- The Washington Times - Thursday, March 3, 2005

After the double-digit years of the 1970s, most Americans take “modest” inflationary increases in stride. Yet even modest increases are highly corrosive when they persist over time, eroding our purchasing power and increasing the cost of government.

The Consumer Price Index (CPI) has now gone up every year since 1955. Last year, it rose “just” 3.3 percent, following a 1.9 percent increase in 2003. During the past 15 years (1990-2004), the CPI has increased 51 percent.

Despite some imperfections in the long-term price comparisons used by the Labor Department to compile the CPI, the best data available indicate a family earning $50,000 in 1990 would have had to earn about $72,250 last year to maintain its 1990 standard of living. That’s the cost of inflation.

While the cost of some of the more than 400 products and services used to calculate the CPI have decreased since 1990 (such as television sets, personal computers and other consumer electronics), many other goods and services have increased in cost significantly.

Prices seem to have increased the greatest, generally, for goods and services provided by government or most affected by government policy. College tuition and fees, for example, increased more than 170 percent since 1990. Hospital, nursing home and adult day-care costs increased more than 150 percent. Trash collection costs were up by 90 percent; water and sewage by 88 percent and intracity public transportation by 68 percent. Physicians’ fees increased more than 82 percent. And cable television rates — regulated monopolies in most communities — were up more than 120 percent.

Fed Chairman Alan Greenspan and his predecessor Paul Volcker have been credited with taming inflation. But the government has been unable to preserve the dollar’s purchasing power. A primary Federal Reserve goal is “stable prices.” This goal was set by Congress, in the Federal Reserve Reform Act of 1977. Since its passage, the CPI has nearly tripled. The longer-term erosion of our purchasing power is almost sure to continue so long as the United States retains its current monetary policy.

All major currencies in the world today, including ours, are known as “fiat” currencies. This basically means they are “legal tender” because the issuing government says so. In other words, they are generally accepted as legitimate payment for eliminating debt, not because private parties always agree they constitute valid tender but primarily because governments, by various means, effectively compel their use. This contrasts sharply with a gold standard, in which the currency is defined as, or redeemable in, a specific weight of gold.

Fiat currencies lack self-correcting mechanisms that maintain stable values. If prices increase “too much,” there is nothing to bring them down other than government manipulation.

In the past, prices in America fluctuated periodically, almost always in response to wars. Sharp upturns in prices coincided roughly with the War of 1812, the Civil War, and World War I. During those periods, the ability to convert dollars into commodities, such as gold or silver, was severely limited. As soon as the disruptions ended, prices returned to their prior levels and stability was restored.

Since abandonment of the domestic “gold standard” in 1933 and the subsequent official suspension of gold redeemability in 1971, the CPI has moved in one direction only: up, more than 450 percent since 1971.

The Fifth Amendment to the Constitution forbids government from taking of private property for public use without just compensation. By failing to preserve the value of our money, the government seems to be doing just that.

Despite news headlines about mild inflation, the dollar’s buying power continues to sink. You don’t have to be a “gold bug” to be concerned that without a truly effective policy, such as a gold standard, this will likely continue and possibly accelerate.

Bill Bergman is a senior economist at the American Institute for Economic Research, Great Barrington, Mass.

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