Madness Monday - January 11, 2010

In 1850, my great-great-grandfather was shown with a real estate value of $15,000 and personal property worth $10,000.


My family always claimed he was quite wealthy, and I was sure that he probably was, for the time. But I just couldn’t begin to compare those amounts with today’s wealth! I mean, after all, how much could $25,000 possibly be worth today?

Well, I spoke with a friend who is a financial advisor a few years ago, and she said she’d look into it. When she got back to me she said she couldn’t give me a definite dollar amount to compare it to, but I could probably figure on about a 1,000% increase.

Well, I still couldn’t believe it could be so great an amount as to make him hugely wealthy by today’s standards! I realize that our annual poverty level income is more than most households earned I their lifetime in the era. Still….

And then Pam Warren over at Granny’s Genealogy  made a post on January 2nd that caught my eye  . She introduced us to Measuring Worth.

Here I was able to put in the year of the initial value I wanted to convert. So I put in 1850. And then the dollar amount I wanted calculated: $25,000. And lastly, the year I wanted it converted to, [the latest year this calculator will assume is 2008, so I put that year into it’s correct slot].

This is what it spat back at me:

$711,040.29…………………Consumer Price Index

$526,056.13…………………GDP deflator

$5,184,848.48……………….Unskilled Wage

$10,787,517.97……………...Nominal GDP per capita

$141,229,003.51…………….Relative share of GDP

Okay, so a student of finance I am not!

Just what does all of this mean?

Well, the website gives the following definitions for each of these listings:

The CPI is most often used to make comparisons partly because it is the series with which people are most familiar. This series tries to compare the cost of things the average household buys such as food, housing, transportation, medical services, etc. For earlier years, it is the most useful series for comparing the cost of consumer goods and services. It can be interpreted as how much money you would need today to buy an item in the year in question if its price had changed the same percentage as the average price change.

The GDP Deflator is similar to the CPI in that it is a measure of average prices. The "bundle" of goods and services here includes all things produced in the economy, not just consumer goods and services that are reflected in the CPI.

The Consumer Bundle is the average dollar value of the annual expenditures of a "consumer unit". The consumer unit could be a family or another type of household. The main point is that spending is a joint decision of the members of the unit. The bundle increases over time as household income increases. Unlike the CPI, not only the cost but also the amount of goods and services increases over time. Note, the 2008 value of the consumer bundle will not be published until November 2009.

The Unskilled Wage Rate is good way to determine the relative cost of something in terms of the amount of work it would take to produce, or the relative time it would take to earn its cost. It can also be useful in comparing different wages over time. The unskilled wage is a more consistent measure than the average wage for making comparisons over time.

The GDP per capita is an index of the economy's average output per person and is closely correlated with the average income. It can be useful in comparing different incomes over time.

The GDP is the market value of all goods and services produced in a year. Comparing an expenditure using this measure, tells you how much money in the comparable year would be the same percent of all output.

Okay, so I thought I was beginning to see a little light. And perhaps I should use the GDB per capita as the correct calculation. But just to be sure, I continued to read the websites examples. And this particular example seemed to stand out best for my analysis:

· George Washington was paid a salary of $25,000 a year from 1789 to 1797 as the first president of the United States. The current salary of the president has recently been doubled to $400,000, to go with a $50,000 expense account, a generous pension and several other benefits. Has the remuneration improved?

Making a comparison using the CPI for 1790 shows that $25,000 corresponds to over $608,000 today, so the recent raise means current presidents have an equal command over consumer goods as the Father of the Country.

When comparing Washington's salary to an unskilled worker, or the measure of average income, GDP per capita, then the comparable numbers are $11.5 and $25 million. Granted that would not put him in the ranks of the top 25 executives today that make over $200 million. It would, however, be many times more than any elected official in this country is paid today. Finally, to show the "economic power" of his wage, we see that his salary as a share of GDP would rank him equivalent to $1.9 billion.

So, let’s take a look at great-great-grandfather’s worth for 1850 and the example above.

He was worth $25,000 in 1850. Looking at the CPI we see that amount corresponds to over $711,000 today [a pretty big chunk of change!] But with the mean average home today worth $350,000, and the average family income at $75,000, I’d say we were looking at a man with a little above average assets, even by today’s standards.

When we compare this amount to an unskilled worker, or the measure of average income, then the comparable numbers begin to soar! Over $5 million now! Wow!

Still, I wasn’t sure which number I should look at for an actual comparability for today! So, calling up my old financial advisor friend again, she asked me, “Was your grandfather skilled in any manner that was unusual for the average man at the time?” The answer was no! He had been an indentured servant, trained to be a blacksmith. Nothing more.

Her reply was, “Definitely compare it to the unskilled age then!”

And finally, I had a number to compare that lowly $25,000 to.

And yes, family, it appears that great-great-grandfather, William Bean, was a man of unusual wealth for his time. If he had a comparable amount today, he would be worth well over $5 million!

Oh, shucks, and none of that has trickled down through the years!!! Next I’ll have to try to figure out where it all went! [Family legend says he hid it from the renegade soldiers who were marauding through the countryside. And when he died, the location went with him. Hmmmm…..] Another puzzle to figure out!