
Again, notice the steady, inexorable rise in prices that have occurred since 1913. It doesn't matter whether we use the Base year of 1967 or the Base years of 1982-84, we still obtain the same result - an unrelenting rise in the Consumer Price Index. Yet, we are told there is nothing to fear; there is no inflation! Says who? Again, just compare this chart with the years from 1800-1913 to see for yourself.
Let's now graph both sets of data: that which uses the base year 1967 and that which uses the base years 1982-1984.
You can observe that no matter which base year is used in the calculation. By switching to the base year 1982-84 in calculating the CPI, the Bureau of Labor Statistics managed to significantly flatten the curve on the chart. Call me a bit cynical but I am convinced there is something a bit devious in this! I would not be a bit surprised if it is not all that long before we use a new base year in the calculation sometime in the near future. The results however are still the same- prices have increased year after year after year since 1913 with the brief exception of the deflationary period surrounding the great Depression.
Now that we have conclusive proof that inflation has steadily and relentlessly eaten away at the value of the U. S. Dollar, let us look at one final graph which will tell us everything we need to know and give us a clue as to the cause of this pernicious effect.
I have included a graph of the simplest measure of the money supply, "M1", using the currency component and demand deposits, overlaying it upon the CPI graph. The data set I used includes the years1959-present as that is currently the only data provided by the St. Louis Fed. I have been unable to locate a source that might estimate the years prior to 1959. Anyone out there who has, I would appreciate hearing from you so as to be able to include the data in my research. My guess is that it coincides exactly with the lines that chart the CPI.
The chart pretty much says it all. The incessant, relentless increase in the money supply by the central bank has paralleled the rise in the CPI. With very few exceptions, notably the years 1982-1985 under the Reagan administration when the U. S. economy was coming out of the stagflation brought on by the Carter administration's dubious policies and the attempt to bring inflation under some sort of control, and then the bursting of the stock bubble in 2000, the central bank has embarked on a systematic expansion of the money supply that has decimated the value of the U. S. Dollar.
For the benefit of those who might be a bit uncertain as to the cause/effect relationship between the money supply and prices think of it this way. The more dollars that the Fed creates, the more dollars there are chasing the same amount of goods. For example - if there are 5000 dollars in circulation chasing a basket of goods and the Fed increases the money supply resulting in another 5000 dollars being created, there are now 10,000 dollars chasing the same amount of goods. The result is that we now have twice the number of dollars competing for the same amount of goods. The effective result is that it now takes 2 dollars to buy the same number of goods that 1 dollar previously was able to purchase prior to the money supply being increased. This is properly termed "inflation.' It is not so much that prices are going up as it is that the value of the dollar is going down because there are more of them competing for the same number of goods. In real life of course, the number of items in the basket of goods would be increasing as the economy grows. The problem is no economy in the world can increase the production of goods anywhere near the rate at which the central bank can expand the money supply. The result should now be evident - the increase in the money supply at the near parabolic rate as evidenced on the graph MUST of necessity erode the value of the dollar and usher in further inflationary pressures. More dollars = higher prices.
In other words, the expression used by Alan Greenspan in his speech quoted at the beginning of this article:
As recently as a decade ago, central bankers, having witnessed more than a half-century of chronic inflation, appeared to confirm that a fiat currency was inherently subject to excess."
That is an understatement of cosmic proportions. If we are to believe the change in tone coming from the Fed these last few weeks as signaled by both Alan Greenspan and Fed Governor Bernanke, the incessant flood of dollars rolling off of government printing presses has only just begun.
Dan is a professional off-the-floor commodity trader residing in Texas and can be reached at firstname.lastname@example.org with comments. Special note to stone throwers: please use small rocks!
Data courtesy of
St. Louis Federal Reserve
University of Michigan Documents Center