Open your wallet and take a look at the money
you have inside. Hopefully you have some metallic coins and slips of
paper (actually its linen). Take a closer look. At the top in large
letters it reads: 'FEDERAL RESERVE NOTE.'
The Federal Reserve is the central bank of
the United States. It issued the money you hold in your hands, although
the Department of the Treasury actually printed it. Although it has the
word 'Federal' in the title, the Federal Reserve is a private bank or
company delegated the power by Congress to manipulate the money supply.
It is no more 'federal' than Federal Express or Wal-Mart for that
matter. More on this later.
Now, far more curious is the use and definition of the financial term 'note.'
Note - A written promise to pay a specific sum of money on a certain date. A written pledge to pay.
Interesting. A 'Note' is actually a form
of Debt, i.e. you are owed its worth by the United States government.
The linen also has text "THIS NOTE IS LEGAL TENDER FOR ALL DEBTS,
PUBLIC AND PRIVATE." 'Legal Tender' is a legalese that means money that
cannot be refused by law when you are paid or go to buy something.
But what is this note for debt actually worth?
A common fallacy is that the worth of the dollar is indirectly tied to
the gold at Fort Knox. Dead wrong! Another is that the dollar is tied
to the nation's GDP/GNP/purchasing-power parity. There is some truth to
this, as the dollar's worth 'floats' or fluctuates with the exchange
rates of other currencies like the Euro and Yen, but what is a dollar actually worth?
Well, fortunately, the Federal Reserve is kind enough to tell us. Visit this Fed link entitled "What is a Dollar Worth?"
There is a nice formula: "If in [year], I
bought goods or services for [$1.00] then in [year], the same goods or
services would cost [$x.xx]"
Try the year 2008, how much was a dollar worth in 1913? Holy smokes, just a nickel!
Well perhaps that was just because it was
way before you were born. Try the year 2008, how much was a dollar
worth in 2000? Just eighty cents worth of goods and services? That kind
of sucks, and 8 years isn't all that long for the value to drop by 20%!
Something is a little fishy here.
Of course the answer for this debasement of the currency, or loss in value, is inflation.*
What is inflation then? Well picture the
United States, and imagine that $100 is the total worth of our economy.
However, if we print and additional $100 and so increase the money
supply from $100 to $200, then the price of everything will double.
After reading Rothbard's work from Part 1, one discovers that inflation is defined as any increase in the economy's supply of money not
consisting of an increase in the stock of the money metal. In other
words, inflation is NOT rising prices. Rising prices are merely the effect from increasing the money supply, or "printing more money."
However, the second part of Rothbard's
definition doesn't really apply, as I wrote above that there is no tie
between the US dollar and a "money metal." More on this in Part 3. To
prove this point, the Federal Reserve reports: