Why was a dollar more valuable 60 years ago?

Question

Inflation, is the simple answer. But what causes this? Why couldn’t society just keep on keeping on with prices? Examples, a $0.25 for a candy bar, $0.75 for a fast food burger, $30k for a home etc. It worked then, so why not now, why not just agree to lower the prices of everything?

In: Economics

Answer 1

Let’s say you are holding an item, we’ll call it X.

You are trying to sell it for whatever maximum price you can get.

There are four people standing around and each is holding $1 in their hand.

What is the marshmallow worth?

Well, it’s worth a dollar, because no matter who you sell it to, they only have a dollar.

Now let’s say one of those individuals has a money tree, and can pluck more dollars off the tree, and can offer you more $. They can effectively outbid everyone for your marshmallow, and the price at which you sell it will be determined by some equilibrium value between you and that person.

But now let’s say two out of the four people have a money tree, and both can pluck dollars off the tree. What is the price of your marshmallow now?

It now becomes a bidding war between the two, and whoever bids most will win.

Inflation occurs because you have too many bidders for an item, and can drive the price up as they are bidding against each other.

Inflation would normally be kept in check by some balance between supply and demand.

For example, when you had the only marshmallow and there were two people with money trees, the price of the marshmallow would be whoever bid highest between the two, and from there, whether or not you accept the price. You can always ask for more.

But wait…just as one bidder offers so much over the other person, and you are about to accept or counteroffer that highest bid….SOMEONE ELSE WALKS IN WITH ANOTHER MARSHMALLOW! Guess what happens then.

So what has happened over time is that the amount of X that we buy/consume, has been outstripped by the amount of $$ that is being plucked from the money tree. More buyers than sellers. Bam! Inflation.

There are other factors that can apply, but this is the ELI5 version.