Value of the Dollar Today

A dollar doesn't buy nearly as much as it once did, as the cliche goes. Since the early 20th century, the decline in the value of a dollar has been dramatic due to inflation. A dollar in 1913 had the same buying power as $25 in 2018.

Three separate factors all can create inflation:

• Increased demand for products and services
• Constraints on available supplies for goods and services
• An increase in the amount of money being printed

The first two examples cause costs to rise, limiting how much can be purchased, while the third example devalues each dollar because there are more of them.

The Consumer Price Index (CPI) determines the value of the U.S. dollar by the goods and services it purchases. The CPI 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 overseas markets. 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.

Hyperinflation after World War I reduced the dollar's value by nearly half from 1913 to 1919, 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.

The following table shows how much the dollar has fallen each decade according to the CPI Inflation Calculator:

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 could be much lower for these reasons:

1. 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.
2. 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.
3. 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.

When the dollar loses value, it drives import prices higher, which is one of the reasons gas prices sometimes rise. Oil is one of 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. Since the recession of 2007-2009, the rich have just gotten richer. As of tax year 2016, the top 10% of earners took home almost 50% of all adjusted gross income reported on tax returns. The top 1% earned about 20% of all income.