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The Cost Of Living In America, 1800—1980
A Graphic Treatment
February/march 1981 | Volume 32, Issue 2
The Department of Labor first began publishing a Cost of Living Index in 1919. Since then this measurement of the prices of the goods and services used by ordinary people in their day-to-day lives has been many times modified and refined. During World War II its title was changed to Consumer Price Index. Attempts also have been made to project the index back through the nineteenth century by collecting data from newspapers, business records, and other sources. Experts sometimes question the accuracy of even the current figures, and everyone agrees that the earlier estimates, especially those for the period before the Civil War, are far from precise. Nevertheless, this graph records with reasonable accuracy the general trend of prices paid by consumers over the years (the base line of 100 represents the 1957—59 price average).
Prices constantly move up and down in response to changes in the supply of and demand for goods. But they also are affected by the amount of money and credit that consumers can command. And these are greatly influenced by the government. Ideally they ought to be manipulated in a way that assures price stability. As the British economist John Maynard Keynes said in 1923, “We must make it a prime object of deliberate State policy that the standard of value … should be kept stable.”
Whether the medium of exchange has been gold and silver coins, or bank notes, or polished sea shells, governments have always created and legitimized money. Fear that they might cause prices to rise by printing too much paper currency was for centuries the main reason most people considered precious metals the only safe money. When, for instance, the Continental Congress was unable to meet the costs of the War for Independence by taxing and borrowing, it printed huge amounts of Continental dollars in order to pay soldiers and suppliers. As a result the dollar plummeted in value until it was “not worth a Continental.”
This unfortunate experience persuaded the Founding Fathers to give the central government constitutional power to tax and sole control over the coining of money. Guided by the Secretary of the Treasury, Alexander Hamilton, Congress used those powers to restore confidence in the dollar. At the same time, by chartering the Bank of the United States, Congress provided a means of expanding the money supply so that the economy could grow rapidly. Prices fluctuated after 1790 but within a limited range.
Between 1800 and 1870 the cost of living rose steeply only twice. In each case war was the main reason. During the War of 1812 prices went up because the blockading British navy reduced the flow of foreign goods into the United States to a trickle. In 1812, $77,000,000 worth of imports came in; in 1815, only $13,000,000. Moreover, repeated military setbacks—including the seizure of Washington- caused Americans to lose confidence in the dollar.
After the war, prices fell almost as rapidly as they had risen. Then, over the next forty years, the general trend was slowly downward. Output increased steadily, and improvements in transportation, such as the construction of the Erie Canal and the rapid development of steamboats and railroads, reduced the cost of moving goods over long distances.
The Civil War caused the next outburst of inflation. The federal government failed to increase taxes enough to pay for the vast war effort. Instead it borrowed heavily, and in addition printed $431,000,000 of “Greenback” paper money unsupported by gold or silver. People preferred “hard money” to Greenbacks, especially when things were going badly for the Union armies. At times the price of goods in Greenbacks was more than twice the hard-money price. (The graph does not show it, but inflation was even worse in the Confederacy. Jefferson Davis’ government issued more than $1,500,000,000 of unbacked paper money; its dollar was worth less than two cents in gold during the latter stages of the conflict.)
After 1865 a concerned government stopped printing Greenbacks and set out systematically to reduce the national debt. Once again the cost of goods and services began to decline.
Prices fell sharply in the 1870’s and went down still further in the middle 1890’s. At the time people believed the United States was passing through a “Great Depression.” Actually it was an era of enormous economic growth. Millions of acres of newly developed frontier land were yielding bountiful harvests, Andrew Carnegie was putting together his iron and steel empire, and John D. Rockefeller was fashioning the Standard Oil Company. Prices declined because the money supply did not keep up with the huge volume of goods pouring from American farms and factories.
The government made the deflation more extreme by withdrawing some of the Civil War Greenback dollars from circulation. Then, in 1879, the rest were made convertible into gold and thus indistinguishable from other paper notes. Reducing the money supply was bitterly resisted by debt-ridden farmers and other groups suffering from the steady decline of prices. They demanded that Washington increase the money supply- either by printing more Greenbacks or by coining large amounts of the silver that was being mined in the West. Congress provided for the coining of some silver, but not enough to reverse the deflationary trend.