Community, Weird Words

Two bits on inflation.

Recently a friend explained the meaning of the phrase “two bits” to me.
It means “25 cents”. He recalls hearing a song on the radio when he was young that went “two bits, four bits, six bits, a dollar”. While I was unable to find this song (the closest I came was a Florida state sports cheer), I did stumble on some more of the history behind the expression.

Back when the Age of Discovery was still underway, many countries were basing their currency on the Spanish silver dollar. Spanish silver dollars were often cut into eight pieces (like the slices of a pie). These smaller pieces were used as coins worth fractions of a dollar. Thus the Spanish silver dollar coin was also sometimes called “a piece of eight”, as it could be cut into eight “reales” or “bits”.

See the source image
A silver dollar, as well as 4-bit, 2-bit, and 1-bit pieces.

Many fledgling governments based their currency on the Spanish silver dollar. In 1792 the US government created a standardized currency for itself. The newly-founded U.S. Mint fixed the value of the American dollar to that of the Spanish silver dollar. When the first American quarter-dollars were minted, each was worth two 1/8 bits of a Spanish silver dollar.

Of course, inflation happened, as it usually does, and the Spanish pieces of eight (or “pesos”) were made with less silver than older ones, and their size kept dropping. The same could be said of Mexican Pesos, which started out based on the Spanish silver dollar as well. Eventually America went off the gold standard as well.

This brought the tune of “shave and a haircut (two bits)” to mind… Those words accompanying the tune date back to the 1930s… and provide us with an inkling of prices then.

It’s hard for the younger of us to imagine that a quarter used to be worth that much.
Nowadays I understand that a haircut tends to cost about $25.00 – one hundred times as much, in less than a hundred years.

It’ll be interesting to see how much one costs five years from now.

A Science for Everyone, Community

Inflation Since 1914

Looking at our nation’s deficit spending, I got thinking back to the Carter years, the high inflation and the high interest.  Then I decided to grab a table or a chart to see how things looked from a historical perspective.  This chart give inflation figures from 1914:

Found at macrotrends.net

It turns out that our highest inflation was under Woodrow Wilson.  20.44% in 1918 – 18.1% in 1917, and 12.62% in 1916.  Back then we were on the gold standard – yet the price of gold remained at $20.67 from 1910 through the twenties.  During the worst years of the great depression, inflation (deflation?) was about -10%. 

Carter’s highest year – 1979 – saw 13.29% inflation . . . and to be fair, Carter inherited a good portion of his challenges from Nixon – whose highest (and final) year was 1974 at 12.34% inflation.  Trump’s last year, 2020, had only 1.34% inflation.  Biden’s at 4.31% on this chart, and we’re not through 2021 yet.  Still, it will be a challenge to top Woodrow Wilson.

Above the chart is this statement “Interactive chart showing the annual rate of inflation in the United States as measured by the Consumer Price Index back to 1914. The current rate of U.S. CPI inflation as of August 2021 is 271.70.”  As I write this, the net tells me that I can buy gold for as low as $1827 per ounce.  Dividing that by $20.67 shows that the price of gold has only increased by a factor of 88.39. 

C.P. Snow described the second law of thermodynamics as “You can’t win, you can’t break even, and you can’t quit the game.”  Who says physics can’t be applied to government?

A Science for Everyone, Community

Welcome Back Carter

It’s time to watch the Consumer Price Index again.  The CPI is published by the Bureau of Labor Statistics(BLS) and the recent release shows an inflation level that hasn’t been seen since Obama was a president.

“The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.6 percent in May on a seasonally adjusted basis after rising 0.8 percent in April, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index increased 5.0 percent before seasonal adjustment; this was the largest 12-month increase since a 5.4-percent increase for the period ending August 2008.”

Well, the inflation rate isn’t up to where it was in the Carter years – but it looks to me like the BLS website is going to be worth watching.

A Science for Everyone, Community

Now That’s Inflation

A bit less than 10 years ago, my department head, Donna Hess, retired.  As a gag gift, I bought a million dollar Zimbabwe note – everyone should retire as a millionaire.  It cost me a little less than 8 dollars US on ebay.  The note, and the sentiment, circulated around at retirement events throughout the year.

Today, I noticed that Zimbabwe currency is still on the ebay market, with even more zeros added.   This time it’s ten hundred trillion dollar bills for $4.40 US.  I think part of the reason I’m writing this is just to have an example that lets me count how many zeros there are in a trillion. 

Still, ten bills represent a thousand trillion dollars.  We know that the guy who is selling a thousand trillion dollars Zim for $4.40 US is making a profit – just like the guy who sold me the million dollar note for $8.00 US.

In Zimbabwe, they have added eight zeros to the currency in ten years – and it only buys 1/20th as much when you measure it in yankee dollars.  Now that’s inflation.

 

A Science for Everyone

Inflation

Inflation is one of the very basic, very important economic concepts. It is deceptively simple. Increase the supply of money, and it’s like inflating a balloon. The amount of air in the balloon increases, the amount of money in the system increases. This is essentially what happens whenever the government prints more money.

When the amount increases, the value of each individual unit goes down. This becomes more difficult to understand, because a dollar is still a dollar. However, a dollar doesn’t purchase as much.

Think back. Remember. How much was gasoline ten years ago? Twenty? Thirty? But it’s not always the price that increases. Sometimes, the amount goes down. Candy-bars, anyone? They’ve shrunk considerably since I was a child admiring them in the checkout isle. Of course, some things increase in efficiency and decrease in price, even while others do the opposite. Why? Developing technology can really reduce the costs of making something, sometimes enough that the price declines, even as the value of money goes down.

The federal reserve aims for an inflation rate of 2%. But that’s a number with very little meaning to most people. We care more about how much the grocery bill will increase by. For that, we look at the consumer price index. Calculating how much the value of money has changed is as simple as having two reference points. Pick an item. What does it cost today? What did it cost back then? Do a little subtraction, and then a little division.

Of course, you could also use the CPI inflation calculator provided by the government. In that case, it told me that a 100$ in 1920 had the same purchasing power as $1,342.65 in 2020.

Why do we care about inflation? Sure, groceries cost more, gas costs more, electricity costs more, but we’re earning more too, right? Eventually, probably. What’s really concerning is when inflation is high, when you see the kind of chance the US dollar had from 1920 to 2020 over the course of a year. Wages just can’t keep up.

Literally printing more money, while the obvious (and easiest) means of causing inflation, isn’t the only way to go about it, but the alternatives are a bit complex for this summary.