Archive for the ‘Economy / Finance’ Category

How Inflation Touches Every Man’s Pocketbook

In 1920, inflation was rampant, with prices double what they’d been five years prior. That would quickly change: prices would peak that June, then decline, fluctuate, and not exceed their June 1920 levels again until November 1946.

What was the primary cause of huge inflation from 1915 to 1920? According to Johns Hopkins political economy professor Jacob Hollander in this article from the time, the primary cause was quantitative easing:

The amount of money which the Government and the banks have supplied the country for the purpose of carrying on its business is twice as great as it was five years ago. The business of the country consists in producing goods and services and in exchanging them.

The amount of things to be exchanged — goods and services — is practically no greater than it was before the war. But we have been supplied with twice as much money to do this exchanging. Consequently two dollars are worth no more than one was before; or, what amount to the same thing, prices have doubled. This condition of having twice as many money units with which to carry on the country’s business is what we mean by inflation.

In other words, it was largely the politicians’ fault:

Inflation is due to the financial mistakes of the Administration at Washington (1) while we were getting ready for war, (2) while we were at war, and (3) after war was over. During each of these periods the Treasury permitted and, indeed, encouraged an increase in the country’s money supply, with the certain prospect of rising prices.

What about in the modern era? As of March 2020, prices were about double what they’d been in April 1990. That means it took about three full decades for prices to double, far more than the five years it took from 1915 to 1920.

 

 

How Inflation Touches Every Man’s Pocketbook: Primer in H.C.L., Prepared by Expert, Shows Why Dollar Does Only Half as Much Work as Before War–Remedies Are Difficult (PDF)

Published: Sunday, May 2, 1920

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Written by Jesse

April 29th, 2020 at 3:01 pm

Chauncey M. Depew on the Middle Class Union

Advocacy organizations exist for various interests: AARP for the elderly, NRA for gun rights supporters, unions for teachers and transportation workers. In 1920, many proposed a “middle class union” to advocate for the middle class on all issues.

The transportation strike hit the doctor of philosophy who commuted to his classes at Columbia just as it hit the shoe salesman who commuted to Fifth Avenue. At one point their interests were identical, however widely they may have varied at other points.

Wait, but isn’t democratic government in general supposed to represent the middle class? Alas, that institution’s failures on that count were the main factor necessitating a middle class union in 1920, supporters claimed:

It is argued that our Government is designed to do exactly what it is proposed to do by means of a Middle Class Union. In a democracy the ballot is supposed to be the last resort. But when the fruit of the ballot is a legislator whose life is his re-election he often finds his life threatened by a minority organization, while there is no majority organization to reassure him or defend him or bring the majority influence to bear on him.

The final sentence of the article: “Perhaps it will be the next thing on the books — who knows?” We now know… and it wasn’t.

There are a few organizations which somewhat qualify for the title, such as Consumers Union which began in 1936, but they primarily advocate on behalf of the masses for issues like product safety specifically. A general “middle class union” to advocate against transportation strikes and the like? That never really took shape.

 

 

Chauncey M. Depew on the Middle Class Union: Need for Organization of Public to Protect Itself Against Strikers and Profiteers Set Forth by Former Senator–Objectors Answered, Advantages Outlined (PDF)

Published: Sunday, April 25, 1920

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Written by Jesse

April 25th, 2020 at 12:08 pm

Motor Owners Paying High Gasoline Prices

In March 1920, gas prices hovered at 31 to 35 cents a gallon. Adjusted for inflation, that’s $4.07 to $4.59 — or double the current national average of $2.21.

Two main factors caused the high 1920 gas prices: demand outstripping supply, and the end of World War I.

Gasoline consumption has increased in much greater proportion than its production in recent years. The number of motor cars in the United States was estimated at the close of 1919 at slightly more than 7,500,000, an increase of 23 percent during the year. For the same period the gasoline production only showed an increase of 9 percent.

While conservation in gasoline was strongly urged during the war and was sufficiently adhered to to show appreciable results, it is said that less care has been shown in gasoline economy since the signing of the armistice.

Today, there are also two main factors for the low gas prices: the broader economic crash in the past week due to COVID-19 (coronavirus), and this month’s oil conflict between Russia and Saudi Arabia.

Source: GasBuddy.com/Charts

 

Motor Owners Paying High Gasoline Prices: No Stability in Retail Rates, Which Range from 31 to 35 Cents a Gallon Since Recent Increase (PDF)

Published: Sunday, March 21, 1920

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Written by Jesse

March 20th, 2020 at 12:01 pm

Simplify the Income Tax? — Perhaps, But Not Soon

Federal corporate tax was created in 1909, income tax in 1913, and estate tax in 1916. By 1920, there were already calls for the tax code’s simplification.

How quaint. Back then, federal tax law ran less than 500 pages. Now it’s more than 70,000.

Source: Tax Foundation

So why is the tax code so complex? One of the biggest reasons given by this 1920 article was limiting follow-ups on the part of tax collectors:

A chief decision, in the policy that was developed, was to reduce correspondence to as low a point as possible, both for the convenience of the taxpayer and the government, because even a small exchange of letters with 4,000,000 persons would mean an immense item. This is a reason given for putting the great number of questions on the income tax blanks. The aim was to bring out the material for a complete audit, without the necessity of follow the receipt of the return from the taxpayer with letters for more information. The friends of Daniel C. Roper, Collector of Internal Revenue, say that only his genius for organization enabled him to mold a machine that could take on and carry such a huge load.

So what to do? One of the most important writers of the 1913 tax law, Rep. Cordell Hull (D-TN4), suggested that objections about complexity would largely dissipate on their own, as people became more familiar with the process each year:

“I think also that the number of complaints will be reduced as the taxpayers become more accustomed to making out the blanks. If each one read the instructions first, carefully, there would not be much difficulty now. A man starts in without having posted himself in advance, makes mistakes, and has to go back. As to difficulties that can be removed, Congress will be enabled to legislate more accurately as soon as it gets the technical facts.”

That prediction was not to be.

 

Simplify the Income Tax? — Perhaps, But Not Soon: Washington Buzzes With Official Reasons for the Complicated Blanks, and One Congressional Reformer Actually Predicts a Method Which Taxpayers Can Understand (PDF)

Published: Sunday, March 7, 1920

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Written by Jesse

March 4th, 2020 at 12:01 pm

ABC of Foreign Exchange

From 1870 to 1914, most Western countries adopted the gold standard, with the primary intent to keep inflation in check. It set a standard value for a country’s currency based on an equivalent value of gold.  The U.S. began doing so in 1900.

World War I changed all that. Most nations temporarily suspended their gold standards, to print way more money to pay for their surging military costs. The U.S. returned to a gold standard again in 1919, the year after the war ended. Not every country which previously had a gold standard followed suit, though, which created some big problems for international trade circa 1920:

The point here is the confusion of the exchange of currencies produced by the breakdown of the monetary system… Why is that greater just now than at any other time? It is because of the difficulties of the keepers of international accounts who have to deal with fractions without a common denominator.

Exchanges of currencies used to be managed by the use of gold. When different currencies would buy equal amounts of gold, the currencies were of equal value in the same place… But gold can now be got for currency at par only in the United States. In other countries gold is at a premium, and if the gold is at a premium the currency given for it must be at a discount.

On only the second month of FDR’s presidency in April 1933, he tried to counter the Great Depression by ordering Americans to trade in their gold for dollars, which (unlike gold) they could actually spend to hopefully jumpstart the economy. As a result, the U.S. created the gold stash at Fort Knox, Kentucky, which exists to this day at a value of more than $6 billion.

Because the U.S. government now held most of the world’s gold, other countries gradually began using the dollar as a benchmark by which to value their currency, rather than gold as they had before. Even today, despite fears that the Chinese yuan could someday replace it, the U.S. dollar remains the peg by which foreign exchanges are measured.

The U.S. discontinued the gold standard in 1971.

Thanks to the article History of the Gold Standard by Kimberly Amadeo in The Balance for much of this information.

ABC of Foreign Exchange: Most Important Crisis in History of International Trade Has Caused Dramatic Upset in Financial Capitals of World (PDF)

Published: Sunday, February 15, 1920

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Written by Jesse

February 12th, 2020 at 12:01 pm

Posted in Economy / Finance