In the early 1790s, after passage of the Constitution, the newly organized government of the
United States of America
turned its attention to monetary issues. Alexander Hamilton, secretary of the Treasury, recommended the term “dollar” and it was adopted by Congress. They knew the importance of having precious metals backing a currency, so each U.S. dollar was backed by gold (1.6 grams) and silver (24.06 grams). In 1834, the first dollar devaluation occurred (6%) by increasing the ratio of silver to gold in the dollar coin. In 1853, the weight of the coins was reduced in
another devaluation
.
In the second half of the 19th century, the discovery of large silver deposits in the western
United States
caused the price of silver to decline and by
1900,
the 100% gold standard was formally adopted.
In 1933, during the Great Deflationary Depression, the ownership of gold was outlawed. The
Roosevelt
administration abandoned the gold standard for international transactions. That allowed the government to use unlimited amounts of paper money.
In 1971, the
United States
under President Richard M. Nixon removed the official link between the U.S. dollar and gold. In other words, the U.S. dollar was no longer backed by gold or any other precious metal. This event was a major contributor to the explosion of oil prices in the early 1970s and subsequent high inflation.
Today we measure inflation through the Consumer Price Index. The government has a stake in keeping inflation low, which is probably why the Federal Reserve Bank has taken to using that index sans food and energy.
While it may make sense to exclude food and energy on a monthly basis given their volatility, when looking over a year’s time the prices of these elements are the most relevant because people must use them.
Investopedia
defines inflation as, “The rate at which the general level of prices for goods and services is rising, and, subsequently, purchasing power is falling. As inflation rises, every dollar will buy a smaller percentage of a good.”
If this is the case, then as the dollar
itself
falls — particularly in our global economy — inflation must rise. Comparing today’s economy to that of the 1970s shows that the decreasing dollar may be a more accurate measure of inflation. Sharply rising gold and oil prices and the manic infusion of money into the banking system are highly inflationary and usually go hand in hand with a falling dollar. The Fed stopped reporting the M3 money supply and the government has found a way to “cook the books” on inflation in a combined effort to report stable inflation in the
United States
. This is done to minimize payments for social security, salary increases for government workers and a myriad of other elements tied to the inflation index.