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Purchasing Power of the U.S. Dollar Over Time

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VCE Purchasing Power of the US Dollar

purchasing power of the dollar

What is Purchasing Power?

The purchasing power of a currency is the amount of goods and services that can be bought with one unit of the currency.

For example, one U.S. dollar could buy 10 bottles of beer in 1933. Today, it’s the cost of a small McDonald’s coffee. In other words, the purchasing power of the dollar—its value in terms of what it can buy—has decreased over time as price levels have risen.

Tracking the Purchasing Power of the Dollar

In 1913, the Federal Reserve Act granted Federal Reserve banks the ability to manage the money supply in order to ensure economic stability. Back then, a dollar could buy 30 Hershey’s chocolate bars.

As more dollars came into circulation, average prices of goods and services increased while the purchasing power of the dollar fell. By 1929, the value of the Consumer Price Index (CPI) was 73% higher than in 1913, but a dollar was now enough only for 10 rolls of toilet paper.

Year EventPurchasing Power of $1What a Dollar Buys
1913Creation of the Federal Reserve System$26.1430 Hershey’s chocolate bars
1929Stock market crash$15.1410 rolls of toilet paper
1933Gold possession criminalized$19.9110 bottles of beer
1944Bretton Woods agreement$14.7120 bottles of Coca-Cola
1953End of the Korean War$9.6910 bags of pretzels
1964Escalation of the Vietnam War$8.351 drive-in movie ticket
1971End of the gold standard$6.3917 oranges
1987"Black Monday" stock market crash$2.282 boxes of crayons
1997Asian financial crisis$1.614 grapefruits
2008Global Financial crisis$1.202 lemons
2020COVID-19 pandemic$1.001 McDonald’s coffee

Between 1929-1933, the purchasing power of the dollar actually increased due to deflation and a 31% contraction in money supply before eventually declining again. Fast forward to 1944 and the U.S. dollar, fixed to gold at a rate of $35/oz, became the world’s reserve currency under the Bretton Woods agreement.

Meanwhile, the U.S. increased its money supply in order to finance the deficits of World War II followed by the Korean war and the Vietnam war. Hence, the buying power of the dollar reduced from 20 bottles of Coca-Cola in 1944 to a drive-in movie ticket in 1964.

By the late 1960s, the number of dollars in circulation was too high to be backed by U.S. gold reserves. President Nixon ceased direct convertibility of U.S. dollars to gold in 1971. This ended both the gold standard and the limit on the amount of currency that could be printed.

More Dollars in the System

Money supply (M2) in the U.S. has skyrocketed over the last two decades, up from $4.6 trillion in 2000 to $19.5 trillion in 2021.

The effects of the rise in money supply were amplified by the financial crisis of 2008 and more recently by the COVID-19 pandemic. In fact, around 20% of all U.S. dollars in the money supply, $3.4 trillion, were created in 2020 alone.

How will the purchasing power of the dollar evolve going forward?

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How the Savings Account Became a Destroyer of Wealth

The interest income needed to beat inflation since 1994 has varied, but in the last 13 years, savings accounts failed to live up to the task.

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How the Savings Account Became a Destroyer of Wealth

Has saving money ever been less rewarding? The average U.S. personal savings account now returns about $100, or 0.1% per $100,000 in interest income on deposits. This is well below the $1,283 per $100,000 required to beat inflation.

In fact, savings accounts have been eroding household wealth for some 13 years. This data from JP Morgan reveals that the interest income needed to beat inflation has consistently fell short tracking back to 2008-2009.

This is a result of ultra low interest rates, as the amount needed to beat inflation has remained fairly steady. When interest rates took a nosedive during the Great Recession, so too did the earnings potential on savings accounts.

Withering Interest Income

Typically, banks and financial institutions pay interest on deposits to incentivize keeping your money with them. These deposits are funneled into their lending business, where they charge higher rates. The difference is called net interest margin, a common financial industry metric.

All things equal, rates go up when demand for loans exceeds the supply of loanable funds, and go down when the reverse holds true. But central bank money printing has altered this equation. With quite literally trillions injected via quantitative easing, the money supply, or supply of loanable funds, has skyrocketed well past any expected level of demand. As a result, rates today are near 700-year lows.

Can The Savings Account Be Saved?

If interest rates do pick back up, the returns on the typical savings account should follow.

Interestingly, one factor that could buoy returns on savings is inflation itself, which is starting to rise. Given one of the Fed’s mandates is to control inflation, any prolonged and serious uptick could mean opening the monetary policy tool box and influencing matters to offset this. This includes raising rates, possibly well above inflation.

An ultra low rate environment has become the status quo for over a decade now, though some market commentators say rates could have a reversion to the mean moment. But the macro environment is highly unpredictable, so how and when that happens is truly anybody’s guess.

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Visualizing the Power of Gold Versus Currencies

Over the last 40 years, the purchasing power of the world’s most popular currencies have declined against gold.

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Visualizing the Power of Gold Versus Currencies

The Power of Gold Versus Currencies

Since the gold standard was abandoned in 1971, the relationship in value between currencies and gold has moved in only one direction: down.

At that time, U.S. President Richard Nixon suspended the convertibility of the dollar into gold, effectively bringing the Bretton Woods system to an end.

Today’s visualization comes from the In Gold We Trust report, and it shows that over the last 40 years, the purchasing power of the world’s most popular currencies have declined significantly against the precious metal.

Turbulent Years

In the first decade after the gold standard was abandoned, the international monetary system was seriously shaken. Several U.S. recessions, coupled with international conflicts and high price inflation put the world’s reserve currency under enormous pressure.

During the 1973-74 oil crisis the price of gold rose 65%. In 1978, U.S. bonds had to be issued in the hard currencies of the Swiss franc and the German mark–the so-called Carter bonds.

The next decade saw the rehabilitation of the dollar through a highly restrictive monetary policy run by the Federal Reserve that led to sky-high interest rates. The trend continued with the fall of the communist Eastern Bloc in the early 1990s.

The Erosion of Purchasing Power is Accelerating

Gold is still the universal reserve asset to which central banks, investors, and private individuals return in times of crisis. Since 1971, the average annual growth rate of the metal price in U.S. dollars is just over 10%. Since the Euro was introduced in 1999, the gold price in EUR has risen by 356%, or on average 7.8% per year.

Unsurprisingly, over the last 40 years, the best performing G-10 currency was the Swiss franc, largely due to its close relationship with gold. The Swiss National Bank has one of the largest reserves worldwide.

CountryGold Reserve (Tonnes)
Value (US$ billions)
🇺🇸 United States8,133.46$493.6
🇩🇪 Germany3,362.45$204.1
🇮🇹 Italy2,451.84 $148.8
🇫🇷 France2,436.19$147.8
🇷🇺 Russia2,298.53$139.5
🇨🇳 China1,948.31$118.2
🇨🇭 Switzerland1,040.00$63.1
🇯🇵 Japan765.22$46.4
🇮🇳 India676.64$41.1
🇳🇱 Netherlands612.45$37.2

Despite significant corrections, gold was able to outperform virtually every other asset class and above all, every other currency between 2001 and 2019.

Gold breakout

Amid the turmoil brought about by Covid-19, investors again increased their exposure to gold. In August, the metal price surpassed $2,000 per ounce for the first time ever.

As political and economic tensions tend to endure over the next decades, so does gold’s role as an anchor during uncertain times.

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