With the huge leaps in industrial productivity during the 20th century, shouldn’t a penny now buy me at least 10 Snickers bars instead of nothing? A great question, considering that world population increased 4.2 times between 1900 and 2010, annual copper mining production increased 30 times in the same period, and industrial/agricultural mass production technology (to make candy) has had exponential efficiency jumps. To investigate this serious matter, let’s look beyond the cries of “the federal reserve and fractional lending stole from us all with overprinted fiat currency depreciation!” and delve into the underlying physical dynamics.
A one-ounce Hershey bar cost 3 cents (9 grams of copper) in 1918, while a 1.45-ounce Hershey bar in 1982 (last year was 95% copper cents) cost 20.6 cents/ 62 grams of copper per ounce of chocolate. As of 2010, the Hershey bar approximates 65 fiat cents an ounce, but since Imperial authorities diluted the penny primarily with zinc (making today’s pennies a mixture of zinc and copper more difficult to quantify ), I will use the period 1918-1982 to simplify.
If adjusted for inflation, 3 cents in 1918 is 19 cents in 1982 (539% depreciation of purchasing power). An 80-year-old man, let’s call him Bob, if he had gotten his favorite childhood candy, his savings under his mattress would have bought 6.3 fewer Hershey chocolates. Now this may not seem also bad IF Bob was in a theoretical situation where his real income growth was linked to inflation throughout his life and his fiat currency grew in a bank at inflation-linked interest throughout the 20th century. Considering the likely moderate increase in the price of candy due to brand recognition, on the surface it appears that the company is only charging Bob 8% more than it did in 1918 (20.6 cents to 19).
Looking through the lens of Austrian economics that inflation is an increase in the money supply, since most people don’t have their finances perfectly adjusted for inflation, Bob is continually being ripped off and impoverished through the tax inflationary. He may not get exactly 6.3 times less chocolate, but even 2 or 3 times less from Hershey’s towards the end of life is a criminal scam.
A defender of the socioeconomic status quo in 1982 may partially agree, but counter this from a pseudo-Austrian angle, “If anything, Bob is lucky to be paying only 62 grams of copper per ounce instead of 9 grams in 1918, since copper is mined faster than people reproduce. It sounds like he’s making a deal on use this depreciating physical metal! Copper is as fiat as paper!” (Authorities saw the copper content in cents rise by more than a fiat cent in the 1980-1981 period and so changed the content, the copper price in cents then collapsed to just under 1 fiat cent again in 1982-1984).
This is an interesting answer and let’s take a look at it without getting distracted by a host of other serious issues, such as the government ending the use of silver as currency, abandoning the gold standard, stagnant real incomes, etc. Some of these questions will begin to be resolved indirectly at the end of the article.
If one tries to look at Bob’s situation through the lens of Marxist commodity-exchange economics, then we see that the poor man is being conned in another way. This research is a bit more complicated considering that technological productivity cannot be easily quantified and that the concept of productivity itself is culturally determined. What is very safe to say is that the mechanical efficiency in producing an ounce of Hershey’s has increased much more between 1918 and 1982 than the 260% increase in the human population in the same time period. That is, if copper production/demand were to magically freeze, an ounce of 1982 Hershey’s chocolate shouldn’t cost 9 grams but substantially less. Surely, they’ve figured out ways to wipe out these chocolate treats by the millions in ways never before dreamed of (even factoring in operating expenses from employee salaries).
Of course, the copper dynamics weren’t frozen, but they also end up benefiting Bob. If he considers the exponential and ever-evolving industrial demand for copper throughout the 20th century, then it is clear that the 530% increase in copper production in 1918-1982 does NOT devalue 62 grams (needed to buy a 1982 Hershey’s ). ounce) in half.
In other words, although the copper money supply increased at twice the rate of human population, we did not see 100% penny inflation as industrial demand for copper kept pace with the human population at a minimum. Therefore, a Hershey bar in 1982 should have cost at most 6 cents (1918 price * population growth) instead of 20.6 cents. Thus, Bob is not only cheated by the expansion of the fiat money supply, but by the value of goods that do not reflect the breakneck pace in the development of Hershey’s bar production and distribution. Considering that a pre-1982 copper cent is approaching 3 fiat cents at the end of 2010 (and many countries have removed copper from their currency in the last 30 years), It may well be that a Hershey bar should they cost much less than a hundred copper today. This makes more sense when you remember that a 1964 silver dime is worth more than $2 today (even though annual silver production increased 35-fold in the period 1900-2010).
It seems safe to say that fiat currency was introduced haphazardly by business leaders in the first half of the 20th century (via their political appointees) to prolong the life of capitalism through inflation. Ironically, the financial robber barons ended up doing the same thing that rural farming interests in late-19th-century America wanted. The 19th century saw several deflationary crashes and farmers wanted silver/gold bimetallism as rapid silver mining would have introduced inflationary pressure on the dollar and thus prevented lost profits. 100 years ago, bankers were lovers of gold, since they made money on loans and deflation benefited usurers. Since finance capitalism’s control of industrial/agricultural capitalism was almost complete by 1900, the bankers tended to win political arguments.
During the Great Depression, a compromise and some convergence of thought developed among financial, agricultural, and industrial interests regarding the benefits of inflation. The biggest bankers of the time found a way to make a profit while expanding the money supply through modern monetary mechanics and farmers ended up getting paid by governments not to produce too much to avoid deflationary profit loss. FDR managed to reconcile the key parasites, preserve capitalism, and artificially prolong the profit-taking of the major monopolistic industries at the expense of the long-term consumer (in a very humane developmental manner). Yeah, he did a lot of cool things too and he’s one of the nicest teachers people have seen in the last century (no sarcasm).
If the price of a 1982 Hershey’s bar reflected the actual amounts of availability of hard money (commodities) PLUS the availability of Hershey’s ingredients (commodities) PLUS the state-of-the-art technological ability to produce and distribute Hershey, then we would see the company experience the periodic deflation is born crisis of overproduction that summarized the communist manifesto. One can imagine what will happen to the corporate bottom line if a copper/silver/gold/rare earth metal commodity money coin buys more consumer goods each year than the last. On paperAustrian utopian capitalism is too efficient and benefits the consumer too much (so much, in fact, that it quickly implodes into a horror show of deflationary collapse, mass unemployment, and a technology-driven socioeconomic evolutionary leap toward post-scarcity society).
Not surprisingly, Trotsky sided with the Austrian economists when he wrote about the prerequisites for the United States to become communist. They are commodity-backed hard money that is used to barter for consumer goods. This is especially true for gold, as gold production only increased 5.5 times in the period 1900-2010, barely outpacing population growth. Ironically, the current wave of libertarians is fighting to make capitalism disappear (since non-fiat currency would completely unleash the post-scarcity potential of the means of production and distribution that have existed around us since at least the 1950s and that Buckminster Fuller and King Hubbert described in detail).
