One of primary reasons for the American Revolution was “taxation without representation”.  This is exactly what it sounds like.  The colonists did not want to be taxed unless they had a say in it, via a representative who could convey their interests to the Crown.  Today, we are in a similar situation.  Our modern taxation without representation comes in the form of inflation.

Must people have likely heard the term before, but few seem to understand it, or recognize the damage it causes.  Inflation is basically the creation of new money.  At first, this does not sound like such a terrible thing.  I mean, who wouldn’t like more money?  But we have to take into account that the US dollar is (like all other major currencies) fiat.  A fiat currency is one which derives its value entirely from the authority of the government.  In other words, the US dollar in its present form only has value and buying power because the US government says it does.  Essentially, the dollar in physical form is nothing more than paper, and coins made of common metals such as copper and nickel.  None of these physical materials have any particular sustaining or widely recognized value.  Remember all of that gold stored in Fort Knox?  It is not in anyway tied to our money anymore.

Since a fiat currency derives 100% of its worth from government, and has no link to anything of physical value, such as gold or silver, the government is free to create new money as it sees fit.  In a currency backed by precious metal this is impossible to do honestly unless you can obtain more of the precious metal, which generally does not see much supply fluctuation.  The way around this for the government to issue more bills of credit (paper money) than it has gold or silver to back them.  This is unethical and dangerous, but has happened repeatedly throughout history.  In ancient Rome they would “clip” the coins by removing small amounts of material from around the edges which they then used to create new coins, thereby allowing the creation of more money without the need for more physical gold, thus diluting the currency. With a fiat currency, there is no need for this.  They simply print more.

As new money enters the market, the market responds by raising prices.  This takes place because as the supply of money increases, the value of it decreases.  When I say value, I am not referring to the numeric denomination of the paper ($1, $2, $5, $10, etc…) but rather to the buying power of the paper; how much of a desired good or service it can purchase.  As the money supply is increased and the dollar becomes more common, or readily available and as a result it loses it’s buying power.

A testament to the weakness of fiat money and the strength of gold as currency is this:  In 1910 the average price of gold was $18.92 per troy ounce.  In 2010 the average price of gold was $1,224.53.  In 1910 you could buy a loaf of bread for about $.03.  In 2010 a loaf was closer to $3.00.  The bread didn’t get any more expensive, in fact, due to automated baking and mass production, it could be argued that the bread got cheaper to produce.  The price shift is a reflection on the buying power of the dollar, not on the cost of the bread.  The real cost of the bread hasn’t gotten higher.  The buying power of the money has gotten significantly weaker.

The current Federal Reserve chairman Ben Bernanke has been utilizing inflation heavily in an attempt to cut off the recession.  The problem is that it is causing prices to go up.  No one can deny that prices are going up.  It is the direct result of this inflation.  Now you may think that if inflation makes everything more expensive, what’s the point of the Fed doing it?  Well, inflation does not make everything more expensive until the new money is in the market.  The Fed prints the money, and then loans it to the US government, who spends it.  The government, being the first to spend the new money, is able to use it before the market knows it exists.  This allows them to take advantage of the inflation, without paying the penalty in higher prices, which is what we see from it.  While the government gets to have its cake and eat it too, we are left to starve as a result of their reckless actions.

So back to taxation without representation… inflation is a tax.  It is a tax because it is a way in which the government takes hard earned money from citizens.  It is a very insidious form of taxation because the government can do it without most people even recognizing that it is being done to them.  It is done with no regard to class, or economic standing.  It damages the wealth of all individuals equally as a universal percentage of value taken from every dollar.  It hurts those who save, because it decreases the buying power of their savings.  Inflation also keeps interest rates low, which further damages the fortunes of people who save because they cannot get a decent interest rate on a savings account, or COD.  Since the inflation is carried out by the Federal Reserve, which is a private bank, the Congress has very little control over it.  In fact, the Congress cannot even get the Fed to show all of their books.  So our elected representatives are unable to represent our interests in regard to the practices of the Federal Reserve.  This is a form of taxation without representation.

Fun fact: Since the creation of the Federal Reserve in 1913 the dollar has lost about 97% of its buying power.

In the 1770s the taxation was direct, and everyone could plainly see what was being taken from them.  In the current era, the theft is more subtle, and few recognize it for what it is.  This needs to change.  Do not simply accept rising prices as normality.  Question it, and seek understanding.  Learn about the mechanisms used to dilute your money.  Knowledge is power.

Suggested areas of research: The Federal Reserve, Keynesian economics, fiat currency, inflation, Austrian economics, and the gold standard.

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Based on a work at http://www.considerliberty.com.
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