Financial Plan - Cornell University Division of Budget & Planning

Tuition, Financial Aid & EndowmentChange in the Consumer Price Index (CPI) Extrapolated Backward to 1665 *(1983 = 100 CPI-U base)200150CPIIndex10050End of external use of the gold standardbetween the United States and other nations.End of internal use of the gold standardwithin the United States.016651680169517101725174017551770178518001815183018451860Calendar Year* CPI values for years prior to 1913 were reconstructed from data in John J. McCusker, “How Much Is Thatin Real Money?,” Proceedings of the American Antiquarian Society, Worcester, MA, 2001.187518901905192019351950196519801995tively modern phenomenon. Periods of inflation anddeflation occurred repeatedly during this country’shistory. (See graph above.) They were episodic, linkedto major upheavals such as wars, in which the scarcityof goods and services drove up prices. Invariably,inflation subsided, although it sometimes settled atelevated plateaus. An American of the 1850’s wouldhave expected to sell farmland for the same $1 peracre that he paid for it 30 years earlier, and a 2 to 3percent interest rate was viewed as advantageous asit represented simultaneously the nominal and realreturn on capital.Two events changed that pattern in the twentiethcentury: (a) the increasing globalization of trade,investment, and currency exchange among nationsand (b) the unlinking of currencies from commoditiessuch as gold and silver. The U.S. currency systemwas partially freed from the gold standard duringthe Civil War, when the federal government, facedwith staggering war costs and a dwindling treasury,had to print what amounted to promissory notes—socalled “greenbacks”—as legal tender. This currencywas backed, not by a precious metal, but instead bythe full faith and credit of the nation. Senator JustineS. Morrill of Vermont, the author of the 1865 Land-Grant Act, railed against the proposal as it was debatedin Congress:If the first step were taken in making paper a legal tender,we must go on. …having tested this facile mode of payingdebts, I fear the stern and honest mode of taxationwould be repugnant to many constituencies, and thatthe doors of the temple of paper money would not soonagain be closed. Gentlemen may think otherwise, but,like a certain heroine who “Said she’d ne’er consent, andconsented still,” Congress would consent. If we have notthe virtue and the power to resist the temptation now,while our reputation is spotless, we shall have still lesswhen the whole country becomes debauched. 36Despite Senator Morrill’s worst fears, the nation andthe world moved away from precious metals as theanchor for currency and currency exchanges. Oneunintended consequence of allowing currencies tofloat, as they now do, is for prices to rise faster thanreal changes in productivity. This can occur because ofexcess demand for goods and services or the need ofproducers to increase prices to maintain profit marginsin the face of increased costs. Governments nowattempt to manage inflation through their monetary36 Bolles, Albert S., The Financial History of the United States,from 1861 to 1885. New York: D. Appleton & Co., 1886.30