Sunday, January 24, 2010

Inflation ”An Old People’s Disease”

I can't remember how many times my grandpa told me; when he was a kid, the price of a loaf of bread was a nickel and how he worked in the oil fields for 50 cents a day. When I graduated from high school in 1964 gold was at $35 per ounce and our coinage was silver. At the age of 17, inflation had no real meaning. I had no past to compare it to. When I went shopping, I had no idea of what was a fair price for hamburger per pound. By the time I was 30, my perceived values of what things should cost were well rounded. Inflation was still not an issue. When I got to be 50, I started to take notice of the price my father paid for our house when I was a kid, $28,000. Then I remembered back to my first car in 1969, a brand new Lemans’ convertible, only $3,000. With the comparison, inflation seems rather obvious.

If you talk to the average guy on the street, inflation might as well be nuclear physics. The idea that government spending without matching taxes creates inflation, makes the listeners eyes glaze over. The general public takes price increases for granted; prices and wages always go up (just like housing). The worker’s wages increase each year and this gives everyone the feeling that they are making more money (it’s the carrot on the stick). The government doesn’t even have to raise taxes, inflation does it for them.

The milestones for government induced inflation are rather subtle if not embarrassing. In 1964 it cost the mint $1.29 to purchase the silver to make 5 quarters. Needless to say, that 4 cent loss was eliminated. In 1965, the government reduced the silver content in the coinage from 90% to 0% silver, and no one blinked an eye (the half dollar and dollar went to 40% silver up to 1969).   In the next 5 years, the bad money chased out the good. Silver disappeared from circulation.

At that point, you’d think the story is over. Well, in 1982 our government had another “mark to reality moment.” It was now costing them 2 cents to buy the copper for a one cent coin. They then introduced this new copper cladded zinc cent.

Our currency is no longer backed by anything except the “full faith and credit of our government.” The churches in this country work on the same principle—a lot of faith and prayer. In government, it’s called “Winging it!”  (It involves a lot more prayer than the religious model).

We have traveled from the gold backed currency’s of 1930’s to the Silver backed currency’s of the 1950’s to the Copper  currency’s of the 1970’s. It kind of makes you wonder what has really happened to our monetary system since the last conversion 28 years ago, when we went off the “copper standard” onto the zinc.

Today’s generation of high school grads is no different  from ours forty years ago. At the checkout counter the other day, a young girl (21) in front of me bought a pack of cigarettes for $6.50. They have always been that price for her (I can remember paying a quarter a pack). I now understand my grandfather’s irritation over the price of bread increasing.  It's not hard to catch on to what the government is doing, it just takes time.  Inflation is a little like sawing a quarter inch off of grandpa's favorite walking cane each week. It's good for a few laughs until he catches on.


Anonymous said...

Great blogpost, Jim.

About a year and a half ago, while checking out, I noticed that nickels were actually worth (looking at their true metal content) a hair above seven cents.

Big deal right? A whole two cents.

That's a 40% premium to face value!

Nickels are now back around .05 again - but with them being composed of 75% copper and 25% nickel, it might be a wise investment to put back a few hundred dollars worth.

El Scorcho

frakrak said...

Eye catching post Jim!!

We've progressed further from the "zinc" standard to the "plastic" standard over these past thirty or so years ....

Rob in NS said...


Great post. Best commentary on inflation I've read in a while.

Cheers from NS

Jim in San Marcos said...

Hi El Scorcho

Funny you should mention The other day, I accidentally dropped a magnet into a box of Canadian coins I had, and a lot of the nickels stuck to it. Nickel is magnetic so I went to that site. Come to find out, the nickels are worth about 20 cent apiece for their metal content. I also learned that some of my Canadian coins had silver in them.

I don't really collect pennies, but there is an incentive now, I'm going to keep all of the 1982 or before pennies. Let's take the good money out of circulation.

Thank you for your comments.

Jim in San Marcos said...

Hi Frakrak

When you examine your billfold, there are the credit cards and they are plastic.

I use to go to Las Vegas and there, you heard the coins dropping out of the slot machines. Now the machines still make the coin noise, but nothing drops out. It is coin-less.

So I think you are right, and it will be hard for me to adjust to. My coin collecting will suffer the effects. You can't press credit cards into those round coin holes.

Take care.

Jim in San Marcos said...

Hi Rob

Thank you.

Many of the posts I write, I expect some comments and get very few. But this one I really didn't even expect a peep. Funy how it works out.

Glad you liked it.

Take care.

Anonymous said...


How long until the paper a dollar is printed on costs more than a dollar?

What will they substitute then?

JMS said...

It will be all digital. A bunch of zeros and onex in a randomn computer out there.

Anonymous said...

I'll bet that most people, when asked what causes prices to go up (inflation), they'll tell you that companies have to raise prices because the workers are always demanding more money. Very few actually have a clue about the true cause.

Anonymous said...

Is there any way out of this? Our entire system is based on factoring in inflation.
Would it be worth collapsing our deck of cards and starting over with a solid non-FED foundation, or is inflation the lesser evil?

random thought:
If the dollar falls in the forest, but there is no citizen intelligent enough to understand it, did it still fall?

Franco Bollo said...

I have my own moment to add to Jim's "milestones for government induced inflation".

In the early Seventies, we were paid by cash or check. I remember complaining that all of the bills I was getting paid in were new and freshly printed. I couldn't seem to get my co-workers to realize that something was wrong, and there was a danger involved with printing so much new currency. No one seemed to care, the general response was that "money is money", and everything was well with the world as long as "the check cleared."
I wonder what they're saying now?

I for one am getting a little worried.

Anonymous said...

We bought our first house in 1962, paid $12,800, lived there for 41 years, sold it for $130,000. Two years later it was sold for $354,000, and now is in default. That’s what you call inflation and bubble inflation. (In fact we bought it from FHA because the builder had gone bankrupt).

I got to thinking the other day, how much gold would it take to pay off the national debt? So I used gold a $1,095 an ounce and divided it in to $12.327 trillion, hang on to your hat. It came out to be over 11,257,534,247 ounces of gold. Correct me if I’m wrong.

Jim in San Marcos said...

Hi Franco

The trouble with any currency, it is based on faith.

Our government never saved for that rainy day, and now they want to spend their way out of it.

I has me worried too.

I liked your bit on shoelace tying in your blog. Here is a link to it for others reading.

Thank you for your post.

Jim in San Marcos said...

Hi Anon 4:25

I don't think the people in charge have any intension of paying off the national debt. It's kind of like trying to wash your car with a q-tip.

I think if the government seriously wanted to back the currency with gold, the price would be closer to $8,000 per ounce.

Historically an ounce of gold represented a weeks wages, so that could mean some pretty healthy inflation if everything gets marked to market.

Thank you for your comments.

Anonymous said...

Work always has represented renumeration. It does not have to be in metals. Your trapped in trading work for paper. Thats not good. Not only that it IS THE ONLY LEGAL TENDER. Thats by law. So you work and get a hand full of paper. Now if I worked for you for a day and you game me oh say something of real value. Like oh a trailer hitch or a computer monitor. Thats more akin to have something of value

SF Mechanist said...

What government spending there is in excess of taxes is funded by treasury bonds. Like taxes, treasury bonds shifts money from elsewhere in the economy, over to government spending, but there is no net creation of money, so is not inflationary.

Only that which comes out of the Fed is inflationary.