Grains and oilseeds are not the only crops with rapidly rising prices. A widely printed wire service story this week noted that cotton hit $1.89 a pound, the highest price since the height of the Civil War. It went on to note that clothing prices are expected to rise by 10 percent or more as a result of price increases for both cotton and synthetic fibers. This is the sort of news that would pique the interest of any economic historian.
Articles that make price comparisons over long time spans without mentioning inflation are all too common. They confuse rather than enlighten readers. This particular article was a commendable exception, as it noted that $1.89 in 1913, when the modern Consumer Price Index first was tabulated, is equivalent to $41.63 in 2010 dollars. So the inflation-adjusted price of $1.89 during the Civil War must have been much higher than now.
That is true. What the writers did not know is that government statisticians have reconstructed a CPI going back to 1800. This is based on prices noted in newspapers, business records and other historical documents. It is not as reliable as the modern CPI, but gives a workable estimate of price levels for the 19th century.
Using this CPI, one finds that the general price level in 1864 was 60 percent higher than in 1913 because of wartime inflation, fueled in large part by the first increase of national paper money or “greenbacks.” So the 2010 equivalent of 1864’s $1.89 is only $26.31.
This post-Civil War deflation is a lesson in itself. As after most U.S. wars, there was pressure to return to sound government finance after a binge of wartime borrowing and money creation. So prices dropped 28 percent in the first nine years after Appomattox and nearly 47 percent by the 1890s.
This deflation benefitted those who had bought government bonds during the Civil War since each dollar of interest and principal received bought substantially more than each dollar they originally had lent to Uncle Sam. But falling prices hurt anyone owing money since it took more bushels of wheat or board feet of lumber each year to make the same mortgage payment.
In general, deflation benefitted higher-income urbanites in the Northeast and scourged anyone in farming, forestry, mining or many small businesses. The result was calls for faster growth of the money supply through government purchases of silver. It is no coincidence that prices hit their low point two years before presidential candidate William Jennings Bryan’s 1896 “Cross of Gold” speech in which he argued the gold standard was crucifying ordinary people.
It was a classic illustration of Milton Friedman’s argument that if the money supply grows faster than the general economy, the general price level must go up. Conversely, if the money supply grows more slowly than output, prices must fall.
That is what happened in the last third of the 19th century. Fueled by high immigration, industrialization and expansion west of the Mississippi River, the overall economy grew much faster than the money supply, hobbled by the gold standard. But falling prices (and wages) imposed harsh economic conditions for many households.
Indeed, the reason the post-1929 recession became called “the Great Depression” was to distinguish it from the “Long Recession” from the 1870s into the 1890s. The whole episode should give pause to the Ron Paulites of today who want a return to a pure gold and silver currency.
Reliable series of cotton prices go back to at least 1820, and they show the same general pattern as wheat or corn prices. Adjusted for inflation, they have gradually declined over the past two centuries, with occasional spikes due to wars or other external shocks.
Yes, cotton prices have nearly quadrupled since 2008. But even in the $1.90 range, they remain lower than in most years prior to 1965. And 57 cents per pound, the average for the 2000-2008 period, is less than one-fourth of the 1945-1975 average of $2.31, all in 2010 dollars.
So yes, cotton prices are high in nominal terms, but the long-run trend has been down. History suggests this is likely to continue in the future. Consumers have benefitted greatly. For a variety of reasons, as of December, the Consumer Price Index for all apparel is down 13 percent from its high in 1994.
Quick calculations show that the raw cotton in a pair of my blue jeans has increased in price by $2.40 in the past three years. Yet consumer prices for jeans probably will increase by much more than that. But that is the subject of another column.
© 2011 Edward Lotterman
Chanarambie Consulting, Inc.