Gold, Greenbacks and Inflation: A History and a Warning

The Federal Reserve, which celebrates its 100th anniversary this year, is tasked by Congress with managing the money supply so as to preserve price stability while maximizing employment. But with the central bank having increased the money supply by 25% since the financial crash of 2008—while the federal government has borrowed $5 trillion—can inflation be far off?

It won't be the first time. Inflation has often been popular, especially in democracies, since it benefits debtors, who are always more numerous than creditors. Inflation allows debtors to repay in money that is less valuable than the money they borrowed. This was the case after America's Revolutionary War, when economically distressed debtors demanded that state governments ease their burdens. State after state enacted paper-money laws, so that debts contracted in scarce gold and silver could be repaid with infinitely expandable paper.

This sort of inflation was one of the principal reasons for the adoption of the Constitution, which forbids the states to "make any thing but gold or silver coin legal tender in payment of debts." In the Federalist Papers, James Madison referred to state paper-money laws as the sort of "improper or wicked project" that the new Constitution would prevent. Chief Justice John Marshall later recalled, in the 1819 Dartmouth College v. Woodward decision, that such laws had "weakened the confidence of man in man and embarrassed all transactions between individuals by dispensing with a faithful performance of engagements."

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