Question: What Is the Value of a Dollar Today?
Answer: The value of the dollar today is less than it was in the past. When the dollar loses value, that's called inflation. That's because prices seem inflated as each dollar is able to buy less and less.
How much lower is today's dollar value? In 1913 you could buy as much with a dollar as you can with $23.63 in 2014, more than 100 years later. By 1920, the dollar had lost about half its value, and was worth $11.48 in today's value. Deflation (the opposite of inflation) during the Great Depression of 1929 increased the value of the dollar to $13.43. By 1940, the dollar was worth even more -- it could buy as much as $16.40 could today.
By 1950, the dollar's value had dropped even lower than before the Depression. It was worth only $9.53. It has fallen ever since:
- 1960 = $7.76
- 1970 = $5.92
- 1980 = $2.79
- 1990 = $1.76
- 2000 = $1.33
- 2010 - $1.05.
Why Is the Value of the Dollar Lower Today?
To some extent, inflation is the necessary cost of an expanding economy. The Fed keeps interest rates low to stimulate spending, which drives demand and ultimately economic growth. In fact, the Fed targets a 2% core inflation rate. In other words, as long as prices (excluding volatile food and energy) only goes up 2% a year, the economy will grow at a healthy rate.
Of course, this is just fine as long as your income also increases more than 2% a year. If not, then inflation will eat away at your standard of living. For many Americans, that is exactly what has happened. That's because income inequality has increased. Between 2000-2006, average wages remained flat despite an increase of worker productivity of 15%. In those six years, corporate profits increased 13% per year. And that was before the recession!
Since the recession, the rich have just gotten richer. In 2012, the top 10% of earners took home 50% of all income, while the top 1% earned 20% of all income. Those are the highest percentages recorded, dating back at least 100 years. (Source: NYT, The Rich Get Richer Through the Recovery, September 10, 2013)
How to Measure the Value of the Dollar Today
Before you find out what the value of the dollar is today, you've must be familiar with the four ways it's measured. When you're comparing the cost of living over time, most experts use the Consumer Price Index, or CPI. This compares the prices of a basket of goods and services for each month.
The second method is to use exchange rates to find out how much the dollar buys 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.
Although you won't see Treasury notes used as often, it also can tell you how the value of the dollar is today. That's because many investors, businesses and even countries purchase Treasuries instead of buying the U.S. dollar as cash.
The third way to estimate the dollar's value today is through foreign currency reserves. That's the amount of dollars that foreign countries keep on hand. Why would they do that? For three reasons:
- The dollar is the world's reserve currency. This means that most international transactions must be made in dollars. Foreign governments keep dollars on hand in case their businesses need it for global trade.
- Some countries, like China and Japan, export a lot to the U.S. They get a lot of dollars in return for their goods. If some companies have too much, the government will exchange it for them.
- China and Japan also like to keep buying dollars to keep its value higher relative to their own currencies. This makes their exports cheaper in comparison, giving their companies a competitive advantage.
Without foreign currency reserves, the value of the dollar today would be much lower. For example, many Congressmen accuse China of manipulating its currency, the yuan. They want China to let the yuan's value rise, so the exporters in their states can be more competitive.
However, this would be disastrous to most of us. Many experts say that the yuan is 30% lower than it should be. If the yuan rose 30%, so would the prices of the things it exports. Next time you want to buy something that says "Made in China," imagine it costing about a third more!