Imagine working for a year and your salary amounts to the equivalent of a hefty 100 ounces of gold. This hefty 100 ounces of gold is enough to purchase three new automobiles or half of a typical home. You keep some of the gold at home and deposit the rest at your trusted local bank. All is right with the world.
Over the next year, you hear of two new government mandates: you have to turn in all of your gold at home and almost none your gold in the bank can be withdrawn. Moreover a new edict declares that you no longer have 100 ounces, but 57 ounces. Finally the government says you have 57 ounces of gold certificates and it can devalue those over time.
Sound fanciful? Such edicts were actually implemented in the United States just 85 years ago.
In 1930 the average salary was around $2,000, and with each dollar defined as 1/20 of an ounce of a gold, that translates to 100 ounces of gold (paper money was then a stand-in for the base money of gold). Then nearly overnight, the government changed the definition of a dollar to be 1/35 of an ounce. People who had all of their wealth in real estate or assets outside the banking system were safe. But imagine being the ordinary person with a year’s income worth of savings who instantly saw 43 percent of savings gone.
Or imagine being a rich person with 10,000 ounces of gold who instantly lost 4,300 ounces of gold. That amounts to more than $5 million at today’s gold prices. My great grandparents were so upset that nobody was allowed to mention FDR’s name in their household.
In 1933 AIER was founded to help educate people about what was going on. E.C. Harwood was a professor at M.I.T. and had, in the 1920s, been warning people about credit expansion and how that was opening the door to what we now call a boom and bust. We can think about inflation and the subsequent devaluation (changing the definition of a dollar from 1/20 of an ounce of gold to 1/35 of an ounce) and subsequent problems as going together. The more government inflates the money supply, the more that prices will eventually go up, and without inflation proof bonds, people who kept their money in the bank would gradually see the value of their deposits eaten away. This is not to mention the boom and bust associated with monetary disruption.
In 1974, E.C. Harwood said that inflating was “one of the three greatest swindles in the history of mankind.” He stated: “a principal noticeable consequence of inflating is a general rise in prices, which reflects the bidding for things offered in the markets. In other words, the buying power of the dollar depreciates…The swindling effected by inflating is reflected primarily in the loss of buying power by all who have placed their faith in assets denominated in the Nation's currency.”
As long-term A.I.E.R. contributor Richard Salsman points out, many of the pictures of bank runs from the 1930s were when people recognized that F.D.R. was going to do what he did and people wanted to get their money out of the banking system as quickly as possible.
Today I agree with my colleague Jeffrey Tucker’s assessment that “government cannot be trusted with the control of money.” Modern people worried about the risk of inflation have to look to have their money in assets not denominated in a fixed dollar amount, but whether that be stocks, real estate, gold, cryptocurrency, or other choices not listed here.
Because inflation changes the value of different assets at different rates (stocks for example, are theoretically immune from inflation the long run but can be negatively affected in the short run or even longer if the monetary changes are disruptive enough), the best hedge against inflation is anyone’s guess.
AIER’s first publication was, “What will devaluation mean to you?” and in it Harwood warned about how government was taking gold from the dollar and that would open the door to more credit expansion and increase in the price level. There he concludes, referring to the everyday person, “One conclusion is inescapable; namely, that the forgotten man is being ‘taken for a ride.’”
Government monetary policy was not invented to help the everyday person but instead to benefit the government and its connected interests, “the swindlers.”