1965 versus 2015, approximate
Total Debt- 45.3% vs 101.9%
Deficit- 0.2% vs 2.5%
Social Security, Unemployment, Labor- 4% vs 7.8%
Medicare & Health- 0.3% vs 5.8%
Education- 0.2% vs 0.5%
Defense & Veterans benefits- 8% vs 3.7%
Science, Space, Technology- 0.8% vs 0.2%
Transportation- 0.2% vs 0.5%
The value of money is not static. In the short term, it may ebb and flow against other currencies on the market. In the long-term, a currency tends to lose buying power over time through inflation, and as more currency units are created.
Inflation is a result of too much money chasing too few goods – and it is often influenced by government policies, central banks, and other factors. In this short timeline of monetary history in the 20th century, we look at major events, the change in money supply, and the buying power of the U.S. dollar in each decade.
A Short Timeline of US Monetary History
1900s
After the Panic of 1907, the National Monetary Commission is established to propose legislation to regulate banking.
U.S. Money Supply: $7 billion
What $1 Could Buy: A pair of patent leather shoes.
1910s
The Federal Reserve Act is signed in 1913 by President Woodrow Wilson.
U.S. Money Supply: $13 billion
What $1 Could Buy: A woman’s house dress.
1920s
U.S. dollar bills were reduced in size by 25%, and standardized in terms of design.
The Fed starts using open market operations as a tool for monetary policy.
U.S. Money Supply: $35 billion
What $1 Could Buy: Five pounds of sugar.
1930s
To deal with deflation during the Great Depression, the United States suspends the gold standard. President Franklin D. Roosevelt signs Executive Order 6102, which criminalizes the possession of gold.
By no longer allowing gold to be legally redeemed, this removes a major constraint on the Fed, which can now control the money supply.
U.S. Money Supply: $46 billion
What $1 Could Buy: 16 cans of Campbell’s Soup
1940s
The massive deficits of World War II are almost financed entirely by the creation of new money by the Federal Reserve.
Interest rates are pegged low at the request of the Treasury.
Under Bretton-Woods, the “gold-exchange standard” is adopted.
U.S. Money Supply: $55 billion
What $1 Could Buy: 20 bottles of Coca-Cola
1950s
The Korean War starts in 1950, and inflation is at an annualized rate of 21%.
The Fed can no longer manage such low interest rates, and tells the Treasury that it can “no longer maintain the existing situation”.
U.S. Money Supply: $151 billion
What $1 Could Buy: One Mr. Potato Head
1960s
An agreement, called the Treasury-Federal Reserve Accord, is reached to establish the central bank’s independence.
By this time, U.S. dollars in circulation around the world exceeded U.S. gold reserves. Unless the situation was rectified, the country would be vulnerable to the currency equivalent of a “bank run”.
U.S. Money Supply: $211 billion
What $1 Could Buy: Two movie tickets.
1970s
In 1971, President Richard Nixon ends direct convertibility of the United States dollar to gold.
The period following the Nixon Shock is uncertain. The federal deficit doubles, stagflation hits, and the oil price skyrockets – all during the Vietnam War.
Over the decade, the dollar loses 1/3 of its value.
U.S. Money Supply: $401 billion
What $1 Could Buy: Three Morton TV dinners.
1980s
The stock market crashes in 1987 on Black Monday.
The Federal Reserve, under newly-appointed Alan Greenspan, issues the following statement:
“The Federal Reserve, consistent with its responsibilities as the nation’s central bank, affirmed today its readiness to serve as a source of liquidity to support the economic and financial system.”
The Dow would recover by 1989, with no prolonged recession occurring.
U.S. Money Supply: $1,560 billion
What $1 Could Buy: One bottle of Heinz Ketchup.
1990s
This decade is generally considered to be a time of declining inflation and the longest peacetime economic expansion in U.S. history.
During this decade, many improvements are made to U.S. paper currency to prevent counterfeiting. Microprinting, security thread, and other features are used.
U.S. Money Supply: $3,277 billion
What $1 Could Buy: One gallon of milk.
2000s
After the Dotcom crash, the Fed drops interest rates to near all-time lows.
In 2008, the Financial Crisis hits and the Fed begins “quantitative easing”. Later, this would be known as QE1.
U.S. Money Supply: $4,917 billion
What $1 Could Buy: One Wendy’s hamburger.
2010-
After QE1, the Fed holds $2.1 trillion of bank debt, mortgage-backed securities, and Treasury notes. Shortly after, QE2 starts.
In 2012, it’s time for QE3.
Purchases were halted in October 2014 after accumulating $4.5 trillion in assets.
U.S. Money Supply: $13,291 billion
The Changing Value of a Dollar
At the turn of the 20th century, the money supply was just $7 billion. Today there are literally 1,900X more dollars in existence.
While economic growth has meant we all make many more dollars today, it is still phenomenal to think that during past moments in the 20th century, a dollar could buy a pair of leather shoes or a women’s house dress.
The buying power of a dollar has changed significantly over the last century, but it’s important to recognize that it could change even faster (up or down) under the right economic circumstances.
the percent of our Federal tax dollars (plus the dollars we borrow from our children) and then spend on various things, and what those things are, is relevant over time.
Which is why the price of gold is manipulated.
Just wait for the coming recession of 2017 and you'll see what I mean.
The Fed is pulling out close to $2 Trillion from the money supply.
Wall Street is in for a rude awakening.
Digital currency (crypto currency) may be the only answer, but the problem with that is that it is merely peer-to-peer valuations with a limit of $43 billion. (Bitcoin) All gold ever mined is worth around $7.5 to $10 trillion, although estimates vary. As for the U.S. dollar, just the M2 measure of bank money, including checking accounts, puts its worth at $13.5 trillion.
I'm still on board with at least 20% precious metals, for the foreseeable future.
But gold cannot be replicated at will and therefore is a better way of exchanging value over time. One dollar bought almost 20 bottles of Coca-Cola in the 1930s. It now buys less than one. One ounce of gold bought 700 bottles of Coke in the 1930s; it now buys almost 800.
Normally, that would mean deflation (increasing value of the dollar). But, so much of the money supply is dead. Monetary base is at an all time high, but the velocity of money is at all time lows (or, at least post WWII lows...I haven't seen measures of it before then). If they are lowering the monetary base, I assume they are not pulling it back from "the wild" but from the unreleased reserves?...which should deaden the effects? Who knows; I surely don't.
...after nine years of unconventional quantitative (QE) easing policy. It is the evil twin of QE which was used to ease monetary conditions when interest rates were already zero.
First, it is important to examine QE and QT in a broader context of the Fed’s overall policy toolkit. Understanding the many tools the Fed has, which of them they’re using and what the impacts are will allow you to distinguish between what the Fed thinks versus what actually happens.
We have a heavily manipulated system. For years, if not decades, monetary policy has been flipping back and forth between how the economy actually works and what the Fed believes works.
QE was a policy of printing money by buying securities from primary dealers and to ease monetary conditions when interest rates were at zero. QT takes a different approach.
In QT, the Fed will “sell” securities to the primary dealers, take the money, and make it disappear. This is an attempt to ultimately reduce the money supply and implement a policy of tightening money.
There’s a bit of a twist to that selling. Today the Fed’s balance sheet stands at $4.5 trillion. It started at $800 billion in 2008 and has increased over five times that since the crisis. Now they’re going to try to get the balance sheet back to normal levels.
Simultaneously, the Fed wants to get interest rates to back to normal. The Taylor rule, which is one of the most accepted normative rules, indicates that interest rates should be 2.5%. As of June 14th, the Fed raised rates by going up 1%, with a new target range of 1 to 1.25%.
The Fed hiked rates not because it believes the economy is getting stronger, but because it is desperately trying to catch up — before the next crisis.
They are now trying to normalize the balance sheet. Under the Taylor Rule a normal balance sheet at the current expansion rate could be expected to be at $2.5 trillion. That means you have to take $2 trillion of money and make it disappear.
They can do that by selling securities, but the Fed believes that the market’s too fragile. Instead they’re going to leave securities on the balance sheet and allow them to mature. Think of this as the Fed putting QE in reverse.
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