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This July marks 250 years since a group of merchants, farmers, and lawyers in Philadelphia signed their names to a document that was, among many other things, an act of staggering financial recklessness. The Revolution they launched was funded largely by printing money, and the Continental Congress printed so much of it that “not worth a Continental” entered the language as a synonym for worthless. By 1781, those paper dollars had collapsed to roughly a fortieth of their face value. The nation that would one day anchor the global financial system was born, in part, out of one of history’s more instructive inflationary disasters.
I find that history worth remembering this summer, because the questions we wrestle with today are not new. They are the same questions that the founders argued about fiercely. Alexander Hamilton spent the 1790s insisting that a young country needed sound credit, a national bank, and a government that honored its debts, while Thomas Jefferson worried that concentrated financial power was its own kind of tyranny. That tension, between the stability a central financial authority can provide and the independence a free people instinctively guard, has never been fully resolved. It simply changes costume every generation.
It took the country more than a century, and a series of bruising banking panics, to arrive at the institution that manages that tension today. The Federal Reserve was created in 1913, after the Panic of 1907 made it painfully clear that an economy without a lender of last resort was an economy perpetually one bad week away from crisis. The Fed’s design reflects the old Hamilton-Jefferson argument almost perfectly. It was built to be powerful enough to stabilize the system, yet independent enough that politicians couldn’t bend it to the needs of the next election. Fed independence has been debated since before its creation, and yet it has endured for over a century. It has not only survived the regular attacks on and tests of its purpose, but its case builds each year that Americans continue to trust that a dollar saved today will still mean something tomorrow.
Which brings us to the present, and to a quarter in which that century-old machinery is once again being tested. Inflation, measured by the Consumer Price Index, ran 4.2% over the past year, with a notable half-percent jump in May alone. That is the highest reading in some time, and it arrived even as the Federal Reserve had spent the prior year lowering its benchmark rate to roughly 3.6%. Cutting rates last year into rising inflation was an unusual play, and it has reopened a very old debate about how independent the Fed should be, and from whom. I will offer no prediction on how that debate resolves. I will only note that the founders would have recognized the debate instantly, because it is the same argument they were having in 1790.
Meanwhile, and somewhat remarkably, the markets spent the quarter celebrating. The S&P 500 rose roughly 14% over the three months and sits up about 9% on the year. It is a useful reminder that the economy and the market are not the same thing, and that prosperity and uncertainty have always traveled together in this country. The investors who did best across these 250 years were rarely the ones who correctly called the next panic or the next boom, or the ones who stayed on the sidelines. They were the ones who stayed invested through both ends of the volatility pendulum, who understood that American financial history is not a smooth line but a long, volatile, upward climb punctuated by exactly the kind of anxiety and excitement we feel today.
That is the lesson I keep returning to, and it is a genuinely patriotic one. The strength of American finance has never come from the absence of trouble. It has come from durable institutions and from generations of ordinary people banking on the future of America by making steady, unglamorous decisions about saving and investing in an environment that has always been and will always be volatile. You cannot control whether inflation cools, whether the Fed holds its independence, what the exchange rate is on your Continental, or whether this year’s optimism survives to next year. You can control whether your own plan is built to endure regardless. In a sense, that is the most American financial act there is: don’t bet on a perfect outcome, but build something resilient enough that you don’t need one.
– Stephan
Stephan Shipe, Ph.D., CFA, CFP®
is the Founder and CEO of Scholar Financial Advising.
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