Saturday, June 06, 2009

Historical CPI Since 1800 and Events

I put together this interactive time series chart of the consumer price index with important events. Remember that prices of things are a symptom of inflation, whereas inflation is a monetary event that entails an expansion of the supply of money and credit. More money and credit = higher prices because there is more money chasing the same amount of goods.

Prior to the Federal Reserve we had the First and Second Banks of the US. The First Bank was chartered to finance the Revolutionary War debt. The Second was chartered in 1816 following the War of 1812. War is extremely inflationary as you can see by the two peaks around the War of 1812 and the Civil War. The period between 1837 and 1912 was the Central Bank free period and was characterized by price stability.

It is pretty clear where the Federal Reserve began operations. Since its beginning, the Fed has systematically destroyed they purchasing power of the dollar by issuing credit. Before the Fed, prices were stable and in fact, deflationary. Capitalism tends to seek the lowest cost of production. Capitalists try to create the most amount of value to the end consumer, and that is usually by providing the best product at the lowest price. As you can see, the Fed has perverted the role of capitalism by issuing credit and calling it capital. So instead of saving money and investing it as capital in the expectations of earning a return on capital, people are forced to invest in order to preserve capital. Under a commodity backed currency system, the value of the currency would tend to appreciate as new achievements to increase productivity were increased. We can see some of the effects of this in the Real Price Index, during the 1980s until now, during the technological boom, when monetary inflation is subtracted from CPI.

So the inflation/deflation debate is the wrong debate. The question is, should we have intentional debasement of the currency through a privately held central bank, or should we have a policy of a currency appreciating in value, allowing people to save and accumulate wealth without having to go through Wall Street to buy Treasuries. I would argue, that intentional debasement of the currency would be immoral and if it were performed by anyone other than the central bank, it would be considered a felony since it is essentially the counterfeiting of money. So the Kudlows of the world can debate inflation/deflation, but they're focusing on the wrong thing.

Obviously, this is a work in progress. Please send me any important events and I will add it to the chart.


Anonymous said...

Wow, very interesting and accurate. I would never think of that on my own but as soon as I read it, I can see it's accuracy.

Anonymous said...

March 9, 2006 - Fed ceases publication of M3.