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Everyone is lying to you about inflation.

The left says corporate greed causes inflation, and the right says deficit spending causes inflation.

They are both wrong, and they know it.

We are going through the history of inflation, how it is caused and managed today, and what we can do to eliminate it for good.

First, we need to define inflation.

Inflation is not rising prices. Inflation is the decrease in the value of money. Rising prices are just a symptom of inflation, not the actual thing. Keep that in mind as we go through the history.

Inflation has existed for as long as we've had money, so we will do a lightning round for historical examples before we jump into US History.

First, in Ancient Rome, from Nero onward, Rome kept mixing less valuable metals into their silver coins, increasing supply and making them WORTH LESS.

Ancient China switched from metallic money to paper money and printed more and more as needed, making it WORTH LESS.

Mansa Musa brought so much gold to Ancient Egypt that he significantly increased the supply of money, making it WORTH LESS.

After discovering the Americas, Spain imported so much gold and silver to Europe that the supply significantly increased, driving down the price and making it WORTH LESS.

Recent history gets even crazier with inflation. Once countries switch to fiat currencies, it is much easier for them to print more money and cause inflation. Dozens of countries even experienced hyperinflation, when a country experiences more than 50% monthly inflation.

The most prominent example is the Weimar Republic in Germany after WWI. Instead of balancing their budget, they just printed more and more money, driving down the value of their money and making it WORTH LESS.

So, it is evident that increasing the money supply causes inflation. A drop in demand for a currency also causes inflation, but that almost always occurs after inflation has already started, just making the problem worse.

There are no significant examples in world history of a stable currency experiencing a drop in demand large enough to cause significant inflation.

So now that we know the history of inflation and that an increase in the money supply causes it, let's narrow our focus to the US.

We start our country off with a period of inflation. The Continental Congress issued the Continental Currency in 1775, but they printed so much of it by the war's end that it became worthless.

After learning that hard lesson, the country turned to a competing currency system. The federal government minted coins but did not issue paper currency until 1861.

During this time, state-chartered banks issued over a thousand currencies, each with its own inflation rate. Inflationary currencies eventually died, and stable currencies won a larger market share. People started companies that carried out many of the functions that the government carries out today, including lenders of last resort, deposit insurance companies, and private clearing houses.

The US did have "National banks" during this period, but they were not central banks. They were commercial banks owned in part by the federal government. They did issue currency, but that currency had to compete with all other currencies from other private banks. The Bank of North America, the First Bank of the United States, and the Second Bank of the United States were the three banks of the United States. Still, the federal government eventually sold them all to private investors.

This system ended with the advent of the Civil War. The Union ran out of money and passed two pieces of legislation that changed American history. In 1861, Congress passed a bill authorizing the US to print paper money, and in 1862, it passed a Legal Tender Law requiring people to accept it as payment for any debt.

From here, the US started massively centralizing the Banking System. The federal government put a 10% tax on all state bank-issued currency and created a system of nationally chartered banks that had to follow much stricter and more uniform regulations. They also required bank currency to be issued backed by a certain amount of gold, designed in a certain way to all look the same, and to be mandatorily interchangeable.

The US had created a national currency in all but name.

Then, in 1913, the US created the Federal Reserve System (which deserves a video all its own).

Long story short, the Fed had the power to change the money supply, regulate banks, and be the lender of last resort to failing banks. However, one thing holding the Fed back from increasing the money supply was the gold standard. It could still only print money if it had the gold to do so.

WWI gave the Fed all the gold it needed. Because Europe was in a war that needed massive financing, most countries dropped the gold standard and started wildly printing money. Dropping the gold standard drove gold to American markets and drastically increased the money supply, causing yet another round of double-digit inflation.

By this point, the US had so much of the world's gold (around 40%) that the resulting inflation was much smaller when WWII came along.

That all changed in 1971. Since the beginning of the Fed, anyone could exchange a US dollar for a certain amount of gold. That pegged the dollar to the price of gold. Throughout WWI and WWII, almost every other country abandoned that exchange rate.

Because of the gold standard, the US dollar became the currency used worldwide to store value and trade in international markets. It had no competition.

And because it didn't have competition, the Fed cheated.

The Federal Reserve had printed four times the amount of money the US had in gold reserves, more than any central bank combined.

The gold standard was dead, and the Fed killed it. All that was left was to let the world know. In 1971, Nixon signed a bill into law that officially ended the gold standard before a run on the nation's reserves could happen.

The inflation of the 1970's didn't happen because of OPEC and oil. It happened because the world realized the money supply was four times higher than they believed.

From there, the Federal Reserve was given a dual mandate in 1977 to stabilize prices and minimize unemployment. Unfortunately, those two goals oppose each other in monetary policy, and the Fed decided to print more money to fight unemployment. From that, we have the country's worst inflationary crisis.

That brings us to today.

As you can see, we can always explain these inflation case studies with increased money supply.

So, what does the money supply look like today?

Before the COVID lockdown, the M1 money supply in February 2020 was $3.9 trillion.

In June 2020, the M1 money supply was $16.6 trillion.

That's where inflation comes from. 2020 is the first time we have seen anywhere close to that kind of an increase in the money supply.

The scary part is that $4 trillion has yet to hit the market.

Since 2009, one way the Fed has controlled the money supply is by creating bank accounts where banks can deposit money and receive risk-free interest.

Right now, those accounts have $4 trillion in them and are paying out over $200 billion of interest yearly.

That means that on top of the inflation we are seeing today, there's much more to come.

So that's the history. What's the problem with inflation?

Inflation first hurts people who hold cash, whether physical or in a bank account. It makes their savings worth less, acting like a tax.

In my opinion, the more significant effect is that it depresses wages. Even when there is relatively low inflation, at 2% or so, workers must ask for a raise if they want to make the same amount.

In a world without inflation, workers could fight for raises that would increase their actual salary.

So, what's the solution here?

Many people say we need to return to the gold standard, but we've learned that throughout history, the gold standard can also cause inflation.

We need a system that has fully stable money.

The first step is to remove the Fed's dual mandate. The Fed should only worry about stable prices, not unemployment.

The next step is to strip the Federal Reserve of all its powers except its ability to control the money supply by buying and selling government bonds. The Fed should target an inflation rate of 0%.

Then, the US should repeal legal tender laws, allowing consumers and producers to accept whatever currency they want. Alternative currencies will provide competition for the US dollar and keep the Fed honest.

Don't worry. As long as the US keeps its inflation rate at 0% and you pay federal taxes in US dollars, the US dollar will stay the world's reserve currency. But if the government lies, then the private market can step in and do a better job.

What do you think? Are competing currencies too confusing?

Let me know in the comments.

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Thank you to our VIP subscribers who help make these videos possible:

Steve Moody

Levi Bannigan

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