Have you heard this story?
To see how much the Fed has depreciated our currency, just go to this calculator at the Bureau of Labor Statistics and compare how much money it took in 2007 to match the purchasing power of $1000 in, say, 1929. (Answer: $12,000. A real shocker, isn't it? The Fed has turned us into purchasing-power paupers!)
You've heard that sob story, right? If you haven't heard at least one or two variations of it somewhere on the internet, I presume you were holed up incommunicado in Antarctica for a couple decades. I just heard it again two days ago as I read an article by one of my critics. (Article synopsis: I'm a government-loving lapdog worshiping at the altar of fiat money, according to this critic.)
But this time, I decided to stop letting the trite sob story go unchallenged. It's a sly play on emotions, it relies on the listener's buying a half-truth, it's single-entry accounting in disguise, and it deserves to be squashed like a bug.
Here's the misleading chart; can you spot the not-so-subtle play on emotions?
What we're supposed to think: "Ohmygod! The dollar has depreciated by a factor of twelve since 1929! A five-cent 1929 bag of oats now costs twelve times that much — how will I feed my horse? It's the Fed's fault! Yeah, that's it; let's go string 'em up!"
Okay, just wait a minute. Before we abolish the Fed based on the evidence above, shouldn't we at least think about it a little harder? Isn't there more to the analysis than just the amount of money we paid for the stuff we bought?
Hint: Shouldn't we give some thought to the amount of money we got paid for the work we did (or for the capital we invested)?
Yes we should. But that doesn't jump out at us when we see the chart above, does it?
What would help is a year-by-year comparison of what we really earned, versus what we really bought with what we really earned. For that, we need both income and expenditures to be in constant dollars, not inflated dollars. The good news is, the Department of Commerce has done most of the work for us. They publish the information we need, and it goes all the way back to 1929. "Real disposable income per capita" is the amount of real, constant-dollar income the average person had left to spend or save (after taxes and transfers); "real personal consumption expenditures per capita" is the constant-dollar value of the real stuff the average person bought.
If our standard of living deteriorated during that time span, both lines would slope downward between 1929-2007; if it stayed the same, both would remain horizontal. Which was it? (Before we string up the Fed governors, we should at least understand how badly their supposed money mismanagement affected our real well-being.)
So, using the Department of Commerce numbers, I plotted the result. Here it is.
Well, well. Not only did we earn more than enough real income to pay for the real goods and services we bought in most years since 1929 (in spite of the dollar's depreciation), we also earned about 5 times more real income (and bought 5 times more real stuff) in 2007 than in 1929. Our standard of living didn't get worse, it got a lot better!
It's true that the value of the US dollar depreciated an average of 3.2% per year between 1929 and 2007. But there are three parts to the whole story: (1) The things we bought in 1929 required 12 times more nominal dollars in 2007; (2) the paychecks we got in 1929 would have been 12 times as big in 2007 nominal dollars; and — more importantly — (3) we were able to buy 5 times as much real stuff in 2007 than we were in 1929.
The purchasing power chart (first one above) doesn't tell us the whole story, does it? Even if we figure out that the factor of 12 applies also to income, not just expenditures, the chart gives no clue that our labor now buys 5 times as much as it did 80 years ago. It gives no clue as to our improved standard of living, our real growth. That's because it's a half-truth scare chart.
The whole truth: we've obviously been doing something right. If deflation is avoided and inflation is kept low and predictable — which is the Fed's goal and their track record (with a few exceptions, especially early on, and again in the 1970s) — we should stop wasting so much time debating the nature of money, and spend it instead debating how to enhance real growth in our standard of living. But don't expect to hear that from the anti-Fed fringe. They peddle fear, and can't allow the rest of the truth to dilute their propaganda; after all, some of them have committed large portions of their adult lives to it.
(1) Because many of the anti-Fed fringe have a gold fetish, the next experiment I have in mind is to compare (as best I can with the same databases) the difference, if any, in the real value of the surplus of income over consumption expenditures, 1929-2007, if we'd been paid in gold instead of nominal dollars. I'll work on that in the next few days, as time permits.
(2) The factor of 12x is the overall aggregate effect of the 3.2% average annual inflation. The oats by themselves don't really cost 12 times as much in 2007 vs 1929; agriculture productivity has skyrocketed.
(3) Links to the Dept of Commerce numbers: