No net inflation in 19th century

[free4now]

I recently came across an article in my alumni magazine about how naming rights for my undergraduate university were purchased for only $5000 in 1803, which was reportedly the amount that endowed a single professorship.

So I looked up inflation calculators, curious to see what ridiculous amount that would be in today's dollars. To my surprise, it was only about $70,000 in today's dollars. Surely that couldn't be enough to endow a professorship; it's not even enough to cover the yearly costs of a professorship today.

But leaving aside the questions of hedonics and why the inflation numbers are off, more digging revealed another very interesting observation:

There seems to have been essentially no net inflation in the 19th century; there was positive and negative inflation periods, but they cancelled each other out and prices remained essentially flat.

Here are my sources:

Chart of Consumer Price Index, 1800-2005

Value of a 2005 $100 Dollar, 1800 - 2006

I'm not sure what to do with this information, whether it comforts me that inflation is not inevitable, or whether it causes me to be afraid, very afraid, of our current fed's power to cause inflation.

 

[haha]

I recently came across an article in my alumni magazine about how naming rights for my undergraduate university were purchased for only $5000 in 1803, which was reportedly the amount that endowed a single professorship.

So I looked up inflation calculators, curious to see what ridiculous amount that would be in today's dollars. To my surprise, it was only about $70,000 in today's dollars. Surely that couldn't be enough to endow a professorship; it's not even enough to cover the yearly costs of a professorship today.

But leaving aside the questions of hedonics and why the inflation numbers are off, more digging revealed another very interesting observation:

There seems to have been essentially no net inflation in the 19th century; there was positive and negative inflation periods, but they cancelled each other out and prices remained essentially flat.

Here are my sources:

Chart of Consumer Price Index, 1800-2005

Value of a 2005 $100 Dollar, 1800 - 2006

I'm not sure what to do with this information, whether it comforts me that inflation is not inevitable, or whether it causes me to be afraid, very afraid, of our current fed's power to cause inflation.

Prior to the 20th century there were many long periods where prices were stable, as well as long periods of falling prices. Usually inflation when it came came in a quick jump which often doubled prices, to be followed usually by stability but sometimes by falling prices. In the 16th century the Spaniards brought two big troubles from their new conquests in the Americas- syphilis, and inflation as a result of the fantastically rich gold mines in Peru and elsewhere.

In the 19th century the gold standard and the Pax Britannica which kept all out war at bay led to very stable prices. Interesting tha tPax Americana really hasn't had this effect, perhpoas because we never learned to make our wars and police actions pay for themselves with some profit left over.

Now, we have only fiat currency everywhere, and very expensive war everywhere. It is astonishing that we have had as little inflation as we have had over the past 30 years. Nevertheless cumulatively currencies are being destroyed.

Ha

 

[RonBoyd]

This "calculator" gives a little over $98,000 (1803 to 2008) as the answer. I am unsure whether that is an important difference but that site does give (on very brief inspection) a good description of the six ways to calculate the solution.

I found the above source through a link in the website entitled "Current Value of Old Money." An interesting find in itself.

 

[ziggy29]

This underscores why I can't get excited about foreign currencies as a hedge against the weakening dollar. Pretty much all fiat currencies are facing similar challenges as the dollar, and in some cases, considerably tougher challenges. As bad as U.S. debt to GDP is, it's worse in much of the Eurozone and I believe in Japan as well. So if that were the reason to avoid the dollar, it's even more so for the euro and the yen.

I wouldn't be surprised to see the dollar "strengthen" relative to other fiat currencies even as its real purchasing power of goods, services and hard assets continues to decline. (It just may not decline quite as quickly as with other fiat currencies.)

And I don't think it's a coincidence that the long, sustained drop in the dollar (and rise of inflation as a semi-permanent entity) began close to 1913 when the Fed was created.

 

[tryan]

Heard a guy on the radio saying the reason we have no inflation is because all the $$ printed are not being loaned out. Banks are using it to beef up reserves and consolodate the failed banks (more reserves needed).

 

[ziggy29]

Heard a guy on the radio saying the reason we have no inflation is because all the $$ printed are not being loaned out. Banks are using it to beef up reserves and consolodate the failed banks (more reserves needed).

Yep. It's all about the "velocity of money."

Let's pretend I had a printing press that produced flawless looking fake currency. I crank out $50 trillion in bogus bills. For all intents and purposes, there might as well be another $50 trillion in "printed money" out there because my fake couldn't be detected. If I take that cash and bury it somewhere, it has *zero* impact on inflation; the "velocity" of that money -- the speed at which it changes hands in commerce -- is zero. As far as the real economy is concerned, that money doesn't exist.

But if I take that $50 trillion, start spending and distributing all of it into the economy and give it velocity, suddenly the inflationary pressures are huge as a LOT more dollars are suddenly chasing the same pool of goods and services.

We can print and print and print, and if banks aren't lending and people aren't spending, it won't stoke inflation. But if the borrowing and the spending return, the inflation will follow. It's not *just* the banks shoring up reserves; it's also consumers doing the consumer equivalent of "shoring up the balance sheets" -- saving and paying down debt.

 

[W2R]

It's not *just* the banks shoring up reserves; it's also consumers doing the consumer equivalent of "shoring up the balance sheets" -- saving and paying down debt.

After watching HGTV and Suze Orman quite a bit lately, I find it hard to believe that consumer behavior will continue in this direction very long. In the long run I doubt that many have learned anything at all. Greed is everywhere, even now.

I expect that after this brief pause, the general public will continue to keep spending every cent the banks will loan them, whether or not they can truly afford to do so. (Present company excluded, of course! Many/most ER Forum members have been LBYM'ers for years before the recession.)

I agree completely that it is not *just* the banks, though I don't see consumers being as big of a factor in this as the banks.

 

[tryan]

... and then if Uncle taxes us a whole bunch before the velocity of the cash has a chance to excelerate: inflation problem solved.

 

[harley]

But if the borrowing and the spending return, the inflation will follow. It's not *just* the banks shoring up reserves; it's also consumers doing the consumer equivalent of "shoring up the balance sheets" -- saving and paying down debt.

After watching HGTV and Suze Orman quite a bit lately, I find it hard to believe that consumer behavior will continue in this direction very long. In the long run I doubt that many have learned anything at all. Greed is everywhere, even now.

I expect that after this brief pause, the general public will continue to keep spending every cent the banks will loan them, whether or not they can truly afford to do so.

There's been a lot of talk in the MSM about the change in behavior as evidenced by the personal savings rate, and how this will be a permanent change and it's a positive effect of the financial crisis and recession. I don't buy it, and I think the numbers are backing me up. News Release: Personal Income and Outlays, August 2009

Personal saving -- DPI less personal outlays -- was $324.1 billion in August, compared with $436.0 billion in July. Personal saving as a percentage of disposable personal income was 3.0 percent in August, compared with 4.0 percent in July.

I know this could just be a blip, but it's timing is suspicious, coinciding with Dow 10K and all. I don't trust the public. LBYM is a tough lesson to learn, and even though the "economic collapse" was a real eye-opener, I think the "recovery" has been too quick and too easy for most to have learned much from it.

PS - When I say quick and easy, I don't mean to denigrate the problems that so many have faced. However, for the large majority of middle/upper class people, the ones who could conceivably save, it's been a pretty easy recovery from the End of the World.