CHAPTER EIGHT

Too Much Money?

The first panacea for a misguided nation is inflation of the currency; the second is war. Both bring a temporary prosperity; both bring a permanent ruin. But both are the refuge of political and economic opportunists.

— ERNEST HEMINGWAY (1899–1961)

The United States government did not create its Federal Reserve Board in 1913 to assist in recovery from depressions. It was started to control and prevent inflation. Even during the long recession starting in 2008, the primary stated purpose of the “Fed” is to make sure inflation is kept at a low level. Why is this? Why is there so much concern with inflation, even over recession? Because you can have too much money. Well, maybe not you personally, but a nation can actually have too many dollars floating around. So more correctly, there can be simply too much money in circulation. Too much currency—whether it be printed dollars, puka shells, coins, wampum, or numbers recorded in a Federal Reserve computer—can create inflation. When the amount of money in circulation increases but the amount of goods that the money can be used to buy stays the same, the result is “inflation.” The cost of everything inflates larger and larger, like a balloon being blown up. Unfortunately, like that balloon, an economy can be burst by too much inflation.

From Ancient Rome to twenty-first-century Zimbabwe, inflation has brought many a nation to its economic knees. It was not that long ago that inflation crippled the U.S. economy. In the early 1980s the inflation rate surged until it reached a staggering 13 percent. That meant that everything cost, on the average, 13 percent more than it did the year before. It also meant that someone on a fixed income, like an elderly retiree on a pension, could buy 13 percent less food, fuel, and clothes compared to a year earlier. Since then the inflation rate has been much lower, so many of us are ignoring the topic, but that is a mistake. Inflation, in the classic form of higher costs for basic goods, is again a threat. The increased cost of gasoline alone shows how inflation can affect every single person in a nation.

Inflation has several causes, but often it happens when the economy expands too quickly. Credit and cash are plentiful, and people borrow and spend freely. That creates a demand for more goods and services, so the prices on these items and services inflate. This is often reflected in the decreasing value of the dollar (or any currency) compared to the money of other nations.

Inflation can be put in two categories: monetary and price. When there is too much money in circulation—monetary inflation—then there’s too much money chasing too few goods or services. This results in price inflation, an increase in the cost of those goods and services.

Inflation is typically measured by the Federal government by excluding the volatile prices of things like food and gas. This “core inflation rate” is what the Federal Reserve considers in determining whether inflation is escalating. This measurement is sometimes controversial because the items excluded from the core inflation rate are many of the very purchases that consumers make daily. When gas and food prices go up dramatically, this is called “headline inflation.” A dramatic rise in those costs makes headlines, but they are not considered in the official number.

Why Inflation Hurts So Bad

When inflation was high in the early 1980s, there was no wage stagnation. So the money earned from wages, savings, and investments made up for the higher cost of living. This meant that Americans could still buy about the same amount of food, etc., as the year before. They didn’t necessarily get ahead, but they had a chance to break even over the long run. This is no longer true. In 2011 the inflation rate was just under 3 percent, but if you added in gasoline and some other costs that the government just happens to leave out, the real rate was at least double that at over 6 percent. In 1981 the banks were paying 16 percent on a six-month CD and the inflation rate was 10.3 percent. This meant that if you saved your money in a bank, you gained over 5 percent after inflation. Thirty years later, money market rates are hovering around 1 percent. This meant that, in 2011, money on deposit in a bank lost at least 2 percent of its buying power by just sitting there. To make matters worse, because of the economy and political uncertainties, many private sector workers haven’t seen a cost-of-living adjustment in the past several years and cannot get a raise to keep up with rising costs. This includes just about everyone. Few private workers in 2010 or 2011 received increases in pay, which effectively means they were paid less in “real dollars.”

In its simplest form, what inflation always does is make things cost more. If there is a rate of inflation of 100 percent per year, then a loaf of bread that costs $1 today will cost $2 next year. The people who are affected the most by inflation are those who receive a set amount of dollars or euros each month, an amount that does not go up when inflation raises their real cost of living. These are people who are living off their savings, as well as anyone who is getting social security (which is adjusted only once per year) or relying on a pension. This can mean that in a place or time where the inflation rate becomes high, someone who retired at age sixty-five with enough money to live comfortably will find out at age seventy that the same amount of money is not enough to live on. The tragedy is that there is often nothing this retiree can do about it. Stories about the elderly who go from buying roasts to secretly eating dog food are painfully real in times of high inflation.

A high rate of inflation also steals the value of any money you have in the bank. Banks rarely pay a rate of interest high enough to balance out rapid inflation. Inflation is the enemy of savings. If you save your money, as the government encourages, but that same government allows a high rate of inflation, then you will actually lose money saving it in a bank (or under a mattress). In 2012, as it had for several years, the Federal Reserve’s policy forced banks to pay virtually nothing, often as low as 0.25 percent interest on savings. The intention was to force everyone to make risky investments to earn more, such as in the still highly volatile stock market. The reality is that this means the money in everyone’s savings accounts is losing real value each year. It also means that where before a retiree could live off the interest on their savings, today they have to use the savings itself to live on, and so lose doubly with higher prices and no safe way to counter that inflation. This below-inflation interest rate was also supposed to allow banks to loan money more easily, but regulation and bank greed have prevented that from happening.

In the United States, food, gas, utilities, health care, education, and insurance costs are rising rapidly. If these prices continue to increase and the current rate of inflation goes up even slightly, consumer spending could drop off significantly. We could then be headed for another recession—a double dip—just as this country is trying to recover from the last one. The livelihood of Americans is once again in economic peril.

“I Can’t Eat an iPad”

The average American family is falling behind in terms of what they can purchase with the money they have. Over time, this can cause a family to take a hit on all their long-term investments and possibly run out of money for retirement. In the short term, it can make it difficult to pay everyday bills without going into debt. Saving for college, vacations, or a new car becomes nearly impossible.

At the start of 2011, wholesale food prices rose by 3.9 percent, the highest monthly increase since November 1974, and they went up 7.3 percent in the twelve months ending in June 2012. Food prices are at their highest levels since the United States began tracking them in 1990. This means food costs more in the advanced countries, and it is also becoming dangerously more expensive in those nations where most of the population earns very little. Yes, inflation can contribute to starvation in the Third World.

U.S. consumers have watched food and gas prices ravage their household budgets. A recent survey showed that 75 percent of American consumers are spending less because of the higher gas prices. In February 2011, the consumer price index (CPI) showed food-at-home prices rose 2.8 percent in the past year, with the cost of certain items, such as beef and pork, surging 9 percent and 16 percent, respectively. Airfares climbed 12 percent in 2011, the cost of used cars was up 15 percent, and gasoline prices climbed a whopping 19.2 percent.

Many economists believe that the United States is once again headed for a high inflationary period. Two years into the economic “recovery,” when the prospect of high inflation is coupled with the recent unemployment figures, the economic forecast looks alarming. Unemployment in the first half of 2012 was once more increasing and the real rate of unemployment remained in the double digits. Industrial growth, home building, and new factory orders have shown little or no growth. But costs continued to increase, including dramatic new increases in such necessities as health insurance and heating oil. When the costs go up but there are fewer current dollars to pay those costs, you have a situation called “stagflation.” Stagflation occurs when the poor consumer is seeing prices rise due to inflation but her income remains the same. This really means that during stagflation everyone loses ground, and when it ends their money does not go as far. It is income stagnation and price inflation, the worst of both worlds. One sign of stagflation is the many empty storefronts seen all across the Western world. Stagflation is now a legitimate concern that could catapult the U.S. economy into a full-blown depression, causing the collapse of the already battered economies of many advanced nations across the globe.

William Dudley, president of the Federal Reserve Bank of New York, recently got a taste of the public’s frustration with higher prices. In the early spring of 2011, he spoke to a crowd in Queens, to address food-inflation questions. Dudley told the audience that while some prices rise, other products are cheaper—like Apple’s latest iPad.

“Today you can buy an iPad 2 that costs the same as an iPad 1 that is twice as powerful,” said Dudley. “You have to look at the prices of all things.”

One frustrated audience member had this to say to Dudley’s comparison: “I can’t eat an iPad.”

The Great Recession

The main reason for the most recent economic crisis, now called the Great Recession, was that the housing market in the United States heated up too fast, as explained in the previous chapter. Credit was easy—really, too easy; some in the industry were saying that if you had a pulse, you could get a mortgage. There was little oversight, and so-called subprime mortgages were readily approved with little or no verification of income and sometimes no down payment at all. More than 80 percent of those mortgages were adjustable-rate. More people than ever before “qualified” for loans, all the new borrowers created more demand, and housing prices inflated rapidly. Many existing mortgage holders borrowed against their newly acquired equity, using their houses as virtual ATMs. A sizable chunk of people moved up to bigger, more expensive houses that they would not have qualified for just a few years prior.

By mid-2006, housing prices had peaked. The subprime mortgage crisis that resulted when the housing bubble burst forced a huge cash infusion to all the banks that were “too big to fail.” Trillions of dollars have been lost in home equity, and many of the long-term unemployed were in construction and real estate. Investment banking firms, heavily invested in risky subprime mortgages, began to topple like dominoes. The stock market plummeted, and unemployment soared in all sectors across the board, with the exception of government jobs. Those jobs increased in order to implement all the government programs designed to get the financial crisis under control.

Concern over the soundness of the U.S. financial markets caused global investors to restrict credit, and slow growth began to occur outside the United States as well, spreading to European countries and causing a global recession.

Many experts are deeply concerned about the size of the 2008 bailout. Adjusting the amounts to equal today’s dollar, the costs from all American wars, from the American Revolution through Iraq and Afghanistan, coupled with all the major government programs—the New Deal, the S&L crisis, and NASA’s entire budget—total less than the amount of the 2008 bailout. Since those bailout dollars were mostly borrowed, the problem is complicated by the interest payments taking dollars away from future needs. And then there was the federal stimulus money and other fiscal policies implemented to pull the country back from the brink of depression. This money disappeared in June of 2011. But will the policies that have been put in place to keep us out of the Second Great Depression threaten to create soaring inflation, coupled with a recessionary economy that would make the crippling stagflation of the 1970s look mild by comparison? One sign of this happening is the cost of gasoline, which has doubled since the bailout.

Funny Money

Government is the only agency that can take a valuable commodity like paper, slap some ink on it, and make it totally worthless.

— LUDWIG VON MISES (1881–1973)

Where did the billions of dollars that funded the stimulus package to pull the country out of the Great Recession come from? Well, it wasn’t from raising taxes. The money was created with a stroke of a pen and some thin air. That got the printing presses started, and the dollars, which seemed to magically appear, were then spent—sometimes before the ink was even dry on them. The magic continues, getting trickier to perform each time, until every dollar is worth less and less. The U.S. government is now printing a lot of new money. The value of the dollar has dropped against foreign currencies: 17 percent since 2009. The current magic show will be over when the resulting monetary inflation cripples the U.S. economy.

During World War II, after the Great Depression that started in 1929, the economy was jump-started by the manufacture of items needed for the war effort. Unemployment dropped from 14.6 percent in 1940 to just 1.2 percent in 1942 in the wartime economy. Such a recovery due to military spending is no longer possible. The United States has outsourced so much of its manufacturing that these jobs aren’t coming back. Similarly, the nation’s housing market by 2012 had lost more of its value than it did during the Great Depression. What’s even more troubling, in 2012, three years into the economic “recovery,” housing prices are expected to rise very slowly or drop further before bottoming out. That would put some areas of the country in the range of a 75–80 percent loss in the value of homes from the peak in 2005–2006.

What has been the government’s solution to get the economy nursed back to health? Borrowing more money and printing more money—the two crucial ingredients guaranteeing inflation.

A Long Tradition

Perhaps the earliest form of inflation can be found way back in Ancient Rome. Nero, of fiddling fame, was not a very good money manager. Unfortunately, he was also emperor. After the great fire in 64 CE destroyed most of the city, Nero decided to rebuild in marble and stone. The problem was that marble and stone were expensive. About halfway through the rebuilding of Rome, Nero’s government ran out of money. Nero personally ran out of money, too, since he controlled every last cent in the treasury.

Money in Rome consisted of coins, mostly made of precious metals. These coins were the aureus (gold), the denarius (silver), and the sestertius (bronze). This meant that unlike today, Nero could not just print more money as he needed it. But it also meant that those Roman coins were accepted anywhere in the “known” world and set a standard for all other coinage. After all, a silver denarius was worth exactly that: one denarius in silver. But Nero was out of silver, and gold, and bronze. He needed more coins to pay the workers, the stonemasons, and the costs of the elaborate stage productions he himself starred in. He came up with the idea to use cheaper metals to make the denarius. But then it would not be a real denarius, and it would be worth less. So he was careful to fill only the center of the coins with lead or tin and leave the silver on the outside, so they looked like real silver coins.

This is called debasing the currency. Basically it is a government version of bait and switch. This worked at first, but soon everyone realized that some of the denarii weren’t worth as much as others. And if you can’t tell which coins are real, then the only solution is to assume that all the denarii are debased coins and raise your prices to balance this out. Prices rose, and since things cost more, the emperor had to create even more coins with less silver on the outside of each denarius to pay for the more expensive marble, food, and so on. But more cheap coins forced the prices up again. Nero very creatively found a way to cause inflation even in an economy using precious metal coinage.

Modern governments have it much easier. They just start the presses and print more money. However, the effect is the same. If a government, any government, prints too much money, the result is inflation. This can vary from a few extra percentage points each year to a runaway disaster that makes everyone’s money valueless. With more dollars chasing the same number of goods, the cost of everything from food to automobiles goes up. Sometimes a government prints too much money because it is financing a war or trying to jump-start a slow economy. Sometimes a government does it because of circumstances it cannot control.

Worst-Case Scenario: Hyperinflation

Can you imagine going to your favorite coffee shop, and in the time it takes you to down your first cup of the day, the price for a cup of coffee has already doubled? This is an example of hyperinflation. In Zimbabwe, 50 percent inflation or more was a daily experience for years. Eventually, hyperinflation was so bad that the government was issuing money with the denomination of $50 billion. Bread cost a billion—yes, billion—times more than it once had. When the economy is in a period of extreme inflation, the price of goods can rise so fast that the money you have in your pocket or bank account or wheelbarrow when you wake up that morning can be almost worthless by dinnertime. Zimbabwe’s solution was to effectively give up control of its currency and link it to the South African rand.

It is interesting to note that hyperinflations have never occurred when a commodity, like gold or silver, has served as money or when paper money was converted to a commodity. In the United States, we are on the “fiat system,” where the dollar is controlled by a discretionary paper-money standard. This means there are no natural constraints on the currency. The Feds can just fire up the printing presses at their discretion, making inflation increasingly likely and the risk of the United States experiencing a period of devastating hyperinflation a real possibility in the future.

The first recorded instance of hyperinflation occurred during the French Revolution, when monthly inflation shot up to 143 percent. This was caused by the French National Assembly printing and issuing hundreds of millions of livres several times over the course of 1789 to 1791 with nothing to back them up. At one point they had printed 40 billion livres, and the cost of goods had gone up to more than a hundred times in a decade. When he became first consul, Napoleon Bonaparte tightened the currency and brought down the runaway inflation. A century later, France wasn’t suffering from hyperinflation . . . however, the French were the cause of it in Germany.

In the Treaty of Versailles ending World War I, Germany agreed to reparations. Those were payments to the countries Germany attacked, mostly France and England, compensating them for the cost of the war. The trouble was that the economy in Germany was already in shambles because of the war. It quickly became obvious that there was no extra money to pay the demanded reparations. But France and other nations insisted the payments be made, so the German government simply printed more money and used that to pay the penalty. This started an inflationary spiral, which means that as the rate of inflation goes up (and the buying power of each dollar, mark, pound, peso, etc., goes down just as quickly), the government prints yet more money even faster to pay its bills.

Post-WWI Germany had terrible inflation. Its money became so worthless that it took a basketful of money to buy a basket of food. There was a story told about a German woman who had to buy a lot of food for her family. To have enough money to pay for her purchases, she had to fill two large baskets with bills. When she got to the store, she put one basket down so she could open the door. Then she went in carrying only one basket. Remembering she had left the other one outside, the woman hurried back. She was afraid that the basket of money would be stolen, and she was partially right. There on the ground was her money. The thief had stolen the basket and dumped out the almost worthless cash.

The dark side of such a crippling inflation is that it makes people desperate. Not long after inflation destroyed the German economy, the Nazi Party was elected to take over the government. More recently, we have seen Egypt and other poor countries have significant political and social unrest partially because of high inflation.

The United States has never experienced a period of hyperinflation, although it has come close during two notable periods: during the American Revolution and right after the Civil War. However, in both examples, inflation never surpassed the hyperinflation threshold of a 50 percent monthly inflation rate.

The American Revolution

Inflation is a problem that has dogged the American economy since before the colonies won their independence. The United States actually has a tradition of cyclic bouts of inflation that goes all the way back to the American Revolution. The Continental Congress needed money to pay the soldiers fighting for them. When in June of 1775 the British army occupied New York, and eventually most of the colonial cities, the Continental Congress still needed money to pay its army but had few places left to tax. They solved the problem that year by printing currency, called the Continental, that they promised to cash in for specie, precious metals like gold, after the war was won and the United States was an independent nation. Whenever they needed more money, the Continental Congress just printed more promises. The trouble was, as the number of Continentals grew, their value diminished. Congress made up for the value going down because of inflation by printing even more Continentals. Even after the war was won, inflation had destroyed the value of the money that had been issued to finance it. The phrase used to mean “totally worthless” was “not worth a Continental.” Even after independence, inflation dogged the Continental currency. Continentals remained the currency of the United States until 1785, when they were replaced by the dollar and much greater fiscal constraint. Backed by gold, the new dollars were far less subject to inflation, and that stability aided in the explosive growth of the nation.

American Civil War

At the start of the Civil War in 1861, the Confederacy began to fund the war by issuing treasury notes. These were bills used as money (which is what every American has in his or her wallet today), and were secured in value only by cotton that could not be sold. Later Confederate money was backed only by the promise to make it good with gold or silver after the war was won. The wealthier groups of Southerners, like rich cotton growers, still demanded payment in gold and silver coins. They had to pay overseas for their seed, machines, and everything imported with real money, and so used their position to obtain it. This used up what hard currency and reserves the Confederacy had. The middle class and poor were immediately forced to accept the new paper money in exchange for the goods and services they provided. As the war dragged on the Rebel government printed more and more money. It was still backed by nothing but hope, even as they were obviously losing the war. Four years into the rebellion it took 1,200 Confederate dollars to buy what had once sold for just one dollar. But by 1865 even that minimal value was an illusion. After the Battle of Gettysburg and Sherman’s March to the Sea, it was apparent that the South had little hope of victory. The average Confederate soldier’s family went hungry because merchants simply no longer accepted the Confederate dollars. The soldiers would send them home, but with the war as good as lost, the Confederacy’s promise to make good on them once it was won was valueless.

The 1970s and Early 1980s

During the 1970s, inflation was very high in the United States, but the economy was sluggish. Both housing and manufacturing growth had slowed, and competition from Asia had begun to affect American employment. This produced stagflation. The problem with stagflation, as mentioned earlier, is that it creates a spiral of decreasing growth and income. If people have to pay more for an item but have less money, then they buy less. If everyone buys less, then factories close and stores stay empty. This created a dilemma for the federal government: If it lowered interest rates, inflation would rise. But if it raised rates, it would create even more of a strain on the economy by forcing inflation even higher. After trying just about everything, including government-mandated wage and price controls, they chose growth over their concern for further inflation. The Federal Reserve raised the interest rates to a whopping 20 percent in January 1981. Satirist Art Buchwald said of this period that it was cheaper to borrow from the Mafia than from the local bank.

Mortgage rates went through the roof, and many people were priced out of the housing market completely. The stock market went into a nosedive, and people on fixed incomes were financially devastated.

Historically, it’s common for a period of high inflation to catapult the country into a recession. Money becomes too expensive for businesses to use to expand or to buy new equipment, housing loans cost too much for anyone to afford, and new businesses have to pay too much for startup capital. The monstrous inflation of the 1970s didn’t end until the recession of 1980–1982 emerged. This stopped the rise in costs by simply and drastically lowering demand because people could afford less and unemployment had increased. For a while this created a balance between inflation and growth. When the economy rebounded from that recession, the stock market soared in what would become one of the longest bull runs in history.

Tightrope Walking

A recession occurs when the economy goes in reverse. Companies make less than they made the year before, so they stop hiring employees or lay off existing ones, meaning there are fewer jobs. Consumers then spend less money because they have no work, and so the companies make even less money, and the recession cycle continues.

As mentioned above, the Federal Reserve’s primary job is to keep inflation under control while preventing a recession. This can be a constant balancing act. Alan Greenspan, the Fed chairman from 1987 to 2006, believed in laissez-faire economics: no micromanaging, just accomplishing the overall goal of stimulating the economy while avoiding high inflation. During the 2001 recession, he began lowering interest rates to alleviate the economic crisis. But by 2004, amid inflation concerns, he began to raise them again. However, in order to keep the economy from slipping back into a recession, he kept stock market investors apprised of his intentions, which encouraged them to keep investing. Some experts feel that the deregulation and lack of oversight of the financial institutions during the Greenspan years created a fertile ground for corruption and the ultimate collapse of the entire banking industry as well as the overall economy.

Since 2007, the Federal Reserve, under current chairman Ben Bernanke, has taken a much more proactive and creative approach to managing the economy, especially after the housing market collapsed. Bernanke implemented many innovative programs to pump trillions of dollars into the fragile U.S. economy. It has been theorized that these actions prevented the United States and the rest of the world from falling into a global depression.

The United States has again been printing a lot of new money in order to ease the financial crisis brought on by the Great Recession. The government has printed more money in the past several years than at any other time since the American Revolution, when it was printing out empty promises—not worth a Continental—to fund the war. And as history has shown from that time, printing excessive amounts of money almost pushed our brand-new nation into hyperinflation and economic collapse.

The Federal Reserve has also recently implemented a controversial policy called “quantitative easing” (QE) to stimulate the economy, which means that the Feds will print more money to buy treasury bonds from the public, and the T-bill holders will receive the proceeds from those sales. Some economists think that will cause inflation. It certainly fits the definition of inflation: putting more money into the system rapidly. They have done two rounds of QE, with a third round now being implemented since QE2 ended in June 2011. The Fed massively increased the money supply again in 2012 and expected to do so far into 2013.

Another important fiscal measure that the Federal Reserve has at its disposal to stimulate a weak economy is to lower interest rates to encourage buying. But interest rates are currently near zero. They have reached the bottom, and there’s nowhere to go but up. Bernanke, however, is very wary of raising interest rates. He was a student of the Great Depression and he doesn’t want the shaky economy plunging back into economic crisis when interest rates are raised. However, the most common fiscal policy employed by the Fed to lower inflation is to raise interest rates. He also has been quoted as saying that the most important job of the Federal Reserve is to give the American public an expectation of moderate pricing. Looking back on the 1970s, Bernanke feels that the high inflation of that period created more volatility in the economy because the public planned for higher prices and changed their behavior accordingly. If the Fed can show moderation, the public’s confidence in the economy will remain high, reducing the likelihood of economic volatility. It is almost inconceivable that the Fed, under Bernanke, would ever raise interest rates to anywhere near the staggering 20 percent of the early 1980s. But if he is leery of raising interest rates, which his predecessors did with some regularity, how will he strike the right balance between price moderation and economic growth?

With all the new dollars being put into the economy, coupled with a soaring national debt and rising costs of goods and services, the perfect inflationary storm is brewing. So what happens when the Fed has to do the inevitable and raise interest rates to curb runaway inflation? As mentioned above, that action could stall an already anemic economy, plunging the nation into another devastating recession. Economists disagree as to the best course of action given the current poor economic conditions. However, one thing is acknowledged across the board: The Federal Reserve is balancing on the tightrope between the rising risk of inflation and the looming threat of another recession. But this time, there seems to be no safety net in sight.

The Collapse of an Economic Superpower?

Just how bad could inflation get over the next few years in the Unites States? Well, two things that add fuel to the inflationary fire are piling up: the national debt and an excess of new money in circulation. We have an astronomical national debt of over $16 trillion. That is an amount equal to the total annual gross domestic product. That simply means it would take every penny everyone makes for a year to pay it off. This level of national debt has never before been reached. The total national debt in 1977 totaled $1.75 trillion in today’s dollars ($706 billion then). The current national debt is more than an eightfold increase in twenty-five years. The debt is twice as high as it was in 2007 and increasing at a higher percentage than even occurred during World War II. As mentioned earlier, the U.S. government hasn’t printed money at this rate since the United States was fighting to become an independent nation. With so much debt and a surplus of new currency in circulation, the dollar is being devalued like never before. Current Treasury Secretary Timothy Geithner said in 2012 that his policy has been and will always be that a strong dollar is in our interest as a country. But compared to other currencies around the world, the dollar has depreciated a troubling 17 percent since 2009. The Canadian dollar cost seventy cents to buy in 2000 and now is worth more than the U.S. dollar. That means everything costs more in the United States and less in Canada because their money has inflated less. In the 1960s a British pound sterling was worth about ninety cents; today buying one would cost $1.55.

In 1912 a loaf of bread cost a nickel and gold sold for $20.17 an ounce. Now bread costs at least $2 and gold sells for $1,600 an ounce. This is because since 1913, the year the Federal Reserve was created, the dollar has lost more than 95 percent of its purchasing power. That is both a striking example and the definition of the effect of inflation. To be as rich as a millionaire was in 1913, you would have to have more than $20 million today.

The fragile recovery from the recent Great Recession has been a jobless recovery, with technological advances and globalization eliminating or moving jobs out of this country. Historically, most recoveries after an economic downturn result in a period of high growth and low unemployment. But this has been an unusually weak recovery. Some economists feel that the current U.S. housing market, having lost more of its value than in the aftermath of the Great Depression, will never come back. What if a weak housing market and high unemployment is the new normal? What can history tell us about controlling inflation under this new normal?

Tighter regulatory control and closer oversight may have prevented some of the economic crisis the country is still trying to dig itself out of. Current Fed Chairman Bernanke seems to prioritize preventing another financially catastrophic event by keeping inflation tightly reigned in. Yet some economists suggest creating a mild increase in the rate of inflation to encourage economic growth. So far Bernanke has resisted that approach.

Some economists suggest that Bernanke do what former Fed Chair Paul Volcker did in the 1980s, keeping a tight control of the money supply and interest rates. In part because of Volker’s fiscal policies, inflation dropped from 13.5 percent to 3 percent in just three years.

The traditional control on inflation was linking your money to the nation’s gold reserve. The amount of gold limited how much money could be printed. When President Nixon took the country entirely off the gold standard in the early 1970s, inflation exploded. Until the United States stopped issuing dollars as “silver certificates” that could actually be exchanged at the Federal banks for actual silver, there was a limit as to how many dollars could be printed. What about the United States returning to the gold standard instead of paper money backed by nothing? With the amount of money in circulation around the world there is not enough gold, or even gold and silver combined, to go back to this. Tie money to some commodity? Oil dollars for real? Coffee dollars? Dollars you could change for land?

Perhaps a problem is that we are not really seeing inflation now in the same way we looked at it in the past. In light of the housing bust, some experts suggest changing the way the inflation rate is calculated to include home prices instead of just rental costs. Others go further and suggest that to really get a realistic rate of inflation the index must include fuel and food prices at a minimum—even if spiraling health care costs and rising educational expenses are still excluded. A more inclusive index would give the government a more realistic picture of inflation, in order to monitor it more closely and prevent it from getting too high. Still others argue that the CPI is a completely bogus index which lacks credibility because it has been “improved” upon twenty-four times since 1978. If the older methods of calculating inflation from just twenty-five years ago were used now, the inflation rate would be a scary 10 percent today.

After several years of falling interest rates to offset the economic downturn, inflationary pressures are starting to be felt. What will the federal government do now? If it raises interest rates to offset inflation, it could wreck an already fragile economy, catapulting it into something that could become known in history as the Second Great Depression.

Is the problem with the political system and not the economy? Historically, a unified government with a strong will is needed to battle inflation. In the political arena, candidates promise things to their constituents in order to win elections. But once elected, they are unwilling to raise taxes on the bulk of the people in order to pay for those promises. The easy way out is for the government to print more magic dollars to maintain the political status quo. This is what happened in Zimbabwe on a massive scale, and something no different in nature—just size—is being done by the United States.

In Nero’s time, when the Romans accepted the initial diluted denarii, the first recipients of those coins thought they were as good as the real ones. But when the word got out, the coins became worth less. The same thing is happening to the U.S. dollar. Over time, citizens, as well as foreign countries and investors who hold our debt, may come to the realization that they need wheelbarrows full of dollars to buy what a single dollar used to. Then no one will buy the debt at any rate and the U.S. economy, if not fixed, will implode.

The American economy is just emerging from the worst economic crisis since the Great Depression, and inflation is heating up. There is a growing fear that we will see another period of stagflation like the one in the 1970s. Some economists are worried that in an attempt to avoid a catastrophic 1930s-like depression, the Federal Reserve’s policies will give us a crippling 1970s-like economy.

To some extent the United States is in uncharted territory. No economy this large and so prominent in the world has taken on such debt. To avoid the trauma the European Union is going through, the United States must do more than governments have done in the past.

As history has shown us many times, excessive inflation can be the catalyst for another recession or depression that may make the most recent economic crisis look mild by comparison. Periods of high inflation seem to cycle in and out with economic downturns. The question is no longer whether we will see another period of high inflation. The past has demonstrated that a rise in the inflation rate is inevitable as the nation and world recover. The Federal Reserve Board feels this inflation can be controlled, and hopefully they will do more than just redefining the calculation a twenty-fifth time. No one feels it can be eliminated. The United States, and many of the nations of Europe, have entered a period where they are plagued by massive debt and deficit spending. Those have always been the harbingers of damaging inflation. The only question remaining seems to be whether or not the next inflation rises so high and so fast that it triggers a collapse of the U.S. economy to rival the fall of the Roman Empire. As we have seen, the lesson from history is that this can happen, and the results can be catastrophic.