Since 2019, the buying power of your paycheck has lost about ⅓ of its value.

The official inflation rate does not count all things for every day cost of living. However, the government says you lost 21% due to inflation over the past five years. In 2021, energy prices as a whole, including electricity, propane, gasoline, and other energy sources, rose 29.3 percent. Gasoline on its own rose 49.6 percent that year. Used vehicle prices rose 39 percent in the two year period of COVID. Some household items doubled in price. CBS News is reporting that auto insurance increased 19.5% from 2023 to 2024.

America has had periods of inflation clear back to the revolutionary war. The cause, though, is often misunderstood.

As the American revolution was being implemented, a source of money was needed to finance the continental army. The American people were strongly opposed to taxes — and the new government had no power to tax, so paper currency, called The Continental Dollar, was issued. It was a bill of credit with a promise to pay the holder once the country was stable. 26 million dollars were printed in 1775 and 1776. The government owned no gold or silver so the new dollars were backed by the faith and credit of the brand new country that had no income or assets.

The result was that the price of goods and services went up at an exponential rate; inflation. So the new government issued rigid price and wage controls in 1777. With no way to enforce them and nothing backing the paper dollars, inflation continued to soar.

By 1779, 200 million paper dollars had been printed. In that short window of four years, inflation had destroyed 97.4% of the Continental dollar’s value. $1 was reduced to 2.6 cents.

“As the Continental Congress churned out paper currency to pay its bills, that currency was quickly devalued until it was worthless. Soon, “not worth a continental” became a popular expression.” (CATO)

Our new fledgling nation’s economy was in shambles. The ‘Continental’ dollar was worthless. The U.S. treasury was broke. Our soldiers needed to be paid and had very little supplies on hand. George Washington was privately soliciting donations to feed the army!

The country was on the verge of bankruptcy. So in 1781, Congress appointed Robert Morris, an investor and former congressman, to fix the new country’s financial crisis. Morris was the wealthiest man in America. He established The First National Bank and put America on a hard currency standard. The U.S. Treasury gained a 1.2 million loan from the new central bank.

The new bank issued paper currency ‘notes’ that were redeemable for silver. This brought confidence back to paper currency at the time and slowed inflation.

In 1816, Congress authorized The Second National Bank based on the central bank design created by Alexander Hamilton and Robert Morris.

The Second Bank failed to control paper money issued from its branch banks. In the Panic of 1819, markets collapsed. The bank was rightly blamed for its money policies that led to mass unemployment and plunging property values. Further, it was revealed that bank directors for the Baltimore branch had engaged in fraud and larceny.

Recognizing the problems with central banks controlling the money supply and meddling in free markets, President Andrew Jackson ended The Second Bank of The United States; the central bank of his time. On January 30, 1835, Jackson nearly died in a close range shooting by a hired assassin. The Derringer single-shot pistol jammed, sparing the president’s life. The 67 year old Jackson poked the assassin with his cane and yelled: “Let me alone! Let me alone!

President Jackson said “the Constitution does not specifically grant Congress the power to create a national bank.” He was correct. The United States operated without a central bank until 1913 when the Federal Reserve was created in a secret meeting. Recommended reading: The Creature from Jekyll Island.

Inflation is a hidden tax because it takes more dollars to buy the same bag of groceries. As prices rise, eventually wages rise and that puts people into a higher income tax bracket further eroding the value of one’s paycheck. Inflation is often blamed on greedy business men raising prices, but the real root cause of inflation is too many paper dollars printed with no backing such as Gold and Silver.

Next week we will look at some of the major financial events of the past century starting with 1913