« Car company bailout quiz | Main | How Russia enforces corporate welfare »


Golly and I was tempted to ask in the TITs topic (:P) if you could do an article about whether the individual purchasing power per dollar means doom&gloom or otherwise!

Unfortunately there's not enough S.O.s in the world. There are doomsayers on both extremes and there are nutters who simplistically argue because 'runaway inflation is bad' somehow 'runaway deflation would be good' when in reality both would cause people to lose faith in the economic system and go back to bartering or create various informal currencies. Heck if S.O.s are too rare then future is definitely doomzed I tellz you doomzed! :(

I found this: "in 1929, gold went from $20.63 in 1929 to $34.69 in 1934"

So, in the 1929, a man earning 1.000 $ could buy 48.5 ounces of gold. And now with 48.5 ounces of gold we could buy 42,800.00 $.

The difference between 12.000 and 42.800 is big.

The problem is compounded as, in the 1929 people had less disposable income could not afford to buy gold jewels and so on, but in the 2008 there are more things to buy over gold (TVs, cars, travels, aesthetic surgery, PC, etc.).

The gains in wealth are from by gains in efficiency that are caused by technology. Stuff can be produced using less time, less resources or with different resources. But the problem is "what the Fed. - or any other Central Bank in the world - did of useful in the meantime?".

Fiat money can be inflated (and it will always be, before or after) and then this will distort the ratios of prices in the economy producing malinvestment ( people will invest/speculate to satisfy a demand is not there - like the house bubble ).

What fiat money and inflation do is to make someone richer and someone poorer. The richer obtained the inflated money first and bought at lower prices (so he freed himself from bad money and bought good stuff pumping the prices higher) and the poorer obtained bad money for good stuff.

Usually the richer people have more of their wealth in not inflatable assets, like houses (no one invented fiat houses), gold, industries, land, capital goods); the poors have much more or all in money. So inflation damage them proportionally more than rich people.

Taking away the power of governments to create fiat money is to take away the power to tax (the poor) without raising the taxes and to redistribute the wealth as they wish and without accountability.

Sounds like you are attacking a straw man argument here. The actual original argument is much more sophisticated that this.

You didn't have a link to your source, so I did a search on the text in your block quote, and could not find it anywhere on the internet. I guess it must be from an email, right? Why not let the other guy tell his side of the story.

There's nothing in the complaint about the deflation of the value of the dollar that says real incomes won't go up. All other things being equal some really bad things can happen with rising real incomes. On your chart, things go green in the middle of the depression and during WWII. Things weren't exactly rosy. The problem with the metrice is that bad things can make it go green too. Does your measure take into account unemployment levels?

Now we were lucky after WWII because most of the rest of the industry world had been bombed and savaged, while our industry was pretty much intact. So of course there are other factors at play here.

That however isn't your main problem with your argument. The point of the FED was to bring price stability and it is quite clear from the chart that it hasn't. The main complain about the depreciation in the dollar is that it discourages savings.

The other complaint is that the Fed has actually made the dollar less stable in the short run also. Especially if you remove periods before the Fed when the government had in the past intervened in banking.

It's actually fractional reserve banking that is the main problem and the cause of the business cycle. The Fed doesn't solve that issue at all. It actually makes it worse.

As long as we continue using the fraudulent mechanism of fractional reserve banking we will continue to see these booms and busts.

I think a better way to measure purchasing power is how Charles Wheelan did it his book "Naked Economics." I don't know if came up with this method but it makes sense. What he did was to compare the price of a good to the average hourly wage at the time. Then calculate how many hours it took to earn the money to buy it. He provided some interesting statistics to demonstrate this.

"A pair of stockings cost 25 cents a century ago. Of course, the average wage at the time was 14.8 cent and hour, so the real cost of the stocking in 1900 was one hour and forty-one minutes of work for the average American. ... The price has gone up, but our wages have gone up even faster. Stockings now costs around $4, while America's average wage is over $13 an hour. As a result, a pair of stocking costs the average worker only eighteen minutes of time, a stunning improvement from and hour and forty-one minutes." (pg 152)

"The price of a three-pound chicken has indeed climbed from $1.23 in 1919 to $3.15 in 1997. ... The "work time" necessary to earn a chicken as dropped remarkable. In 1919, the average worker spent two hours and thirty-seven minutes to earn enought money to buy a chicken. In short , you would work most of your morning just to earn lunch. How long does it take to "earn" a chicken these days? Fourteen minutes." (pg 153)

"In 1870, the typical household required 1,800 hours of labor to just acquire its annual food supply; today, it takes about 260 hours of work." (pg 107)

When you convert purchasing power to the time it takes to earn the money the gains are remarkable and easy to see.

My, my , my.

Can one really take the data sets here and use them in isolation? I can think of numerous other questions (and the data the goes with them) that would have to be incorporated to get a real picture and I think that would not be possible. For example:

What are the implications of demographics such as the baby boom and longer life on supply and demand?

How can one compare the automobile of say, 1932 with the automobile of today?

How doe we factor in import tariffs and price subsidies to this?

What role has productivity played?

I'd say it's not possible to incorporate all the economic change from 1929 to the present in a model.

Let me ask a simple question:

If we were still on the gold standard would there be more or less competition, higher or lower productivity, less births and more deaths before before the age of 60 and no farm subsidies or import tariffs?


The weaknesses in the GDP and income data are well-known. Here's a good web page explaining most of the problems and quasi solutions:

On the other hand, it's the most comprehensive and scientifically assembled data set we have available to us, so I'll have to keep using it for analyses like this.

Regarding the gold standard question, I think it's more a question about fractional reserve banking than whether the base money is metal vs fiat. Fractional reserve banking began in London when the warehousemen issued more gold-backed certificates than they had gold to back them up -- and it usually worked effectively as long as they maintained public confidence by not overissuing the certificates. Gold-backed systems had problems with inflation and deflation, too, but the swings (as I understand) were wilder.

"and it usually worked effectively as long as they maintained public confidence by not overissuing the certificates."

That is precisely why I am worried. Public confidence (including mine) in our financial system and leaders is at an all time low. And, we have "overissued"/printed waaaay too much money.

While I agree we can purchase more as a result of working less since the FED originated...this bubble > burst > bubble > burst way of running the economy has caught up with us.

We are on the path of nationalizing the economy and, frankly, I am scared to the point that I moved all of my 401k and investments OUT of the market. I'm content to sit on the sidelines for the time being until there are signs of stability.

Hi Steve -

One thing that is not being accounted for here is quality: you literally could not buy back then what you can buy today for a pittance. Want an accurate watch, within chronometer specifications? Back then, 3 month's salary, today: $3 at Walmart for the cheapest quartz watch. Let's not even get into cars, home appliances and computers.

Adjusting for this is called hedonic deflators, and if you were to do that, you'd see that the value of what you can buy today is vastly superior to what you could buy back when.

These numbers are indeed scare numbers, and pop up when those involved really don't understand what inflation is.

Sorry for not linking the source.
The source is this:

I found it immediately using Google "in 1929, gold went from $20.63 in 1929", but different Google centers give different results (I write from Italy and English is not my first language).

It's actually fractional reserve banking that is the main problem and the cause of the business cycle. The Fed doesn't solve that issue at all. It actually makes it worse.

As long as we continue using the fraudulent mechanism of fractional reserve banking we will continue to see these booms and busts.

On this I agree and agree to the fact that using only gold as metrics have many limits.

The fractional reserve and the fiat money work together to bring instability in the long run. And they bring more instability when the governments try to do social engineering using the banks.

With a gold standard and not fractional reserve banking the cycle of bubble-bust would be much more limited and faster to correct (the swings Optimist123 wrote about). Malinvestment would exist but it could not go on so long.

Causing bubbles and busts , the central banks (FED is a great example) cause a continue destruction/displacement of wealth from a group to another and this reduce productive investments.

The further back one goes in time the more tricky judging "real" prices becomes.

E.g. the "CPI" adjustment for a number starts to move away from "compared to the average wage", and from "as a % of national income" and so on.

Happily, EH.net provides a nifty caluclator that gives "Six Ways to Compute the Relative Value of a U.S. Dollar Amount, 1774 to Present".


For everybody's information. Have fun with it, I do!

We must know the facts about the Federal Reserve. It was created by bankers for bankers and is owned by bankers. The government went along with it because it could benefit by using the Fed printing press to fund the governments over spending. The inflationary aspects of the Fed actions are only a part of the story. But they are the most destructive to the common people. Wages adjust to inflation not the other way around. The ones that benefit from inflation (remember that inflation is not the increase of prices, inflation is increasing the amount of currency in the market. Increase of market prices is a symptom of inflation.) are the ones that receive the new money first - the bankers and the government, and then big business.

If you are going to be skeptical of those that you say are only including half the truth please include the whole truth. The whole truth is that fractional reserve banking has been creating inflation and the bubbles that go along with them for many many years. In the US the Fed and the US government have been creating a grand bubble since we went off of the gold standard. These other bubbles are just bubbles inside the grand bubble that, because the Federal Reserve Notes has been allowed as the worlds "reserve currency", is bring down the world economy. But it will be the USA that suffers the most as the rest of the world refuse to keep funding our debt and no longer accept the US dollar as the main reserve currency. The main things that are keeping the USA from collapse are that the other central banks and governments have been making the same mistakes and most of the world has too much invested in the Federal Reserve Notes.


Did you recently finish reading The Creature from Jekyll Island? Just a guess.

FYI, fractional reserve banking isn't going away -- unless it is changed to zero percent reserve requirements as in Australia, which I guess would mean it went away.

The comments to this entry are closed.