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The Cost Of Living In America, 1800—1980
A Graphic Treatment
February/march 1981 | Volume 32, Issue 2
In the early 1890’s a severe economic downturn caused prices to fall to an all-time low. Agitation for inflating the money supply increased, and the presidential election of 1896 was fought on the issue of coining silver. The Republicans stood behind “sound money” based only on gold, while the Democratic nominee, William Jennings Bryan, championed silver’s unlimited coinage.
It is one of the ironies of American history that the Republican William McKinley’s victory in 1896 was followed by a general increase in prices. New discoveries of gold, and of more efficient ways of refining it, and the return of good times were responsible. The rise was modest, however, until the outbreak of war in Europe in 1914 greatly increased demand for American products. After the United States entered the war, government deficit spending added to the inflationary pressure. Prices soared. But as had been the case after earlier conflicts, the price level dropped sharply. During most of the 1920’s conservative monetary and fiscal policies kept the price level steady while the economy boomed.
Then came the Great Depression. The steep decline of the early 1930’s was made still more precipitous by the repeated efforts of the government to balance the federal budget. The apparently commonsensical theory that in hard times the government should tighten its belt and economize in every way possible died hard.
Although Franklin Roosevelt was accused by his opponents of being a reckless spender of public funds, he was almost as eager to balance the budget as his conservative foes. When economic conditions improved in 1936 and early 1937, he cut federal spending, and the nation fell back into the recession of 1937—38.
World War II ended the Great Depression as once again European demand for American products brought hectic economic expansion and rising prices. After Pearl Harbor few thought about balancing the federal budget. And during the years of all-out war production, price and wage controls kept inflation more or less in check.
This wartime experience demonstrated the effectiveness of the policies that John Maynard Keynes had advocated during the Great Depression. Keynes insisted that governments could prevent depressions by lowering interest rates while spending more money than they took in. Easy money and unbalanced budgets stimulated national economies, he said. Prices went up when Keynesian policies were employed but their author argued in How to Pay for the War that inflation could again be restrained after the economy picked up by reversing the monetary and fiscal policies used to end the slump. High interest rates and budgets that showed surpluses would brake a booming economy and stop prices from rising.
When the fighting ended, the United States—like most other industrial nations—based its economic policies on Keynes’s ideas. In large part because of this there was no postwar depression in America. Prices rose at first but leveled off by the late 1940’s.
The Korean War forced the government to resume heavy spending. The result was alarming inflation. Critics began to point out that prices had been going up continuously since the 1938 recession and were currently at an all-time high. “The inflation of 1939-51,” one economist wrote, “is one of the greatest, if not the greatest, in the history of the world.” Still, the advance slowed during the Eisenhower years, and by the mid-1950’s economists worried more about high unemployment and slow economic growth than about the “creeping” inflation that continued its upward course.
John F. Kennedy made effective use of the slow-growth issue in his 1960 presidential campaign. His proposal for deliberately unbalancing the budget by cutting taxes in order to stimulate the economy—not enacted until after his assassination—seemed again to prove the power of Keynesian techniques.
Once more, however, war, this time in Vietnam, upset the balance. President Lyndon Johnson refused to ask Congress for a big tax increase to help pay the bill, thereby ensuring heavy budget deficits.
As the graph shows, prices have risen without interruption and at an unprecedented rate ever since 1965. There seems to be very little that can be done to stop them; even the most optimistic experts talk only of keeping the price rise below 10 per cent a year—an inflationary rate which before Vietnam would have been considered “runaway.”
Can such inflation continue indefinitely? Has the law of gravity been repealed so far as the price of goods and services is concerned? Time will no doubt tell. But a look at the past record from the dizzy heights of the 1980 Cost of Living Index is not reassuring.