$100 a Century Ago Wouldn’t Be Worth $3.50 Today

While central banks do everything they can to boost inflation, it seems that wages won’t catch up to prices for a long time. In the United States, the buying power of the dollar is the lowest in history. In Switzerland, the erosion isn’t as bad.

Central banks inundate the world with liquidities in order to boost the economy and prevent deflation. Admittedly, prices have started to go back up, along with interest rates, but buying power has diminished for a century.

In January 2021, the dollars kept by U.S. households lost 1.5% of their purchasing power compared to the same period the previous year, and now the dollar finds itself at a historic low, according to the Federal Reserve. For more than a century, the trend has almost never been reversed. The dollars that Americans have in their possession allow the purchase of fewer and fewer goods and services.

John Plassard, investment specialist at Banque Mirabaud, revealed in a study on Thursday that that the buying power of $100 in 1913 wouldn’t be worth more than $3.47 in February 2021. The calculation for the buying power of a currency (here, the dollar) consists of using data from the consumer price index inflation calculator, the market basket (goods and services most commonly bought and sold) established by the U.S. Labor Department.

Rare Changes in the Trend

The phenomenon of the erosion of the dollar has continued in recent years. Since 2003, it has fallen by one-third. Among the rare interruptions in this long-term decline, Plassard mentions the 2008 financial crisis, but the upward correction of that period was short-lived. Other exceptions to the long-term trend were mentioned, such as the rise of 31% between 1913 and 1923.

The buying power of a currency evolves inversely to the index, according to the study. Economists talk about a negative correlation. The more inflation rises, the less purchasing power increases, Plassard indicates. The economist estimates that one of the few ways to reverse this trend is to increase salaries. “While this debate isn’t new, its application may finally see the light of day, notably in the United States, if Joe Biden’s stimulus package should come into effect as it currently is,” he writes. In effect, the new president’s plan, which includes almost doubling the minimum wage, will have 32 million people potentially see their basic salaries increase. Such wage inflation could, however, cause businesses to increase the prices of their products and services.

Same Phenomenon in Switzerland

The erosion of currency is also seen with the Swiss franc. According to the World Bank, the buying power of 100 francs in 1961 has fallen to 24.4 francs in February 2021. Because of inflation, Swiss households have to spend 409.5 francs today to buy the same basket of products that would have cost 100 francs in 1961. The statistics for the supranational institution don’t go beyond 60 years. The increase in prices, cumulatively, is 309.5%. Therefore, prices have been multiplied by four.

Because of a methodological change, it is not possible to calculate the development of Swiss wages before 1993. On this basis, the increase is a rise of 14.5% in hourly wages and 32.3% for actual salaries (after inflation). This means that 100 francs now would only buy a shopping basket worth 85.5 francs in 1993.