What might prices be if the money supply had been fixed since 1959?
According to the CPI, the 2005 price level was 6.7 times higher than it was in 1959. However, in the absence of an expanding money supply, the price level would have been oneâ€“fifth as high as it was in 1959. Due to economic growth, the price level in this period would have fallen by 80 percent. Therefore, the expanding money supply over the last 46 years has resulted in a current price level over 34 times higher than it otherwise would have been.
Let’s put this in everyday terms. Suppose these estimates represent the changes in the prices of goods such as hamburgers, cars, and housing. According to these numbers, a hamburger that cost 60Â¢ in 1959 would have cost $4 in 2005. If the money supply had been fixed, however, that hamburger would only cost 12Â¢ today. Similarly, a $20,000 car in 2005 would have cost slightly less than $3,000 in 1959. Again, without the monetary effect on prices, that car would only cost $600 today. The price of a $45,000 house in 1959 would have increased to $300,000 in 2005. With a fixed money supply, that house would cost $9,000 today.