Thursday, March 29, 2012

History of the Value of the U.S. Dollar and Today's Economical Crisis

Susan Brannon
30 March 2012

I decided to take a look at the U.S. dollar's value to compare it with today's in order to find out why the dollar continues to drop.  I wanted to know, when in the past has it dropped and what may have caused it.  I wanted to understand what we can do today, to help stabilize the American economy.  I don't take it for granted as "truth" when the media and politicians tell me (us: The Americans) that things are getting better, when all I need to do is to open my eyes and see in reality they are not and have not been getting better since they have been telling us for the past few years.  I have been feeling like a Ethiopian waiting for the rain to fall so my crop will grow and the rain never comes.

This may seem like boring stuff, but it is rather important for us to know and understand our "history" in relation to the U.S. dollar and the American economy.  It helps us to gain insights as to what we can intelligently petition our politicians to help create change to improve our lifestyles. What I discovered were two important years that the value of the U.S. dollar started to fall, never to regain its previous status.  The years were 1933 and 1968, both of which had something to do with changes in the Gold Standard Act.

The U.S. Dollar

In 1800 the estimated value of the U.S. dollar was $1.961 and continued to go up from the first railroad (1827) on through the California gold rush to an all time high of $4.00 in 1849.  It remained stable at $4.00 until 1853. 

From 1853 the value of the dollar started to drop until the development of the Marconi telegraph in 1895, where it went back to $4.00 followed by zero inflation until 1901. During zero inflation and the stability of the dollar, historical events such as the Klondike gold rush and the discovery of penicillin and the end of the Spanish-American war occurred.

In 1900, was the development of the Gold Standard Act, where gold became the sole legal-tender coinage of the United States, and set the value of the dollar at $20.67 per ounce. The gold standard act was suspended twice, and re-opened in 1914.

By the time the Federal Reserve Act in 1913, came into power the dollar was valued at 3.367 with a 2.4% inflation rate.  From then on the value continue to drop and inflation continued to bounce around until the great recession in 1920 when inflation hit 15.8% and the value was $1.667.

If we compare out current economic crisis to the great depression that started in 1929 through the 1930's, we will find that in 1929 the inflation rate was zero with a $1.949 dollar value and in 1932 with the development of the new deal and the Third Reich, the dollar went up to $2.577 after which the value has been dropping ever since.

In 1933, many countries went off the gold standard, and during the great depression people starting to hoard gold not trusting the dollar depleting gold reserves. This was an historical event for the American economy and its future.  In 1933, President Roosevelt implemented a series of Acts of Congress and Executive Orders, which suspended the gold standard except for foreign exchange.  As a result, the value of the U.S. dollar started do tumble. They revoked gold as a universal legal tender for debts, and banned private ownership of significant amount of gold coin.  At that time, the set amount of gold was $20.67 per ounce was lifted, allowing the dollar to float freely in the market.

Next, they devalued the the dollar on the foreign exchange and made the dollar a fixed price of $35.00 per ounce of gold.  This created more countries to exchange gold for dollars, to allow the U.S. to corner the world gold market. From 1933 the dollar value was $2.577 and slowly declined to $1.00 in 1967.

In 1968, the redemption of pre-1963 Federal Reserve notes for gold or silver officially ended.  For 177 years gold was set at fixed prices with the gold-based dollar with a long standing value of $35.00 for an ounce of gold.  The ability for the U.S. to control the market became too
complicated to manage, caused by economic and trade pressures, as a result the effort to control the private market price of gold was abandoned and a two tier system started.

This was the beginning of a time when the U.S. dollar was not worth a dollar anymore to $.960 in 1968. Central banks trading gold became a isolated event.  They would trade gold with each other at $35.00 per ounce, but would not trade with the private market, this pushed gold to the price of $43.00 per ounce by the end of the year. 

When the gold standard act was abandoned, the dollar became a free market, meaning that the value was based on what other countries felt the value was to the dollar, not backed by anything.  Prices became unstable, inflation was harder to control, it left unchecked balances to America's debt, and started chaotic "floating" of currencies valued against each other.

By 1972 the price of gold was over $70.00 per ounce and by 1973, the two-tier system was abandoned and the dollar was "self valued" at $.798.

By the official end of the Vietnam war in 1975, there was not enough gold to back the dollar and the value of the dollar fell to $.620.

Now we are under the Fiat standard that is, money not backed by any physical asset. In 2010, the value of the dollar fell to $.153.* 

The New York Times reported, that the dollar weighed against global currencies had "hit a 40-year low" in May of 2011.  This is because the Federal Reserve's policy of printing dollars to spry the economy is not working.  Bernanke, the Federal Reserve chairman believe that the cheaper dollar encourages "American manufactures to hire more aggressively." Has anyone seen that happen except for outsourcing?

The claim of the Federal Reserve to continue to print money in order to  "stabilize" the economy has not worked.  History has proven that the government continues to borrow and expand as long as the money is available and the government has not proven to spend any less than it has before.  They borrow money to bail out banks and on foreign investments with money that America does not have. 

America's unemployment rate in real numbers is estimated at 22.5%, according to WND while prices continue to rise.  When this happens, people spend less and cut back on just about everything that they can in order to survive month to month.  With less people buying, the harder it is for companies to keep their employees or stay open; it becomes harder for manufactures to stay open because of the lower demand and high cost of developing products.

Inflation is a real threat and here is why:
In the past forty years the U.S. dollar dropped in value by 72% compared to the Euro and 75% compared to the Japanese yen.  When America's purchasing power falls, inflation occurs,  drop of exchange rates can cause inflation, the national debt can cause inflation, price control of certain markets such as oil, can cause inflation.  

There is another problem, the reported inflation rates are not "real" numbers in terms of practical living.  For example, in 2011 a gallon of milk cost $3.39 in December. Compare that to the average price of $4.25 in March 2012 or a gallon of gas from 3.89 to $4.00 in 2012. This reflects much more than the reported inflation rate of 2.9% for February 2012.  The actual rate for inflation in 2011 was 9% based on consumer goods such as gas, food, house rent, compared to the reported amount of 3.5%.  In the end, if you receive a 3% pay raise, you will have lost 8.9% of your income due to "real" inflation numbers.  This is why American's are continuing to feel the pinch of the current crisis and do not feel that things are getting any better.

History tells us that if we went back to the Gold Standard, it would be easier to balance the budget, increase price stability and lower inflation.  It would put into a "check" of our spending and national debt. 

Conclusion:  Get back to the Gold Standard Act, to stabilize the economy, create checks and balances for national spending, and to help control inflation. 

*The "values" listed here are based on an old survey called "Prices paid by farmers" to approximate inflation.
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