08 May 2011

The Value of a Dollar...

[This note was originally posted on Facebook on 30 November 2010, and has a link to a picture in Polish.]

I'd like you all to take a glance at this image for a moment, and the ad for the dolls featured.

Where did I get this ad? I stumbled across this when searching for my great-grandfather's obituary in the archives of the Kuryer Polski, which was a major Polish-language daily newspaper in Milwaukee, Wis. Specifically, this ad ran in mid-December 1923.  The prices sound incredible-- decent dolls for one's daughter (or sister, or niece) would put you back between ninety-nine cents to $2.29.

I looked at this ad and while I did the price comparisons to the current day in the comments thread, it got me thinking. A lot of libertarians and "smaller government" types argue for the abolition of the Federal Reserve. Indeed, a popular argument is often brought up somewhat like so:

In 1913, the cost of an ounce of gold was $20.64. Today it "closed" at $1,384.95 per troy ounce.  This would mean that the dollar has lost over 99% of its value since the Federal Reserve took control of the dollar in 1913 and that the price of gold has increased by over 6700 percent. This of course could have been avoided, and perhaps our economic crisis if we'd have never let the Fed come into control and remained on the Gold Standard.

 The Federal Reserve Bank of Minneapolis, Minn. (which is the 9th Federal Reserve District covering most of the northern Great Plains, northern Wisconsin, and the Upper Peninsula of Michigan) has a nifty little calculator on their site. According to them, a dollar of goods or services bought in 1913 would cost approximately $22.19 today. (For what it's worth, that same 1913 dollar would have been worth $1.73 to a reader of the above ad in 1923).

Of course, there are many factors at play besides the Federal Reserve's existence. First, the U.S. abolished the gold standard in 1933 (though through Bretton Woods, which collapsed in 1971, banks and foreign governments could still convert between U.S. dollars and gold), though the U.S. hung on to silver until 1963, and remaining silver certificates were redeemable up until 1968.  Second, the above argument uses comparisons with the price of gold, the Minneapolis Fed uses adjusted consumer price indices (remember, people aren't just buying and trading dollars for gold, silver, etc.). Third, through various controls at the Fed and in the government-in-general (e.g. the enactment and periodic revisions of wage and hour laws to keep up with society), the average amount of dollars people have to spend has increased.

According to the U.S. Government, the average American annual income in 1913 was $800 (1). In 2010 dollars, this comes out to approximately $17,750.  Yes, that is far below the Census Bureau's published latest figure of $49,777. There are a wide variety of factors (besides the three that I mentioned already) that need to be accounted for, and these probably explain a lot of the apparent "gap."

But, let's go back to the ad for a moment. Have the values for baby dolls that are dressed and make some basic noise really changed that much in the past eighty-seven years? While it's true the exact same dolls that are in the ad are obviously no longer for sale (perhaps save for a few surviving ones in antique stores as collectibles), we can look at the fact that these were basic toys, and similar products obviously do exist today.

The ad lists three basic dolls for sale:

a.) a 24-inch doll for $2.29
b.) a 16-inch doll for $1.79
c.) other ones (presumably 10-12 inches) for $.99

In 2010 dollars, these would approximately cost $29.42, $23.00, and $12.72, respectively. So, do similar dolls that are in the stores today (e.g. Walmart) sell at a similar price? Let's find out:

a.) 24-inch doll: Overstock.com has one that sells for $28.95; which is less than fifty cents less than the Fed's converted figure.
b.) 16-inch doll: Walmart has a 17 inch doll on sale for $20.00 and Amazon has a 16 inch one for $25. Since this is a range, let's take the average of the two and say a 16 inch baby doll costs $22.50--which is fifty cents less than the Fed's value of $23 for the 1923 doll.
c.) other "inexpensive" doll: Google Shopping has 12-inch dolls that are quoted as $13, which is twenty-eight cents more than the Fed's figure.

Now, let's take another example--let's look at a half-gallon of milk. Given the fact that there is such a difference in years, let's assume that milk in 1923 did not have rBST (which was developed in 1994, and is probably a good part of why "regular" milk is less expensive at a grocery store). From what I see online (2), a half-gallon of milk would set one back about thirty cents. In 2010 dollars, this comes out to roughly $3.85. According to the Brownfield Ag News, the average price of a half-gallon of rBST-free milk today is $3.62.

So, what can we glean from these two little exercises?  Well, it's true that the exact same dolls aren't for sale, mostly due to an eighty-seven year difference. Looking at similar "basic" dolls though, the prices appear to be fairly close to the same. The milk is also fairly close to the same, perhaps implying that in the long-run, the goods had roughly the same value, but between various factors such as inflation, technology, and the adjustments that have to be made to the consumer price indices, it looks like we're paying more dollars for the same stuff--although, to be fair, the average American also gets more dollars to spend. Whether that is a good or a bad thing I leave to the economic experts...

(1)http://www.irs.gov/app/understandingTaxes/student/whys_thm06_les01.jsp#quickCheck (hint, the answer is "D. $800, which shows up as "Correct")

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