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Gold has proven time and again that it’s, ultimately, the most reliable inflation hedge. Investing in gold is the one move that investors make that enables them to stay ahead of inflation and avoid the inexorable loss of purchasing power that afflicts paper dollars.
The Federal Reserve was created with one of its mandates being to keep inflation low, to ensure “stable prices”. But since the creation of the Fed, prices have never been stable. Rather, history has shown that the Federal Reserve has continually failed at meeting its stated goal of keeping inflation under control. In fact, with the creation of the Federal Reserve serving as the first in a long line of steps that eventually took the US dollar – and, consequently, the rest of the world – off the gold standard, it can be argued that the Fed is actually the root cause of inflation.
In this article, we’ll take an eye-opening look at how the Federal Reserve has consistently failed miserably at meeting any of its stated goals. Logically, the Fed should probably have been done away with following the Crash of 1929 and the subsequent Great Depression of the 1930s. The Great Depression showed that Federal Reserve was totally ineffective in fulfilling its stated purposes, which included ensuring “maximum employment” and “a stable banking system”. Unemployment soared to nearly 30%, and hundreds of banks failed. But the Fed remained, thanks to the fact that – despite massive evidence to the contrary – the Keynesian economists who controlled the economic policies of the federal government continued to believe that the Federal Reserve was the solution, rather than the problem.
The year 1913 should have black banners of mourning hung around it. First, it saw the creation of the Federal Reserve Bank under the Federal Reserve Act. Second, as if that wasn’t bad enough, it also saw the ratification of the 16th Amendment, which enabled the federal government to impose an income tax.
You want to hear a joke? (Unfortunately, this “joke” was on the American people.) In order to get people to support passage of the 16th Amendment, many Congressmen, as they often do, shamelessly lied through their teeth. They swore that the federal income tax rate would never be any higher than, at most, 10%. But just three years later, in 1916, the highest marginal tax rate was already up to 15%. Just two years after that, in 1918, it had taken a moonshot to 77%. In 1944, the highest marginal rate topped out at a whopping 94%. It stayed at 91% throughout the 1950s and into the early 1960s. Although rates began to decline in the late 1960s, the highest marginal tax rate never fell below 70% until President Reagan got it knocked all the way back down to 28%. Unfortunately, it’s never been that low again since 1990, shortly after Reagan left office.
But, enough about that beloved government institution, the Internal Revenue Service (IRS). Today, our focus is on another beloved institution – referred to by one historian as “The Creature from Jekyll Island” – the Federal Reserve Bank, the central bank of the United States.
So, what was the stated purpose for creating the Federal Reserve? I say “stated” purpose because many believe that there is a huge difference between the Fed’s stated purpose and its real, decidedly more nefarious, purpose. But I’m not even going to go there. I believe that you can easily bash the hell out of the Federal Reserve without needing to reference any conspiracy theories about its true intent being diabolically evil. So, we’ll give the Federal Reserve the benefit of the doubt and proceed on the assumption that its stated purpose and goals are, in fact, its actual purpose and goals.
The following is from the Federal Reserve’s own website -
“The Federal Reserve Act mandates that the Federal Reserve conduct monetary policy ‘so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates…The Federal Reserve works to promote a strong U.S. economy…the goals of maximum employment and stable prices are often referred to as the Fed’s ‘dual mandate’.”
Elsewhere, the aims of the Federal Reserve are stated as including acting “to enhance the stability of the American banking system” and to ensure “low and stable inflation”.
Note: The call for the United States to have a central bank goes all the way back to one of my favorite founding fathers – Alexander Hamilton, Washington’s Secretary of the Treasury, whose life was cut tragically short when he was killed in a duel by that miserable scumbag, Aaron Burr. Hamilton definitely had more economic smarts than most of his colleagues. However, I think one of Hamilton’s major policy errors was his advocacy for the creation of a national central bank. The simple truth of the matter is that Hamilton, despite being a fervent supporter of the Revolution, remained an ardent admirer of England and the English government. And much of his belief in the desirability of having a central bank rested on little more than the fact that England had a central bank – therefore, the United States should have one, too. Oh well, nobody’s perfect.
Less than two decades on from its creation, when the Great Depression of the 1930s hit, the Federal Reserve revealed its utter inability to carry out any of its chartered functions. Unemployment skyrocketed to roughly 30% and stayed stubbornly high throughout the decade. Tens of millions of people remained unemployed, despite wages falling almost 20%. Banks failed by the thousands, all across the country (by 1933, more than 10,000 of the country’s approximately 25,000 banks had gone under – and taken the deposits of millions of Americans with them), and the economy was in freefall. Like banks, massive numbers of businesses failed. The number of small farms that went under was catastrophic. In less than three years, the US GDP was cut in half.
So…tell me again all that stuff about the magnificent Federal Reserve ensuring maximum employment, a stable banking system, and a strong US economy?
I’m willing to give the Fed some benefit of the doubt. Let’s assume that it was initially blindsided by unforeseen economic calamities that caused the crash. So, we’ll give it at least a partial pass on not preventing the Great Depression in the first place. (Although, should it really have been blindsided? – Shouldn’t the Federal Reserve, more so than any other institution, have foreseen the coming calamity? – After all, there were plenty of warning signs. More than 500 banks had failed between mid-summer of 1928 and mid-summer of 1929, several months before the October, 1929 stock market crash.)
But even if we give the Federal Reserve a pass on the start of the Great Depression…well, what about the next 10 years of depression??? – Nothing that the Fed did throughout the whole of the 1930s accomplished anything in terms of significantly alleviating the disastrous conditions in the wasteland that was the US economy. It’s widely acknowledged today that the only thing that finally pulled the US out of the Great Depression was World War Two, when the massive demand for soldiers and for record-breaking industrial production simultaneously solved both the unemployment problem and the problem of a largely unproductive economy.
Over the years, there have been plenty of other instances of the Federal Reserve completely failing to achieve its mission – such as the runaway inflation of the 1970s (we’ll get to inflation in a minute – it deserves its own dedicated section). Where was the Federal Reserve in the financial crisis of 2008? Where is it today, with bank failures steadily mounting and industry forecasts of only “more of the same” to come? Would you say that we currently have “a stable economy”?
But enough about the general failures of the Federal Reserve to ensure smooth economic sailing. Let’s move on to examine one specific failure – the Fed’s monumental and ongoing failure to control inflation.
A key part of the Federal Reserve’s original charter was the mandate to ensure “stable prices”, to keep inflation low. So, how’s it doing at that job? Well, to truly appreciate just how unbelievably abysmal the Fed’s performance in controlling inflation is, we need to go back before the beginning, before the Federal Reserve was created…because here’s the thing: In the 100 or so years prior to the creation of the Federal Reserve, inflation was virtually non-existent!!
Here’s a chart showing the cumulative inflation from the year 1800 to the present day (you might want to sit down and brace yourself before you dare to take a peek at it) -
Perhaps you’ll notice the relatively long, flat line that extends throughout the entirety of the 19th century. Well, that’s what 100 years with virtually no inflation at all looks like. In fact, the 19th century ended on a note of negative inflation – of falling prices. See where I’ve highlighted the year 1901, where it shows 67 cents? – Well, what that means is that in 1901, it only required 67 cents to purchase the same amount of goods or services that it had cost $1 to purchase in the year 1800.
So, looking at that extended run of a rapidly growing US economy that evidenced little, if any, rise in the prices of goods and services – for a hundred years – well, I don’t know about you, but I can’t help wondering why anyone felt a need to charter some gigantic, new government financial institution to “control inflation”. I mean, it seems to me like it was already – without any Federal Reserve Bank – pretty much well under control.
But what happens after the founding of our beloved Federal Reserve Bank? Well, by 1920, just seven short years after launching the entity charged with keeping inflation low and stable, people then needed $1.50 to buy the same amount of stuff that they could have bought for $1.00 back in 1800 (or even just a few years before the creation of the Federal Reserve).
It took the Fed a little while to get running smoothly on all eight cylinders, but once it did – say, by around the mid-1940s – you can see that inflation was firmly controlled. Well, that is if by “controlled”, you mean set to skyrocket at pretty much an ever-increasing pace (it really got roaring when we abandoned the gold standard in 1971 – go figure, right?). If you take in the whole of the chart (again, you might want to brace yourself before taking a look at the far right-hand side), it reveals that the total cumulative inflation since the creation of the Federal Reserve, by 2024, was an astounding increase of…wait for it…2,500%!!!
Here's another chart that shows another view of the effect of inflation. (Sorry, but it’s pretty much just as bad as the first chart.) This one reveals the astonishing decline in purchasing power of the dollar over time. You may want to take note of how perilously close the buying power of a dollar now is to zero, compared to what it was in 1800 – or even 1900. The last time that a dollar would actually buy you a dollar’s worth of stuff was around 1916, 1917…that is, three or four years after the creation of the Federal Reserve.
The bottom-line news flash is that the Federal Reserve can’t control inflation. But the scary part is that the reason that the Fed can’t control inflation is because it’s the cause of inflation. How does the Federal Reserve actually cause inflation? – Well, it’s because there is one thing that the Federal Reserve is really good at: printing more and more money - increasing the money supply.
It’s a basic law of economics that, at any given point in time, the total value of all the goods and services in an economy has to approximately equal the total amount of money in the economy, the total number of dollars in circulation. Therefore, if the amount of goods and services available stays roughly the same, or only increases by a modest amount, but the money supply increases exponentially, then prices have to rise substantially to accommodate the larger number of dollars available to spend. Increasing the money supply creates inflation.
And here's the harsh reality: the M2 money supply in the US has increased by almost six trillion dollars in just the past four years. For an historical overlook –
Of course, the major driver of the monstrously increased money supply in recent years has been the federal government’s need to borrow more and more money. Aiding and abetting that desire for more cash is the Federal Reserve, running its money printing press 24/7.
The President who oversaw, in his very first year in office, the inauguration of both the Federal Reserve and the federal income tax system was Woodrow Wilson. But, believe it or not, there are plenty of other reasons to crown Wilson the “worst President ever”.
Basically, Wilson was a classic liberal elitist snob, who thought he was smarter than everyone else and should, therefore, be allowed to rule the world. Reminiscent of the current President’s attempt to establish a “disinformation board” and control the information visible on social media, Wilson successfully created a federal propaganda office to shape public opinion, the Committee on Public Information (CPI).
The Fed can play around with interest rates to try to tamp down the rate of inflation, but as long as it keeps blowing up the money supply, it is, inescapably, fueling the existence of inflation. And with the US dollar being a fiat currency, not backed by gold, the Fed is free to print all the money it wants to, at will. And the federal government’s debt situation means that it wants the Federal Reserve to keep printing more and more money every month.
The one financial asset that investors have access to that can provide them with protection from runaway inflation is the safe haven investment of gold. Throughout all the economic ups and downs in history, gold has continually proven its ability as a superior store of value. No matter how far inflation runs, gold can still keep pace. Gold preserves your purchasing power, while also offering superior protection against online thieves and seizure by governments or creditors.
You can’t stop the Federal Reserve from debasing the dollar by printing more money. But you can protect yourself from the effects of the Fed’s money printing by holding a physical asset that neither the government nor the Fed can debase – gold. Simply the fact that the Fed doesn’t like gold makes me love it. 😊
Sources:
https://www.stlouisfed.org/in-plain-english/history-and-purpose-of-the-fed
https://www.federalreservehistory.org/essays/federal-reserve-history
https://www.federalreserve.gov/aboutthefed/files/the-fed-explained.pdf
https://www.taxpolicycenter.org/statistics/historical-highest-marginal-income-tax-rates
https://franklaughter.tripod.com/cgi-bin/histprof/misc/depression.html
https://ycharts.com/indicators/us_m2_money_supply
https://conventionofstates.com/news/wilson-the-terrible-horrible-no-good-very-bad-president
https://en.wikipedia.org/wiki/Woodrow_Wilson
https://www.officialdata.org/us/inflation/1800?amount=1/
https://en.wikipedia.org/wiki/Committee_on_Public_Information
https://www.econlib.org/library/Enc/FederalReserveSystem.html
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