The Warren-Pearson Index
February 12, 2012
The most commonly used source of price information for the U.S.
before 1920 is a series compiled by two academics, George Warren and
Frank Pearson, from Cornell University. The U.S. government only
began collecting such data in 1919, with the Bureau of Labor
Statistics wholesale price index. This was not what we would
consider a "consumer price index" today, but more of a commodity
price index. The CPI as we know it was first introduced in 1940.
Warren and Pearson produced a book called Prices, published in 1933. In it, they introduce a
price index going back to 1749. My main point today is that this
price index, which is the most commonly used reference for "the
price level" or "purchasing power" before 1920, is basically a
commodity price index. The index is made up of eleven subindexes.
The subindexes and their weightings are found below. The weightings
apparently changed over time. The first number is the weighting in
1799, and the second number is the weighting in 1889.
Farm Products (35%/25%)
Hides and Leather (5%/4%)
Fuel and Lighting (4%/10%)
Metals and Metal Products (4%/10%)
Building Materials (10%/10%)
Chemicals and Drugs (0.5%/1.0%)
House Furnishings (1.0%/1.0%)
From this we can see that Farm Products and Foods were 62%/50% of
the index. So, it is mainly a measure of farm prices. Energy,
Metals, and Building Materials (mostly lumber) are another 18%/30%.
Leather and textiles are 13%/14%. Everything else -- mostly booze --
is 8%/6%. The index was based on prices in New York. It was not a
nationwide index. In the days of horse-drawn wagons on dirt roads,
commodity prices would have quite a lot of regional variation due to
the inability to cheaply transport them, especially farm
Obviously, this is nothing -- nothing at all -- like today's
Consumer Price Index. Today's CPI-U has the following weightings:
Food and Beverages: 15%
Medical Care: 6.2%
Education and Communication: 6.0%
Here is what the Warren-Pearson Index looks like:
What do we see here? This is about what a commodity index would be
expected to look like, in my opinion, if gold were stable in value.
It ends at roughly the same level as it begins. There are three big
spikes. The first (around 1780) corresponds to the devaluation of
the Continental Dollar.
2011: The End of the 1970s Gold Bull (includes bonus graph of
the devaluation of the Continental Dollar).
The second is a plateau corresponding to the Napoleonic Wars in
Europe (possibly creating demand for commodities), leading to the
War of 1812 in the U.S. which involved a partial devaluation of the
dollar. Then there is a slow, decades-long return to roughly
1770-era prices. Of course there is a big spike in the Civil War,
related to the devaluation of the dollar during that time, and then
a return to prewar prices right in line with the return to the gold
standard system in 1879.
Here is a longer commodities price series, which we've seen before.
It looks like they also used the Warren-Pearson index before 1914.
I bring this up in part to show additional war-related rises in
commodity prices, particularly in World War I. This was a
combination of both demand for commodities from Europe, and also
some devaluation of the dollar during the war years.
The dollar was, of course, devalued in 1933, to $35/oz. from
$20.67/oz., but the effects of that devaluation didn't fully pass
through to commodity prices until the demand created by World War
II. We have a new plateau during the Bretton Woods years, and then
of course the chaos of the floating currency era since 1971.
If you mentally compensate for some of these episodes of war and
devaluation, I have to say the index looks remarkably stable to me.
Remember the time frames we are dealing with here. A decade fits
into a centimeter. Yes, the index might move 30% over a decade, but
that averages less than 3% per year. Also, these are commodity
prices, not today's CPI, so it is supposed to have a fair amount of
The declines in commodity prices to relatively low levels in the
1840-1860 period and the 1880-1900 period are related to the
expansion of farmed acreage during those placid peacetime years,
especially in the U.S. This was exacerbated by the rapid expansion
of railroads, which allowed these farm products to be effectively
moved to a central market such as New York. While the huge expansion
of farm produce was of great benefit to non-farmers, many farmers
got themselves into trouble due to the heavy new supply and
resulting low prices. Thus, there is something of a business cycle
here: somewhat higher prices for farm products encourages people to
put more acreage under cultivation; the increased supply and
consequent falling prices puts an end to the overexpansion of farmed
acres. People can only eat so much, you know.
I will have some interesting statistics on this business cycle,
regarding the 1880-1914 period. Here are some preliminary details to
whet your appetite:
5, 2011: Gold Is Stable In Value 4: More Commodities Prices, and
Unfortunately, these price indices are put to rather stupid uses. It
is an old rhetorical trick of the Keynesians to claim that "prices
during the gold standard era were highly volatile." They are trying
to imply that this commodity price index bounces around a lot more,
year to year, than today's CPI index. Well, of course it does. They
are measuring different things.
Another rhetorical trick is to imply that the "value of gold" was
bouncing up and down, basically as the reciprocal of this price
index. The "value" of gold is immediately equated with the
"purchasing power" of gold, and the "purchasing power" of gold is
immediately equated to the price of corn and wheat in New York. We
are supposed to believe that a 30% rise in the price of wheat and
corn (remember, the Warren Pearson index is mostly farm products) is
thus equivalent to a "30% decline in the value of gold," or that a
30% decline in the price of wheat and corn is a "30% rise in the
value of gold." Obviously, this is stupid. But, it has served its
purpose over the years, as a means to influence public policy along
Keynesian lines. Actually, it hasn't served so much as an influence
of public policy, but more of a justification for what politicians
wanted to do anyway, which was devalue the dollar during recession.
The better classical economists have been pointing out this fallacy
for literally centuries:
Here's David Ricardo in 1817:
It has been my endeavor carefully to
distinguish between a low value of money and a high value of corn,
or any other commodity with which money may be compared. These
have been generally considered as meaning the same thing; but it
is evident that when corn rises from five to ten shillings a
bushel, it may be owing either to a fall in the value of money or
to a rise in the value of corn …
The effects resulting from a high
price of corn when produced by the rise in the value of corn, and
when caused by a fall in the value of money, are totally
Remember that David Ricardo didn't just dig this out of the ether,
he was responding to the intellectual debates of his day. Things
haven't changed much, have they?
Here’s a similar passage from Ludwig Von Mises, dating from 1949:
Changes in the purchasing power of
money, i.e., in the exchange ratio between money and vendible
goods and commodities, can originate either from the side of money
or from the side of the vendible goods and commodities. The change
in the data which provokes them can occur either in the demand for
and supply of money or in the demand for and supply of the other
goods and services.
Political justification was the main purpose of Warren and Pearson's
book. Note the publication date: 1933. That was the year that the
dollar was permanently devalued for the first time in U.S. history.
If Warren and Pearson were actually influencing and leading public
policy, the book would have been published in 1920, and it would
have taken thirteen years for its intellectual effect to spread. Its
publication after the process of
dollar devaluation had already begun shows us that its
main purpose was political justification, rather than innovation or
26, 2012: Gold Standard Vs. a Commodity Basket Standard
This was not the first time such rhetorical tricks had been used.
The 1890s were another time of declining commodity prices due to
oversupply, causing marginal farmers to default on their mortgages.
The Democratic Party wanted to fix this with a 50% dollar
devaluation, which goes by the term "free coinage of silver." So, in
a sense, this was the second time around for the Democratic Party,
this time via Roosevelt rather than William Jennings Bryan.
Of course, the Great Depression was another time of collapsing
commodity prices. Warren and Pearson wanted to "stabilize prices" by
way of managed dollar devaluation. They speak glowingly of a
proposal at that time by John Maynard Keynes:
Keynes proposes that the central
bank keep gold reserves in bar form, but that there be no fixed
ratios of reserves to note circulation. The central bank would
change its buying and selling price for gold just as it regulates
the discount rate. The intelligence necessary to operate one of
these could operate the other. The bank would use both these
methods to keep commodity prices stable. ...
I bet that was a popular notion, considering that the Roosevelt
administration had already begun just that.
Warren and Pearson then quote Keynes for more details:
"Whilst it would not be advisable to postpone action until it was
called for by an actual movement of prices, it would promote
confidence and furnish an objective standard of value, if, an
official index number having been compiled of such a character as to
register the price of a standard composite commodity, the
authorities were to adopt this composite commodity as their standard
of value in the sense that they would employ all their resources to
prevent a movement of its price by more than a certain percentage in
either direction away from the normal ... Actual price movements
must of course provide the most important datum; but the state of
employment, the volume of production, the effective demand for
credit as felt by the banks, the rate of interest on investments of
various types, the volume of new issues, the flow of cash into
circulation, the statistics of foreign trade and the level of the
[stock] exchanges must all be taken into account. The main point is
that the objective of the
authorities, pursued with such means as are at their command, should
be the stability of prices."
Obviously, what we are talking about here is currency manipulation
in response to economic conditions. However, you can imagine that,
after 144 years of a dollar worth $20.67/oz. (with some lapses), not
to mention a dollar worth the same during the Colonial period, many
people weren't so gung-ho about currency devaluation as Mr. Keynes.
Thus, we see an adoption of vaguely classical, gold-standard
rhetoric ("stable prices") as a justification for currency
manipulation and devaluation. Actually, the goal of a gold standard
system was never "stable prices," which is silly, but rather a
stable value of the currency. Prices would be free to go up and
down, in response to supply and demand factors, as measured in a
currency of stable value.
Even gold standard advocates get a little caught up in this sort of
silliness. I would note Roy Jastram's book The Golden Constant, which, although somewhat
gold-friendly, tends to make the same mistake of equating gold's
value with its "purchasing power" vs. a basket of commodities.
Fortunately, we aren't so stupid today. At least, I'm not.