Inflation

Inflation is too much money being spent on too few goods, or as Will Rogers put it. “Inflation is when your dollar won’t buy as much as it did during the depression when you didn’t have any.” Some things cost more now than in the past, but some things don’t.

For example, when I was growing up my dad would give me a quarter on Saturday nights so I could go to the movies. I spent a dime on the movie ticket, a dime for a bottle of pop, and a nickel for a bag of popcorn. My friends and I were set for the night. My Parents couldn’t afford a TV, but as a family of five we could afford to go to the movies once or twice a week. Today taking a family of five to the movies just once is enough to buy a modest TV.  I remember hamburgers costing a quarter, french fries were a quarter, a malted milk was quarter. I could have 2 hamburgers, french fries and a malt for a Dollar, and I was full.

In the late 1970’s I bought my first computer. I bought it with a friend. We paid about $2,500 for it. It was an Apple II+ with a 48k memory. It came with two disk drives. On one disk we put the programs. On the other disk we kept the data. It didn’t come with a screen, so we hooked it up to an old black and white TV. It had more computing power than the computers used in the space program sending men to the moon. Today my cell phone has more computing power and does a lot more things than my old computer. It cost $60.

Many people today are blaming President Biden for high prices after Covid. They claim the government is just printing more money and that is why prices are so high. Those people don’t understand that the government doesn’t create money, and that the president has little influence on inflation.

By design, the creation of money in the United States was removed from political actions. The government has three ways to raise money; taxes, borrowing, and user fees. Money is created by the Federal Reserve. On December 23, 1913 President Woodrow Wilson signed the Ferderal Reserve Act establishing the Federal Reserve System. It is a private company. It is to operate for the good of the country, not for profit. But it does make substantial profits. The Head of the Federal Reserve is appointed by the President and confirmed by the Senate. Other than that, it operates without government interference.

The New York Federal Reserve (Fed) creates money by lending it out to any one of it’s 12 member banks. The member banks then lend it to the private sector. Unlike a normal bank, there is no pile of cash that it takes money from to make these loans. It creates the money by making the loan. The borrower, however, is to have collateral for the loan. The interest rate that the Fed borrows the money at is called the Rrime Interest Rate. This Prime Interest Rate is determined by the Fed.  

The interest rate is the cost of the money. The more money costs, the less is created. So when you hear of the Fed raising the Prime Interest Rate, it is slowing the amount of money being created. When it lowers the Prime Interest Rate it is increasing the amount of money being created. The Fed has other tools it can use to adjust the amount of money in circulation, but the changing of the Prime Rate is the most influential one.  

At one time the amount of money created was related to the amount of gold in Fort Knox. That changed during the Nixon Administration. The Dollar was falling in value in relation to the currencies of other countries. When the currencies were converted into Dollars, gold was taken from the United States and sent to the other countries. America was losing gold. In response, the Nixon administration completely removed the amount of money created from gold stocks owned by the government.

When I learned this as a student, I asked my teacher, if not gold, what is the value of the dollar based on? His answer was that the value of the Dollar is based on the productivity of the American Economy. The value of the goods produced is the collateral given to the Fed when it lends money out to its member banks.

Blaming inflation on President Biden, or any president, is simply wrong. Presidents and politicians have little control over inflation. That was by design when the Federal Reserve System was created. The spending patterns of the American people affect inflation.. The amount of goods to purchase is also a determinant of the amount of inflation. The productivity of America’s farms and factories is a determinant in the amount of inflation. Presidents like to take credit for low inflation and they like to find someone else to blame for high inflation. But the reality is that they have little control over it.

The news media talks of inflation leading to a recession as though it were a natural occurrence.  Think of it.  Inflation is when too much money is being spent on to few goods.  The Federal Reserve’s policy action to fight inflation is to create less money, not make more goods.  The people hurt most by inflation are the ones hurt most by the Feds solution to it.  It is no surprise that the actions of the Fed lead to a recession or slowing of the economy.  If the policy of the government were to initiate policies that increase the production of goods, rather the reduction of  the money supply, we could end inflation without a recession.  

Richard Pulcher                                                          

BA  Economics, History, Quantitative analysis                                                                                                  

Augustana College, Sioux Falls, SD      

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