TAMPA, August 3, 2012 – “When I was your age, I went to the movies for a dime and bought a big bag of popcorn and a soda for a nickel.”
My father said that to me a hundred times when I used to pay $2.75 to go to the movies and another $1.25 for the popcorn and soda. For five generations, Americans have understood steadily rising prices as an immutable law of nature. Yet history shows that this just isn’t true.
The Federal Reserve of Minnesota publishes historical inflation figures on its website going back to 1800. The attached chart from that website shows annual inflation rates from 1800 through 2008. I added the last column to calculate the price movements of a basket of goods that cost $100 in 1800.
You don’t need a Ph.D. in finance for the numbers to jump off the page. The basket of goods that cost $100 in 1800 only cost $58.10 in 1913 (the year the Federal Reserve System was created). For that entire first full century of American history, steadily decreasing prices were something Americans took for granted.
In the ninety-nine years since the creation of the Federal Reserve System, that same basket of goods has risen to $1,265.14.
Do the math.
The Fed and its apologists often explain rising prices as the result of economic growth. If the economy “overheats,” then money changes hands more quickly and prices get bid up. This holds water neither from a logical nor from a historical perspective.
Basic economic principles tell us that price is determined by the intersection of supply and demand. As supply increases relative to demand, prices should go down. Thus, if the economy produces significantly more goods and services, price levels in general should fall.
History bears this out. As great as the gains were in the 20th century, the nineteenth century saw the United States transform from a mostly agrarian producer of raw materials to an industrial giant. Yet throughout that period of explosive growth, prices fell. This contradicts the Fed’s explanation for rising prices.
Perhaps there is another explanation that might emerge out of a full audit of their operations.
The implications of the two different experiences of falling and rising prices in the two respective centuries are innumerable. Here is just one:
For the average 19th century working class family, living on daily wages, it made sense for them to save their modest surpluses in cash. They didn’t have to risk their money in financial markets that they didn’t understand. They could save cash and pass it on to their children. Price inflation wouldn’t rob them of their meager savings. Their money would be worth more when bequeathed to their children than it was when they earned it.
After a generation or two, it was possible for an average working class family to save enough to send their kids to college, start a business, or make a thousand other choices that capital makes available to those who possess it. The natural phenomenon of falling prices during increased productivity fostered upward mobility and a higher standard of living for average people.
Conversely, the unnatural phenomenon of steadily increasing prices fosters a lower and lower standard of living. At the beginning of the 19th century, the average working class family required all hands to earn income, including the children. As production went up and prices came down, the family could stop sending the children to work and eventually maintain a lifestyle of modest comfort on the income of one parent alone.
The trend during the 20th century has been exactly the opposite. Despite continuing gains in per capita productivity, the average family requires both parents to work, with a second job for one not uncommon. They struggle to pay for routine healthcare. Food Stamp enrollments are exploding.
All of this begs the questions: Why do prices go up? Why is “progress” not resulting in better living standards?
“If the American people ever understood the banking and monetary system, there would be a revolution the next morning.” These words are often attributed to Henry Ford, although they do not appear in his autobiography and are likely apocryphal. However, these words are not.
“The people are on the side of sound money. They are so unalterably on the side of sound money that it is a serious question how they would regard the system under which they live, if they once knew what the initiated can do with it.”
Ford goes on to say, “But money should always be money. A foot is always twelve inches, but when is a dollar a dollar? If ton weights changed in the coal yard, and peck measures changed in the grocery, and yard sticks were to-day 42 inches and to-morrow 33 inches (by some occult process called “exchange”) the people would mighty soon remedy that.”
Taken together, these statements render the apocryphal quote an accurate paraphrase.
The cornerstone of Ron Paul’s revolution is to end the Federal Reserve System. His Audit the Fed bill passing the House is not his Yorktown. The bill is unlikely to pass the Senate and there are likely many defeats in the future before the final victory is won.
However, it is Lexington and Concord. The shot heard round the world has been fired and the banking establishment is running headlong for Boston.
Ron Paul is retiring from politics, but hopes to someday see the Federal Reserve raise the white flag.
Tom Mullen is the author of A Return to Common Sense: Reawakening Liberty in the Inhabitants of America.
This article is the copyrighted property of the writer and Communities @ WashingtonTimes.com. Written permission must be obtained before reprint in online or print media. REPRINTING TWTC CONTENT WITHOUT PERMISSION AND/OR PAYMENT IS THEFT AND PUNISHABLE BY LAW.