Signup for our free newsletter:

Inflation and the Falling U.S. Dollar

Written By Brian Hicks

Posted December 18, 2008



continental dollar


War fighting may be tough on boots but its murder on the wallet. Unfortunately, Captain Allan McClain learned this lesson the hard way.

And a hard lesson it was. Amazingly, he laid out an incredible $600 for new a pair. And to add insult to injury he was charged a whopping $10 for a simple spool of thread.

It hardly seems like a fair deal for an American fighting man but it happened.

It was January 1781.

Captain McClain wasn’t fighting Islamic fascists but the British. He was a soldier in the Continental Army. And he was paid in Continental Dollars.

Needless to say he deserved better.

Of course it wasn’t supposed to turn out that way. And like most things it seemed like a good idea at the time.

Created in 1775, the Continental Dollar, was a series of notes designed to support the Revolution. Its plates were crudely engraved by Paul Revere himself and printed on such thick paper that the Brits referred to it as “the paste board money of the rebels”. The Brits were onto something.

At the behest of Congress only 2 million dollars worth these of “paste board” notes were to be created. And by July of 1775 these notes became part of the currency.

But surprise…surprise….it wasn’t enough. It never is…not even then.

Almost as soon as these new bills hit the street the Congress decided that they needed more money and by the end of 1775 over 6 million dollars worth of these notes rolled off the presses and into circulation.

Since the total money supply in the colonies at the time was estimated to be about 12 million dollars, the new dollars represented an amazing 50% increase in the money supply.

But Congress, of course, could not help itself. Even our sainted founding fathers needed more.

By its final printing the aggregate amount of bills in circulation skyrocketed to a stunning $242 million dollars in as little as 5 years!

Needless to say, this massive devaluation of the currency through the inflated money supply devastated the notes. By the end of 1781 it took $16,800 to purchase a mere $100 worth of gold.

In the end the Congress never redeemed the bills and their part of the debt was not assumed by the new U.S. government. In six short years the Continentals became worthless.

Such is the danger of the government printing press. And such is the wisdom of holding gold in the face of the devalued dollar.

Sadly, what was true in 1775 is still true today-bankers love to print money.

The reasons for this are twofold. One is that central bankers believe that they can somehow “manage” the economy through the manipulation of interest rates.

The second is that the government printing press is necessary to monetize the escalating federal debt that politicians not only hunger for but thrive on.

We don’t sell war bonds or raise taxes anymore. It’s too restrictive you see.

Besides why bother when you’ve got tons of paper and the keys to the press

In short, it’s a combination of hubris, greed, and blind ambition. As such it cannot end well.

Other countries see this. And they’re buying gold. Tons of it.

But few American have gotten the picture. How could they?

After all, we don’t remember the Continental and our modern nation has never suffered from inflation so severe that it destroyed the dollar. That’s something that only happens to other countries.

Instead, we believe the bankers and the politicians. We see soft landings. We have lived our whole lives at the top of world heap.

How could tomorrow be any different?

But the truth is it could be very different. The rapid expansion of the money supply ensures it because when we devalue the currency by creating money out of thin air the result is inflation.

In 1781 it was $600 boots. Earlier it was $150 dollar oil and $500,000 houses. These outrageous prices maybe separated by 225 years of history but they rest upon the same premise.

Inflation is a monetary phenomenon. History proves it.

Since the creation of the Federal Reserve a pre-Fed dollar is now worth only 4 cents. 

It’s simple, inflating the money supply devalues the currency. Politicians and bankers know this but they can’t help themselves. As such, the printing press is a dangerous tool and the only hedge against these characters is gold.

You see, the soaring gold price is not some anomaly. It’s a world wide vote of no confidence. It’s a vote against Fed and their dollars. It was the case in 1979 and 1980 and is the case today.

And as long as the world is restless with our increasing money supply, our trade deficits, our unfunded liabilities, and the complete inability of Congress to reign in government spending the price of gold will continue to rise.

Clearly, these problems won’t end any time soon.

In fact helicopter Ben can hardly wait to do it again. That’s why the dollar is taking it on the chin this week.

And while the dollar won’t likely have the same fate as the Continental it won’t be pretty.

It’s called inflation and it’s coming to a boot store near you in the years to come.

After all, digging out of this hole will come at a cost.