In the coming months, Bastiat’s Window will feature draft chapters from my not-yet-published book, “Fifty-Million-Dollar Baby: Economics, Ethics, and Health.” Readers are invited to offer comments, corrections, suggestions, and criticisms. This chapter is an amalgam of two earlier essays: “Monticello, Borax and McDonald’s—Three Tales of Inflation,” from InsideSources.com (2018) and “Grandpa’s Neighbor” (1997/98), from the Federal Reserve Bank of Richmond’s Equilibria magazine.
In 1834, Commodore Uriah Levy bought Thomas Jefferson’s Monticello for $2,700. In the 1880s, the Harmony Borax Works paid Chinese immigrants $1.30 per day to mine borax in the often-brutal heat of Death Valley, California. In 1961, Ray Kroc strong-armed Mac and Dick McDonald into selling their restaurant chain, later worth billions, for $2.7 million.
The shock-and-awe these isolated facts elicit are off-kilter, thanks to the perceptual distortions of inflation and altered standards of well-being. The effect is to generate spurious narratives of villains and victims.
The real messages of these factoids are far less startling. Commodore Levy paid lots for a dilapidated, not-very-old celebrity house with a clouded title. Borax workers did grueling work but earned well above what most Americans received at the time. And Ray Kroc took a big risk to pay a small fortune to a couple of guys with a hamburger stand. We’ll come back to these three cases below. But as inflation gathers steam in 2022, it’s important to remember that it will make our national conversation even less coherent than before.
Inflation: Confounder of Conversation
Inflation strikes many a wicked pose. He is a thief in the night, silently snatching away the value of your bank accounts and pensions. He is a taskmaster, forcing grocers to run up and down their aisles, changing price tags on merchandise. He is a con artist, tricking businesses into investing in questionable schemes, and then running off with the proceeds. He is the grasshopper that begs you to fiddle rather than to save.
But the worst of all his poses may be that Inflation is the meddlesome neighbor who interrupts and confounds every conversation you have with your Grandpa. Just when you and Grandpa start to have a serious heart-to-heart about how your life differs from his early life, Inflation barges through the door and tells you that Grandpa walked five miles to school each morning and ten miles back each afternoon, uphill in both directions, and always in the snow, even in summer when school was closed.
Inflation confounds conversation by forcing you to make several comparisons at once. The equivalent happens when your friend observes, "Isn't it amazing? My little car got 30 miles per gallon on our trip, while your big car only got 12." You point out that you were also lugging a heavily loaded trailer behind your car. "It's still amazing," your friend responds.
It's not clear, though, what he expects should amaze you. Is it how much more fuel-efficient his car is? Or is it how much more gasoline it takes to drag a trailer? Or does he expect you to apportion your amazement—say 60% to 40%—between the fuel-efficiency of his car and the fuel-inefficiency of dragging a trailer? A meaningful comparison would be to compare the two cars' mileage when neither is pulling a trailer or when both are.
Inflation (along with rising living standards) twists conversations in similar ways. Suppose your friend (the annoying one with the small car) says, "Isn't it amazing? My annual income has gone from $30,000 to $90,000 in the past ten years!" Again, what does he think should amaze you? If your friend can now buy three times as much as he used to, then perhaps he expects you to marvel at how successful he has been. But if his $90,000 income buys exactly what $30,000 did ten years ago, then perhaps his point is that the monetary authorities have done an amazingly poor job of maintaining the value of the dollar. If his $90,000 today buys 40% more than $30,000 did ten years ago, then once again, it's hard to decide how to apportion your amazement between his success and the monetary authorities' failure.
Levy, Borax, and Kroc
Around 1990, I took Don Patinkin—one of the 20th century’s leading monetary economists—to visit Monticello—Thomas Jefferson’s home—near Charlottesville, Virginia. A young guide told the gaggle of tourists that Commodore Levy had purchased Monticello for $2,700—and the audience gasped in amazement. I smiled, knowing that the guide would soon receive a stern lecture from Patinkin. At the end of the tour, Don took the guide aside and offered the following admonition—whose numbers I update to incorporate inflation through 2022.
Levy’s purchase pleased him greatly, but it wasn’t the deal of the century. In 1834, $2,700 bought about as much as $97,000 buys today. That still seems a bit low for such a place, but consider other factors. A disputed title made it unclear how much land came with the house. Property was cheap back then, since land was plentiful and Americans weren’t. Monticello was only 62 years old, with construction only finished around 23 years earlier. Jefferson neglected upkeep, and subsequent owners utterly trashed the place. Levy’s $97,000-equivalent purchase got him a money pit of a fixer-upper. Also, in 1834 Jefferson wasn’t a revered icon from antiquity. Bill Clinton’s presidency is about as remote from us now as Jefferson’s was to Levy then. Jefferson had only died eight years earlier.
In 2018, my wife and I visited the Harmony Borax Works in Death Valley — the famous twenty-mule team company. A sign at the site mentioned that in the 1880s, Harmony paid Chinese immigrants $1.30 per day to scrape borax from the hard soil with shovels. Two other tourists read this, and one commented how terrible it must have been to work so hard in such harsh conditions for so little money. Like Patinkin at Monticello, the economist in me could not resist giving an impromptu lecture to these unsuspecting strangers.
$1.30 a day, I explained, was actually pretty good money for unskilled workers in those days. Figuring in inflation, $1.30 per day in 1885 is around $41.57 in 2022 dollars. Many farm laborers often made substantially less than $1.30.
I have no idea how many days borax miners worked each year, but it wouldn’t surprise me to learn that it was at least 300 days. If so, the income would be over $12,000 per year in today’s money. Even half that would put the miners well above many other unskilled workers’ annual incomes. (In the mid-1880s, the average American earned perhaps $4,000 or $5,000 a year in today’s money.) That sum would have been astronomical compared to wages in China, where per capita GDP was only around $40 per year — $1,279 per year in 2022 dollars.
Let’s add an important caveat. The Harmony Borax Works apparently deducted housing and food costs from the $1.30. So, after deductions, take-home pay may have been considerably lower than $1.30. But the $1.30 figure by itself wasn’t a sad story in those times.
Finally, there’s the Golden Arches. Ray Kroc’s battles with the McDonald brothers were the subject of the 2016 film The Founder. After a tense seven-year relationship, Kroc bought the company from the brothers for $2.7 million. McDonald’s was eventually worth billions, and for many, the movie’s takeaway was that Kroc practically robbed the McDonalds.
But in 1961, McDonald’s wasn’t yet worth billions, and it wasn’t clear that it ever would be. The $2.7 million purchase price is equivalent to $27 million in 2022 dollars. The McDonald brothers were inventive geniuses but seemed to have neither the ability nor the drive to build the international empire that Kroc constructed. For two small-town owners of a really creative hamburger stand, it’s hard to imagine any other path that would have brought them checks for $27 million.
In the following scene, Dick McDonald (Nick Offerman) expresses self-pity over having to sell his business to Ray Kroc (Michael Keaton). Kroc, disdainful of McDonald’s lament, asks, “So you DON’T have a check for $1.35 million in your pocket? … …” To fully comprehend the true power of Kroc’s retort, however, imagine translating the scene into 2022 dollars: “So you DON’T have a check for $13.5 million in your pocket — with an equivalent check in your brother’s pocket.”
Moral of the story: Do the inflation math right, and the past looks quite different.
The editor in me notes: "... make our nation[al] conversation ...".
Every so often, a visit to John Williams' "shadowstats.com" site provides a bracing slap-in-the-face reminder of how the published inflation rate serves those who profit from its manipulation. *sigh*
As to L.K. Simmons' observation: "... they were probably better off ... ", that was truly my grandfather's experience, both economically and existentially, as most of the extended family he left behind vanished in the maelstrom that was (is again) Central Europe. And, also the story of an immigrant friend, who, had he not made it to the US to found his business, would be a long-dead target of any one of the take-your-pick criminal enterprises ready to profit from his labor. Makes me wonder by what measure we might meaningfully value a human life across the generations, when the monetary metric is so unreliable.
Thank you!
I believe I saw this phenomenon when I visited my hometown museum in Joliet, Illinois. I left thinking that the curators had worked hard to give the impression that the eastern and southern Europeans who worked in the steel mills and on the railroads in the 1880s through the 1920s in Joliet were exploited by their American-born employers. In fact, they were probably better off than they would have been in their native lands. Given Joliet’s excellent schools (at that time), including America’s first public junior college, their children certainly had more opportunities.
Second thought: Jane Austin’s Pride and Prejudice makes note of Mr Darcy’s “ten thousand a year!” I had to look up not only what that was in dollars, but what it would have bought in 1811 or so. As I remember, it was a pretty staggering amount of money.