Inflation

“Man, are these gas prices outrageous or what?”

With gas prices now over $3 a gallon, we’re hearing this more and more. And there’s no shortage of targets for the blame: big greedy oil companies, Middle East tensions, terrorism…but very few cases of the blame being placed where it belongs.

We see changing gas prices all the time. Many of us purchase gas more often than we buy groceries. The gas prices are more noticeable to us, and so when they increase we tend to react to them more than other prices. How many people have noticed, for example, that the price of milk has risen at a faster rate than gas prices? How many people have noticed that water costs more at the supermarket per gallon than gasoline?

The culprit is something Libertarians often refer to as the Inflation Tax. When news reports talk about the price of gasoline, they usually aren’t adjusted for inflation. When they are, the prices tell a different story: gasoline is historically cheaper than it has been in the past. What is happening is not the price of gasoline rising; it’s the value of the dollar dropping.

A good gauge to use is silver. Silver holds its value very well against inflation. In fact, in 1960, a silver dollar (made of one troy ounce of fine silver) was $1. You can still get silver dollars from the US Mint, and they’re still one ounce of silver, and they’re still marked “One Dollar,” but they’ll cost you $17.50!

Once our currency was removed from the silver standard, inflation could rise with impunity, as our government printed more money at extremely low cost whenever it wanted to spend more than it collected in taxes. This continues to this day to the tune of over $330 billion a year. The result: the dollar is only worth less than 6% of what it was in 1960.

In 1960, gasoline was 31 cents per gallon. A lot of people look back fondly to those good old days. You could also see a movie with a dollar—and have enough change left for popcorn. Milk was 49 cents a gallon. So you could take one dollar (one ounce of silver) and get either three gallons of gas, a movie with popcorn, or two gallons of milk.

As I write this, the spot price for one ounce of silver is just under $14. That will buy either four gallons of gas, a movie with popcorn, or three gallons of milk—and get you more change back. The market has actually caused the real price (meaning, adjusted for inflation) to drop, as technology makes it easier to produce, store, refrigerate, and transport goods. If our currency were still commodity-based, these prices would actually be lower, and our dollars would go further towards buying the things we need.

This hasn’t happened, because the change to fiat money (money not based on a commodity, just printed paper) has allowed the government to spend way beyond its means, taking the spending power of our hard-earned money in the process. The more money the government creates for deficit spending, the more inflation rises. So your money doesn’t go as far at the gas pump, or at the grocery store, or at the movie theater. You have less money in real terms, and the government has more.

That’s why it’s referred to as the “Inflation Tax”—even though you have the same amount of money, you can’t buy as much with it, and it’s effectively as though they took a portion of that money from you in taxes.

It’s a tax that hurts the poor, because their spending power is affected the most. It’s a transfer of wealth from the poor and the middle-class to the government, the banks, and Wall Street. But it’s a tax that people don’t see, and generally don’t know to complain about. And when they do, the complaints are generally misdirected, as they are with gas prices.

Our founders learned the problems with fiat money the hard way, after they printed money to pay for the debts incurred during the Revolutionary War, which led to inflation and devaluing of the currency. They set up a sound money system that lasted until 1913, the year the Federal Reserve Act was passed. Now, with the value of the dollar dropping compared to the pound and the euro, we may be poised to learn the same tough lesson.

The solution is the elimination of deficit spending, and the return to a sound monetary policy. But this can only happen if we stop trying to police the world, stop trying to use the government to care for people from cradle to grave, and get back to the basic Constitutional foundations that made this country great.

This article was published in the Lincoln Times-News on 6/22/2007.

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