“Brother Can You Spare Two Dollars?”: Inflation Edition

Another busy day with various daemonological folderol. But since Keyser’s been interested in historical economics, here’s something interesting he read in an article analyzing F. Scott Fitzgerald’s tax returns (1919-1940):

The publication of This Side of Paradise when he was 23 immediately put Fitzgerald’s income in the top 2 percent of American taxpayers. Thereafter, for most of his working life, he earned about $24,000 a year, which put him in the top 1 percent of those filing returns. Today, a taxpayer would have to earn at least $500,000 to be in the top 1 percent. The 1920 census reported the American population as 106,021,537. That year only roughly 7 percent of the population—7,259,944—even filed tax returns. Today, about 45 percent of the population files returns: 134,000,000 returns out of a population of 300,000,000.

What would Fitzgerald’s $24,000 annual income be worth today? It’s hard to say. Most economists, based on the Bureau of Labor’s Consumer Price Index, would multiply the amount by 12. That seems low. The CPI was designed in 1919, because prices had risen during World War I, to provide an index for cost-of-living adjustments for workers’ wages. The CPI today indexes all goods and services purchased by a middle-class consumer—which is not what we’re after. If you used Manhattan townhouses or beachfront property in the Hamptons as a basis for analysis, the multiplier would be astronomical. Perhaps a more reasonable measure for a high-income person would be the luxury car. In 1920, you could buy a Packard Single 6 for $2,975, which is probably the equivalent today of a Mercedes S550 costing $90,000, which suggests a multiple of about 30. If, to avoid exchange-rate issues, you used Cadillacs as the measure, it would be 20 times—$2,400 in 1925 and $48,000 today. The current dollar, based on that measure, is worth five cents compared to that of Calvin Coolidge’s day.

Perhaps when work calms down, Keyser will report on the later chapters of Rothbard’s A History of Money and Banking in the US, which largely revolve around the inflationary effect of the Federal Reserve system. So, how has that turned out? Seems a dollar has lost 95% percent of its value since the Fed was set up in 1913. Good thing there’s a genius like Benny Bernanke in charge. No doubt he’ll be as stalwart a guardian of the value of the dollar as his predecessors were.

Anyway, read the rest of the article about Fitzgerald. It’s interesting in its own right as a glimpse into an artist’s way of (making a) living, and along the way shows how much different life was only eighty years ago.