Value of the Dollar Today
Why the Dollar Is Worth So Much Less Than It Used to Be
The value of the dollar has declined dramatically since the early 20th century. Inflation has three causes. occurs when the federal government creates more money, making each dollar less valuable; when demand rises; or when there are constraints on supply.
The value of the dollar increased 28% between 2014 and 2016, but by 2018 it had fallen 14%.
Tracking the Dollar's Value
The value of the U. S. dollar is determined by the goods and services it purchases, as tracked by the Consumer Price Index (CPI), which compares the prices of a basket of goods and services each month.
As the dollar's value falls, the cost of living increases.
Exchange rates tell you how much the dollar's value is at any given time in . One easy way to find out the dollar's value against most of the world's currencies is to use the dollar index, which compares the U.S. dollar to the Euro, the Japanese yen, pound sterling, the Canadian dollar, Swedish krona, and the Swiss franc.
How Much Value the Dollar Has Lost
Since 1913, the dollar has plummeted in value. At that time, a person with $100 could buy the same amount of food, clothing, and other necessities as $2,529 would buy today. By 1920, he'd need nearly double that amount or $197. Hyperinflation after World War I reduced the dollar's value, but the Great Depression created deflation, which is when prices drop while the dollar gains value. After World War II, the global economy grew and inflation returned.
Through the years, recessions initially created deflation, but inflation followed as the government spent to fight it.
By 2018, the dollar's value was almost half what it was in 1990. The following table shows how much the dollar has fallen each decade according to the :
|1913||$100||The first inflation measurement|
|1920||$197||End of World War I|
|1930||$175||The Great Depression|
|1950||$240||World War II inflation|
|1960||$299||Less inflation from recessions|
|1970||$386||Increased inflation from deficit spending|
|1980||$794||End of gold standard|
|2000||$1,722||Expansive monetary policy to fight 2001 recession|
|2010||$2,211||Expansive policy to fight the Great Recession|
Why the Dollar's Value Is Lower
Inflation is necessary for an expanding economy. The Federal Reserve keeps interest rates low to stimulate spending. This drives demand and ultimately economic growth. Currently, the Fed targets a 2% core inflation rate. In other words, as long as prices rise only 2% a year, the economy grows at a healthy rate. These prices exclude volatile markets such as food and energy.
Many countries that export to the United States accumulate dollars as payments. They keep these on hand as foreign currency reserves. Without these reserves, the value of the dollar today would be much lower for three reasons:
- The dollar is the world's reserve currency. Most international transactions are made in dollars. Foreign governments keep dollars on hand in case their businesses need it for international trade.
- Some countries, like China and Japan, export a lot to the United States. Their companies receive many dollars as payment for their goods. The government exchanges those dollars for local currency.
- The central banks of China and Japan use the dollars to purchase U.S. Treasuries. This practice keeps the dollar's value higher relative to their currencies. Their exports become cheaper in comparison. It gives their firms a competitive advantage.
What It Means to You
When the dollar loses value, it drives import prices higher, which is one of the reasons gas prices sometimes rise. Oil is our nation's biggest import. A declining dollar also makes trips overseas more expensive, but it helps U.S. manufacturers export because their products cost less in foreign countries.
A decline in the dollar's value eats away at your standard of living. Between 2000 and 2006, average wages remained flat despite an increase in worker productivity of 15%. In those six years, corporate profits increased 1.3% per year. And that was before the recession. Since the recession of 2007-2009, the rich have just gotten richer. In 2012, the top 10% of earners took home 50% of all income. The . These are the highest percentages recorded in the last 100 years.