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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.
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.