Open your wallet and take a look at the moneyyou have inside. Hopefully you have some metallic coins and slips ofpaper (actually its linen). Take a closer look. At the top in largeletters it reads: ‘FEDERAL RESERVE NOTE.’
The Federal Reserve is the central bank ofthe United States. It issued the money you hold in your hands, althoughthe Department of the Treasury actually printed it. Although it has theword ‘Federal’ in the title, the Federal Reserve is a private bank orcompany delegated the power by Congress to manipulate the money supply.It is no more ‘federal’ than Federal Express or Wal-Mart for thatmatter. 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 formof 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 thatcannot 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 tothe gold at Fort Knox. Dead wrong! Another is that the dollar is tiedto the nation’s GDP/GNP/purchasing-power parity. There is some truth tothis, as the dollar’s worth ‘floats’ or fluctuates with the exchangerates 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], Ibought goods or services for [$1.00] then in [year], the same goods orservices would cost [$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 wasway before you were born. Try the year 2008, how much was a dollarworth in 2000? Just eighty cents worth of goods and services? That kindof 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 theUnited States, and imagine that $100 is the total worth of our economy.However, if we print and additional $100 and so increase the moneysupply 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 notconsisting of an increase in the stock of the money metal. In otherwords, 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’sdefinition doesn’t really apply, as I wrote above that there is no tiebetween the US dollar and a “money metal.” More on this in Part 3. Toprove this point, the Federal Reserve reports: