The Hidden Cost of Inflation

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Walter
Block and William Barnett II

wrote a very good rebuttal to David
Frum’s
vicious and groundless attack on Ron Paul’s economic
acumen. In addition to noting how, under the Fed’s tender care,
the dollar today isn’t even worth a plugged nickel, they mentioned
some figures regarding how the dollar fared prior to the creation
of the Fed. Those figures are instructive, and reveal a cost of
inflation that is little remarked in the debates on monetary policy:

Let us compare
this with a similar 93-year time period before the creation of
the Fed. This calculation shows that "What cost $100.00
in 1820 would cost $63.02 in 1913. Also, if you
were to buy exactly the same products in 1913 and 1820, they would
cost you $100.00 and $158.69
respectively." In other words, the dollar held its value
to a far greater degree under the relatively more free market
situation before the advent of the Fed. Indeed, it was worth more
at the end of that period than at its beginning. What is so "kooky"
about ridding ourselves of an institution that debauches the currency
to such a degree, particularly when the free enterprise system
has shown money not only need not lose its value but can actually
increase in purchasing power?

Growth in the
purchasing power of the dollar is exactly what is to be expected
of a growing economy, absent inflation. More and more goods and
services are available, while the supply of dollars remains the
same.

The point to
note here is that the economy, not the dollar, is growing. The figures
quoted above reflect a nearly 60% growth in the economy over the
period.

With today’s
technology, economic growth by all rights should be many times what
was experienced at the dawning of America’s industrial age. I won’t
attempt to estimate the difference, but I trust all will accept
it is huge.

Now to the
interesting part: What the Fed has actually accomplished is not
just eroding the purchasing power of the dollar by over 95%. It
has wiped out America’s cumulative economic growth since 1913! That
growth should have made today’s dollar worth perhaps thousands of
times its 1913 par value.

The moral of
the story, of course, is that to focus on the diminished purchasing
price of the dollar almost trivializes the actual damage the Fed
has caused to America through inflation. Someone more knowledgeable
than I can perhaps calculate the magnitude of the disaster.

Be angry. Be
very angry.

December
22, 2007

Kent
Van Cleave [send him mail]
is a philosopher finishing his doctorate at Indiana University,
Bloomington.

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