Buying Power

What is Buying Power?

Buying power refers to the amount of goods and services that a unit of currency (like $100) can purchase. It's essentially a measure of how much your money is worth in real terms. As prices for goods and services rise (inflation), the same amount of money buys less, and thus its buying power decreases.

The Example Explained:

The data you provided shows that $100 in 1934 had the purchasing power of about $100 worth of goods and services (that's our baseline). By 2024, that same $100 only buys about $4.25 worth of the same goods and services. This doesn't mean the number of dollars decreased, but what those dollars represent in terms of real-world value shrunk dramatically.

How Does This Happen?

The primary driver of declining buying power is inflation, which is a general increase in the price level of goods and services in an economy over a period of time.

• The Gold Standard (and its Abolition): For a long time, many countries' currencies were tied to a fixed amount of gold – this was the gold standard. This theoretically limited the amount of currency a government could issue, as it had to be backed by gold reserves. This helped to keep inflation in check. However, most countries abandoned the gold standard in the 20th century (the US effectively did so in 1971). This gave governments more flexibility in managing their economies but also removed a significant constraint on currency issuance.
• Government Spending: Governments spend money on a wide range of things, from infrastructure and defense to social programs and education. When governments spend more than they collect in taxes, they often finance this spending by creating new money (either by printing it or through electronic means). If the money supply grows faster than the economy's ability to produce goods and services, it can lead to inflation. More money chasing the same amount of goods and services drives prices up.

The Connection:

The abolition of the gold standard allowed governments to increase spending more freely, and this increased spending, in turn, has often led to higher inflation. This is a simplified explanation, as many other factors contribute to inflation (e.g., supply chain disruptions, changes in consumer demand, global economic conditions), but it's a significant part of the picture.

Why is this Important?

Erosion of purchasing power is a hidden tax. It reduces the real value of people's savings, wages, and investments over time. If your income stays the same but prices rise, you can afford less. This can have a significant impact on people's standard of living and financial security.

In summary: The data you provided shows the dramatic decline in the dollar's purchasing power over 90 years. While many factors influence inflation, the decoupling of currencies from gold and the increase in government spending are important contributing factors. Understanding this concept is crucial for making informed financial decisions and advocating for policies that promote long-term economic stability.