The macroeconomic idea that price inflation is "always and everywhere a monetary phenomenon," as Milton Friedman had famously claimed, surely warrants a rigorous 'common sense' testing from the microeconomic viewpoints of individuals and businesses. After all, it is businesses and individuals that ultimately do the setting of prices. Yet this microeconomic sounding board of the macroeconomic theory of monetary price inflation is sorely missing from economics literature. To say in macro terms that "more money chasing the same amount of goods must cause prices to rise" or that "a glut of money will reduce its value (purchasing power)" is not adequate as explanation. How, exactly? These statements cannot be macroeconomic truths unless they are microeconomic truths.

       In much of my writing I reveal that such simplistic, overarching statements—which boil down to a supply/demand relationship for the valuing of money—do not make sense. For one thing, most individuals' demand for money is essentially infinite. Thus, it is exceedingly difficult for money's supply to overwhelm money's demand in our economy and create a 'glut of money'. The reason for money's insatiable demand is that money is a nearly frictionless proxy for anything and everything that money can buy. People don't want the money. They want the endless variety of things for which money can be so easily traded. Money poses no storage or liquidity problem, so demand for it is as limitless as people's desire for anything and everything. Unlike the demand for a specific good or service, when considering "the demand for money", one must really equate that phrase with "the demand for all things that money can buy." That is a radically large quantity of demand!

       You can do a test at home of how the demand for money is unlike the demand for a good. Fill some boxes with items of some value—perhaps your good used clothing or books—and offer them on a street corner for free. See how vigorous the demand for these items is at the price of zero. Then try that with an equal value in jars full of free dollar bills or coins. Surely the first passer by will take all your jars of money and ask you whether you have any more. The demand for money is pretty insatiable. Only a profound sea change in the population's view of and faith in the money itself can produce a runaway 'monetary' type of price inflation in conjunction with large money growth. This price inflation is not simply a monetary phenomenon but must be driven by a substantial element of psychology. Even a quite large influx of newly created fiat money will only cause such rampant inflation if widespread public faith in the money's value markedly falters. This can happen at times, but I do not see the conditions necessary for this runaway inflation to be present in the U.S. economy. I expect that though the U.S. money supply is likely to grow dramatically in the coming years, price inflation will remain tame. In my view it is highly unlikely for U.S. consumer prices to rise over the next decade by more than (low to mid) single digit annual inflation, on average.

Let's go back to the supposed 95% loss of wealth for those possessing dollars over the 96 year period: the Federal Reserve Note was never intended for long term wealth storage, nor has the Federal Reserve or the government ever claimed so. It is printed with only the claim to be "Legal Tender for all debts, public and private." A dollar bill is supposed to be tendered, or spent—for long term wealth storage, only a fool would not put his dollars into some form of interest-bearing account. Currency and equivalents (demand deposits such as checking accounts) are for one's spending money and nothing more. The Fed cannot be blamed for fools being foolish, especially when they have a century to figure out their foolishness.

       The supposed 95% loss of wealth over 96 years represents average annual price inflation of about 3.2%. Therefore, an interest yield of 3.2% compounded over that period would have held steady a 1913 dollar's value. Actually, an average yield of 3.2% has been easily beaten in even the very safest of government-insured investments for the great majority of the last century. Longer dated U.S. Treasuries have yielded as high as 13% (circa 1980), more than making up for lost ground during the periods of low interest rates. But even during such periods, the longer-dated maturity end of the Treasury curve has typically yielded more than the 3.2%. In short, anyone in 1913 wishing to safely preserve their dollar's value for a very long period could have easily done so (and even achieved a real return exceeding inflation), by investing in only the safest U.S. Treasuries or FDIC insured bank CD's.

Virtually nobody. Ron Paul misleadingly suggests that if a family had stashed some cash back in 1913, by 2009 it would have in fact lost 95% of its value. However, it can be easily shown that this is not true. That is because there was only one way to lose your cash's purchasing power in such a big way over that period. That was to put the cash in a non-interest bearing account and let it sit for all those decades. As I said above, someone foolish enough to do that with interest bearing alternatives readily available probably deserves to lose their purchasing power! Surely, extremely few families actually did this with any significant amount of cash for decades on end, as the generations came and went.

       But what of somebody who was distrustful of keeping their wealth in banks or other investment management firms at all? Such fear was once quite common, especially before FDIC depositors insurance began in 1934. Many people actually did lose their deposits held at banks or other financial institutions during various 'panics' throughout the 19th and early 20th centuries. These fearful folks would sometimes hide cash at home. Fortunately for them, anybody stashing cash in the mattress in 1913 did not lose any purchasing power long term. On the contrary, currency and coins from the era have exploded in value. Depending on the dates, mintmarks, and conditions, much of the contemporary small change, preserved as it was in 1913, is fabulously valuable now to collectors. One hundred dollars in small change stuffed in a shoebox in 1913 is likely to be worth tens of thousands or more now. The fact that such coins in unworn condition are so valuable is testament to their great scarcity, which means that hardly anybody in those days stashed cash for long periods. This, of course, means that Ron Paul's complaint is a crazy claim on behalf of nobody.