The purchasing power of a currency is the amount of goods and services that can be bought with one unit of the currency.
For example, one U.S. dollar could buy 10 bottles of beer in 1933. Today, as Visual Capitalist’s Govind Bhutanda notes, it’s the cost of a small McDonald’s coffee.
In other words, the purchasing power of the dollar – its value in terms of what it can buy – has decreased over time as price levels have risen.
Tracking the Purchasing Power of the Dollar
In 1913, the Federal Reserve Act granted Federal Reserve banks the ability to manage the money supply in order to ensure economic stability. Back then, a dollar could buy 30 Hershey’s chocolate bars.
As more dollars came into circulation, average prices of goods and services increased while the purchasing power of the dollar fell. By 1929, the value of the Consumer Price Index (CPI) was 73% higher than in 1913, but a dollar was now enough only for 10 rolls of toilet paper.
Between 1929-1933, the purchasing power of the dollar actually increased due to deflation and a 31% contraction in money supply before eventually declining again. Fast forward to 1944 and the U.S. dollar, fixed to gold at a rate of $35/oz, became the world’s reserve currency under the Bretton Woods agreement.- READ MORE
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