As I have mentioned before (here and here), I attempt to inject some basic economics into the water-cooler conversations that take place around my office about inflation and gas prices. This weekend, I attended an economics seminar where I met someone who gave me the following illustration, which I thought I would pass along.
Ask the typical “man on the street” if he thinks he could buy a gallon of gas these days for a quarter. If you’re lucky, he’ll just laugh at you. If you’re not so lucky, he’ll launch into a tirade about high gas prices, greedy oil companies, and what government needs to do to “fix” the problem. Wait for him to calm down, then show him a 1964 quarter. In 1964, a gallon of gas cost about $0.30/gallon, but it is my contention that the same quarter that wouldn’t quite buy a gallon of gas in 1964 could now be used to buy gas at today’s price of about $2.85/gallon. Impossible, you say? Let’s take a closer look.
In 1964 U.S. coins were still made of silver, not the copper/nickel “sandwich” found in modern coins. The 1964 quarter contains roughly .2 ounces of silver. At today’s silver price, that .2 ounces is worth about $3.28 – enough to buy a gallon of gas and even get some change back. So is the pain at the pump really caused by a cabal of evil oil companies, or is it more likely that it is primarily a reflection of inflation? Certainly there are real factors driving gas prices (such as increased global demand and artificially constrained supply), but we should not lose sight of the role inflation plays. Inflation, of course, is the increase in the money supply which causes prices to rise across the board. Say what you want about the “greedy oil companies,” but they’re not the ones responsible for doubling the money supply in the U.S. over the past decade.
The role of inflation is particularly important these days given the hostility shown by some toward the gas companies, and the many demands directed at politicians to “do something” to bring prices down. If we don’t properly diagnose the problem, it’s very unlikely that any of the “remedies” offered by Washington will be of much help.
