Thomas Tooke

Inflation in 1913-1920. The obvious mistake of blending all prices together.

In Commodities, Inflationary Period of 1913-1920 on April 30, 2012 at 11:43 pm

Kemmerer seems to be writing as of 2012 not 1920. This is why I abundantly cite his books back from those days. In this post and the next few posts, we examine the result of the reduction in reserves, Gold embargo, re-hypothecation of War bonds by the Fed, liberal 0 reserve requirements for Government bonds, propaganda to elicit the public into buying war bonds that we have described before. Here is the result on commodities prices. Here is what Kemmerer writes:

[…]

Of course even without inflation the prices of those commodities for which the war made most urgent demands, such as munitions, ship building materials, and the like, would have advanced greatly, but these advances would have been compensated for by declines in the prices of other goods. If an individual with a given income spends more for articles A, B, and C, he will, of necessity, spend less for articles A, B, and C, he will, of necessity, spend less for articles D, E and/or F, unless he draws on his capital, in which case someone will have less to spend on these or other articles. A shifting of the country´s economic demand from one kind of goods, say the goods of peace, for another kind, say the goods of war, will force up the prices of the former. If more of the circulating media is used in exchanging the war goods less will be available for exchanging the peace goods, and the demand for them will fall off with a consequent reduction in their prices. The rise in the prices of the one group, however, would be compensated for by the fall in the prices of the other and little or no change in the general price level would result. When, however, this shift of the economic demand from peace commodities to war commodities is accompanied by a large inflation of the media of exchange, no such compensating effect is necessary. There may be an upward movement of practically all prices although of course the price of those commodities upon which the war demand is concentrated will advance most.

[…]

A few important points here.

First commodities price rise = inflation in the mind of the author, it is quite a different situation that today´s massaged numbers.

Second, evidently a rise in prices of a set of essential needs with inelastic demand, say food and energy will decrease the income available for other consumption. So there will not be a lot of pricing power from the sellers of 3-D TV while demand for food is quite inelastic if not growing if the population grows.

The conclusion would be that statistical agencies know about this phenomenon perfectly well, and evidently the omission is not “devoid of sense” since it is not an omission in the first place, as it is excluded purposely.

Finally, from an investment point of view, one should select the commodities whose demand increase in period of stress or stay constant. To that respect agricultural commodities have the most inelastic demand features and benefit a lot in period of massive monetary expansions.

Here is below indexes of commodities price computed by different agencies.

Kemmerer continues:

[…]

Taking the index numbers of United States Bureau of Labor Statistics as the most comprehensive and most scientifically prepared of the index numbers covering the entire period 1913 to 1919 inclusive, we may way that the wholesale price level increased from 1913 to April, 1920, 165%; in other words, if one calls the dollar of 1913 a 100% dollar in its purchasing power over commodities at the wholesale, the dollar of today is approximately a 38 % dollar.

[…]

Patriotism well rewarded!

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