I don’t want to debate if it will or anything like that. This question has nothing to do with the financial crisis; I actually thought of it a few weeks ago when I was watching The Sting - set in 1930s Chicago. A steak dinner was something like 35 cents, a phonecall a penny I think, the goal was to scam someone out of $400,000, which was enough to split between several people and presumably allow them all to retire filthy stinkin’ rich.
Is it economically possible to ever get back to those kind of prices? What would need to happen? Has it ever happened?
it is possible for prices to go down – it’s called deflation. If it happens over an exended period and to all kinds of goods it is a very bad thing. Think about it. If you knew that something you wanted to buy would be cheaper next week, you would not buy it now, you would wait. So would everybody else. As a result, nothing would get bought and the economy would grind to a halt.
Not the best example, but one commodity deflation happens to is gasoline. Not that long ago we were paying close to 5 bucks a gallon. Last week I paid $1.74 and $1.89 while I was over in Iowa. I saw it today for $2.03 in West Allis.
Yeah, I obviously know about deflation. Gas, last generation’s ipods, etc. I meant more like over the loooooong term, where everything goes down, or rather, the strength of the dollar goes through the roof. Eight hundred dollar cars, 25 cents for a movie, popcorn, and soda, etc.
Generally speaking, deflation is considered much, much worse than inflation. If an economy is experiencing deflation, it becomes a better investment to keep one’s money than to spend it - after all, the money is worth more in the future. That leads to low growth and a downward spiral. So, central banks do whatever they can to prevent deflation. That said, some items (usually technological ones) often get cheaper and more capable as time goes on.
The other way to do this is just to redefine the currency. Knock a zero off it, and that $3.99 hamburger is back to 39c.
Zimbabwe did this recently: they knocked off 11 zeroes. Division by 100 billion, and they were back to ten-dollar bills. It didn’t hold, though; last I heard they were back to million-dollar bills…
Note that incomes would presumably deflate as well. That 35-cent steak dinner may have been more expensive, in terms of purchasing power, than a $35 steak dinner today.
A related question that I’ve often wondered about is how far back price inflation could be traced. Suppose a loaf of bread now costs $2.50. There must have been a time when it cost a quarter. Did it ever cost a nickel? A penny? What did it cost before then?
(Yes, I know there were halfpennies. What about before that?)
IANAEconomist, but my description of inflation or deflation would be if ALL prices went up or down together.
If last week bread costs $1 per loaf and your salary was $100, but this week your salary doubled and so did the price of bread, that’s inflation. You haven’t gained or lost as long as everything moves in sync. If it doesn’t, you could get a windfall or get screwed.
So deflation wouldn’t be bad as long as everything moves in sync. Obviously that is impossible (true inflation or deflation would have to adjust all bank accounts and the money in your wallet, too), and that’s where the problem occurs.
Reminds me of a friend who, during the rapid inflation times of the 1970’s, said he had the perfect solution for all our problems (he wasn’t kidding) to wit: Pass a law that at midnight on some day, all bank accounts, prices and wages would lop off a right-hand zero: $500 becomes $50, etc. and inflation is solved!
Of course those with big piggy banks full of coins would have their values multiplied by 10, so he admitted there were a few bugs in his scheme…
I wonder about that too. It might be easier to trace in an older country whose currency goes back farther. I recently read book that took place in mid-Victorian times when a pound was worth $130. Some very interesting monetary numbers in that book, especially salaries and what kind of savings it took to retire.
Wasn’t that long ago. When I was a kid a loaf of plain white bread cost a quarter. During the Depression it cost a nickel.
Of course it’s not all that cut-and dried. Newspapers, movies, candy bars and pay phones all cost a nickel at some point, and now they all are different prices.
Something interesting I found. According to this cite when Bowling Green, Kentucky first began selling electricity to residences in 1913, the rate was 8 cents per Kilowatt/hour. Today the rate is 9.174 cents per Kilowatt/hour (warning: PDF). People use a lot more electricity than they did in 1913, but the actual cost isn’t much more.
Of course, one could also see repricing through the simple device of rebasing the currency - knocking off some zeros as it were. That has been done often enough in countries that suffered hyper inflation.
Pay phones in the 1930s generally charged a nickel for a local toll call. Phone service used to be a LOT more expensive than now, and I can’t believe it ever cost a penny.
About a week ago I saw something on a German news website about how a U.S. Federal Reserve benchmark rate of zero, in the not too distant future, was not unthinkable. For all the publicity this idea has gotten, it’s evidently not too pleasant to think about, at least partly because it could lead to the kind of deflationary spiral that suranyi mentions.
His or her post makes it clear why the central banks seek to maintain a mild inflation rate of about 2%. Consumers feel moderate pressure to buy things before prices rise, but are not in such a state of panic over rising prices that they will not invest or save.
For me the intriguing thing about the low price levels back in the day was not the prices per se, but the fact that a mere pocketful of change could buy major stuff. A popular beach restaurant in Malibu has an old menu from the 1930s on the wall, and it’s amazing to think you could get mixed drinks for a quarter and entrees for two or three bucks.
I don’t remember what it cost in the movie, or if they actually even said. I was just throwing numbers out there. Disclaimer: the steak dinner might not have been exactly 35 cents either.
Yes, this is appealing to me too. Part of why I asked. A lot of restaurants around here have old menus painted on their walls. A full spaghetti dinner with appetizer, drink, and dessert was something like 50 cents at the Old Spaghetti Factory at some point.
I think it would be more accurate to say that the central problem with high inflation or deflation is that money doesn’t act as its proper store of value. In deflationary times people hoard money, and in inflationary times people spend and don’t save or invest.
In our modern economy the easy exchange of money for goods is what makes our fabulous lifestyles possible. When something throws a wrench into that system (e.g. nobody knows if a dozen eggs should be 10 cents or 10 dollars) then the system slows and unpleasant results ensue…