Why Coke Cost A Nickel For 70 Years | Hacker News Reader

Why Coke Cost A Nickel For 70 Years

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319 pointsriffraff124 comments

>In 1886, a bottle of Coke cost a nickel. It was also a nickel in 1900, 1915, and 1930. In fact, 70 years after the first Coke was sold, you could still buy a bottle for a nickel.

Without getting into a huge argument about the causes of inflation, it's really weird that they didn't even mention the word inflation until almost the very end.

In 1886, an ounce of gold cost $20.65 and in 1930 an ounce of gold cost $20.65. 70 years after 1886 (1956) it had increased to $34.99 (a 70% increase). But surely a large part of the reason that a Coke cost a nickel for 70 years was that there was no real inflation for a large part of that time, during which time Coca-Cola also had the opportunity to significantly increase production and cost efficiency.

That doesn't explain why Coke continued to cost a nickel after WWII, when we started having significant inflation. According to the economists interviewed on Planet Money, Coke has the longest known stuck price of a consumer good in modern history.

They attribute it to the original mistaken fixed-price bottling contract, Coke's response of pushing the price down with "predatory" marketing of a 5c price point, and the rise of vending machines and their inability to make change until the late 40's.

The best part of this story, and I'll just go ahead and spoil it for you: late in this drama, Coke decided they wanted to raise prices, but since vending machines couldn't reliably make change they were stuck with a nickel-denominated price and couldn't double it. So instead, they stocked vending machines with "official blanks"; one in every 8 times you went to a Coke machine for a drink, you got an empty bottle, and had to pay again, which raised the effective price of Coke across all consumers by less than a cent.

I agree that some inflation occurred (my original comment noted the inflation that was ultimately experienced near the end of the 70 year period), and I agree that the article contains some interesting information about contracts and vending machines (I did read the article). I just think it's disingenuous to say basically "the price was the same in 1886, 1915 and 1930!" and that they don't remind the reader that the price of many things was essentially the same over that same time period.

A less informed reader may be unaware of this and be reading the article from the context of modern inflation, for which a 70 year history of no price change would be much more remarkable.

... the parent pointed out that CPI almost doubled in that period. The fact that the nominal price of gold held steady doesn't show a lack of inflation - that's also the period when the world started pulling huge amounts of gold out of South Africa, which would be expected to drive down the real price of it. Unless coke's secret recipe includes a lot of gold, that's not going to have much relevance.

Measurements of CPI during that time point are of more questionable accuracy, CPI measures many different types of goods (not all go up together), and a doubling of CPI over that many years is relatively low inflation. I didn't disagree there was inflation in any of my comments. Further, the article admits at the very end that increasing inflation was ultimately what forced Coke to raise its prices. Doesn't that imply that the lack of high inflation was part of what enabled Coke to maintain low prices initially?

"Measurements of CPI during that time point are of more questionable accuracy"

I am not sure what you mean here - "of more questionable accuracy [than CPI measurements today]", or "of more questionable accuracy [than gold in reflecting the cost of producing a coke]"? If the former, I grant it, but not (automatically) that it's enough to make a difference. The latter seems absurd - as I elaborate on a bit below.

"CPI measures many different types of goods (not all go up together)"

Coke is made out of many different types of goods (in terms of everything it takes to put a bottle on a store shelf), plus labor of people who want to buy many different types of goods. CPI should be expected to track the cost of producing a coke quite a bit better than a single commodity that isn't even involved in the manufacture and which experienced changes in supply that had nothing to do with coke.

"[A] doubling of CPI over that many years is relatively low inflation."

Relatively low, but not absurdly low, and certainly not completely flat; and note (!) that the end points picked here are not representative. 1930 CPI is the start of the depression; inflation in the 1920s was higher than anything we've seen since (says wolfram alpha) and the price of coke did not move.

To the general, implied counterfactual - "would Coke have raised it's prices sooner if there were much higher inflation?" - I think we have to answer "of course", but that doesn't necessarily mean that unusually low inflation was a significant part of it. Earlier periods have experienced less inflation, but coke's price lasted an unusually long time.

How did Coke get away with loading blanks into machines? Doesn't that break some kind of law? Genuinely interested in how they managed to make that fly.

According to the Planet Money podcast, the idea was never implemented.

So instead, they stocked vending machines with "official blanks"

In the podcast[1] they say that idea "never saw the light of day".

[1]: http://www.npr.org/blogs/money/2012/11/13/165046113/episode-...

Doh! Just re-listened. You're right. I missed that part the first time, and had instead heard "they abandoned the plan", and figured they might have actually done this for awhile.

It's still the best part of the story. Followed by the request for a 7.5c coin.

Followed by the observation, that for a 2 liter, the price per ounce is still remarkably close to the original price

Maybe folks were kinder to vending machines back then, but if I put in my last nickel and received a blank, that blank would have been used to thrash the heck out of the machine.

Maybe they should have raised the cost to 10c, and advertised that you get a bonus, second Coke 3 in 4 times.

Longest known stuck price. It used be be standard here to ask for $20 of petrol. That is all fine, but if you forget and do that now that petrol is expensive, you have to refill about a day later. Turns out equating an amount of petrol by a variable that continually changes (ie goes up) isn't such a good idea.

I also think this may be an example of increases in production and distribution efficiency being roughly on par with inflation. I think a similar thing happened with coin operated video games.

Don't you think that prohibitive cost of upgrading all those machines would have been much more likely explanation than the assertion that efficiency was, for some unknown reason, exactly in line with inflation?

I have to agree that a significant amount of price increases in a product like Coca-Cola is probably due to inflation. As an example, I was curious so I looked up US inflation and there's a chart showing historical inflation from 1650 to 2000. It shows inflation being a wild rollercoaster of positive and negative inflation all the way up to 1950, which probably balances things out over time. From that point forward inflation was still a wild rollercoaster, but only in the positive inflation side. Well, there does appear to a small turn down into the negative for a brief moment.

A discussion on why the ups and downs before 1950 and why only positive inflation after 1950 is beyond my area of expertise. But part of me does wonder on the accuracy of the chart because it shows several spikes much higher than the highest level of inflation past 1950. I'm assuming those are due to wars.

The difference is that until fairly recently, no nation had a coherent monetary policy. One of the reasons is that economics did not really understand what money was until fairly recently. For a long time, people looked at money primarily as an asset that could be used for trade. Because of this, they viewed precious metals such as gold and silver as having intrinsic value. When they do not. Today, we understand that the primary backing of money is trust. Trust in gold, trust in governments, trust in economies.

Good post. This might be a slight derail, but: I wonder if part of the problem with getting people to accept this is the use of the value-laden word "trust". Many people immediately react to this concept with horror: they don't "trust" the government in the same way they trust their spouse or their parents. I wonder if economists would do better to replace "trust" with "future expectations" or something like that. [Edit: when presenting to mainstream audiences.]

naw, trust is fine. trust is pretty specific in this context

I personally have no issue with the word trust in this context. My concern is with the many people who vote and who aren't educated about what its specific meaning is in this context and react to the word emotionally. In the case that the participants in the conversation are trained in economics, "trust" seems exactly the right word to use.

The interminable Free/free/Libre/"free as in freedom, not as in beer" comes to mind- sometimes jargon or switching words is better, so you don't confuse people not already in the conversation.

"Technology" in economics also comes to mind as something that causes a lot of confusion.

credibility?

I hear that used sometimes and I think it's better than trust, but it still holds some connotations that seem undesirable for the purpose: right now, a significant number of people in the USA seem to dogmatically believe that the government "can never be trusted"; these same people, if asked how much credibility the US government has, would say "none"! Etc... basically, there are lots of people that see "government" as pure evil and they make their decisions and form their beliefs around that. IMO it'd be really nice to change that, of course; but as long as people have extremely emotional responses like that, it might also be worth looking for ways that word choices can be made in order to make communication more accurate.

Frankly I don't see this as a problem with accuracy of terminology. Both trust and credibility are perfectly adequate and sufficient terms. The fact that money has any stability at all is testament to the fact that a majority of the people who use it do 'trust' the 'credibility' of the government to manage it, whether a bunch of wingnuts think they ought to, or like the terminology used to describe it, or not.

Predictability is probably a better word; uncertainty is enemy of business planning, far more so than unfairness or corruption or incompetence. Business (writ large) is just fine with incompetence or corruption, as long as it can plan around it.

The talk about "trust" is also problematic from an empirical point of view. You see plenty of people who loudly proclaim that they don't trust the government / the Fed / any official institutions, yet you seem them using the currency provided by those institutions. Clearly, trust is not what gives the currency value.

Granted, those people may not have their savings in assets denominated in that currency (if they have any savings at all), but - in line with what you write - investment decisions shouldn't (and rarely do) have anything to do with "trust". Consider that security-thinking folks more or less define a "trusted person" as "somebody who can undermine your security".

Have you ever read The Wealth of Nations? It would seem that at least some economists understood this principal.

The gold (and silver and other metals) standard. When more gold was discovered, all of the sudden, there was a huge increase in the money supply. When no one discovered any gold for a little while, deflation increased.

There are other reasons including weak governments that had much less control over the economy and a lack of knowledge about how the economy worked but the money supply was a big part of it.

It is my understanding that continuous inflation is a major goal of those working with the money supply, due to fears of a deflationary spiral. That the risks of deflation are significantly worse than manageable inflation. (http://krugman.blogs.nytimes.com/2010/08/02/why-is-deflation...)

Positive but low inflation.

The price of gold might have remained constant, but that's hardly the binding factor here. All inflation is measured with respect to a basket of goods and if you choose "an ounce of gold" as your basket of goods then under a gold standard you'll get 0 inflation by definition.

But the relevant basket of goods here is the inputs in materials and labor that go into a bottle of Coke, and that ought to be fairly close to the CPI, which rose from 27 to 50.2[1] from 1886 to 1930. Now, of course, I presume they found ways to economize and automate but it's still rather impressive that they could hold the product price down over that timeframe.

[1] According to estimates from the Minneapolis Fed http://www.minneapolisfed.org/community_education/teacher/ca...?

Perhaps they shrunk the size of the product to match? I know Hershey resized their chocolate bars to keep the price paid per bar constant for a while.

This was covered by the story. They didn't do that. In fact, they made efforts to discourage individual shops from doing it.

Hence why the 4-lb. bag of sugar seems to have become the norm around where I live, and what used to be a pound of coffee in a can is now around 11 oz.

And a pint of Haagen-Dazs ice cream is slightly less than a pint.

Maybe they are using metric units like 500ml?

A (UK Imperial) pint is 568ml. I don't know what a US Customary pint is. (Fun fact: UK and US customary/imperial units aren't the same! Every country used to have it's own system. That's why the metric system was invented)

a US pint is like 450ml.

Wikipedia tells me it's 473ml. God I hate the imperial systems

No, they're just being cheap. A pint of Ben & Jerry's is still a pint.

Interesting. I always assumed the cost of the actual product for things like this was next-to-nothing, with marketing/profit/administration/distribution making up the vast majority - thus making portion sizes basically irrelevant.

Depends on the product. For coke that's probably true. But cocoa beans are getting more expensive since demand is up, and supply isn't changing much.

Cost is nothing, but with a smaller portion size, demand can be forced up.

This was covered in the podcast, if you'd listened to it. They didn't.

And the appearance of "59oz" half-gallons of orange juice.

And the disappearance of "20% more free!" in your bag of chips, after 10 years of that "temporary" bonus.

Exactly. If you define a new basket of goods to be "one bottle of coca-cola" (let's call it's a "Coka"), then there has been no inflation since coke was first sold! One bottle of coke still costs the same as 1 Coka!

To elaborate, it would be a basket of goods comprised only of Coke, measured using the Coka currency.

It's something like ∂Coke/∂Coka, and historically when gold presumed to be a neutral measurement of value, the price of labor and the price of land still varied with respect to each other.

I am reminded of The Economist's "Big Mac Index", comparing currencies' purchasing power to buy a Big Mac in different countries. The index "seeks to make exchange-rate theory a bit more digestible". ;)

http://www.economist.com/blogs/graphicdetail/2012/07/daily-c...

https://en.wikipedia.org/wiki/Big_Mac_Index

That is incorrect. Inflation is defined as the expansion of the money supply, CPI is measured as the change in price of a basket of goods minus volatile things like energy and food.

I agree that inflation should be officially defined as an expansion of the money supply, with rising prices being simply a result of that rather than the definition of it.

But the actual textbook definition is, simply, a rise in the general price level of goods and services [1].

This unfortunately makes discussions of inflation ambiguous - is it being caused by expansion of the money supply, or increase in demand, or decrease in supply, or falling interest rates... etc?

[1]: http://en.wikipedia.org/wiki/Inflation

Falling interest rates usually result in increases in circulating money supply. Supply/demand definitely has an effect, but then so do increased living standards (more taxes, more pay to those who stock coke machines). Coke in Switzerland is not expensive because of inflation. With increased living standards, lower end goods necessarily become more expensive while higher end goods become cheaper (or at least don't rise so much).

Confusingly, while rises in the general price level are called inflation and that's what pretty much everybody means when they talk about inflation a proper term for an increase in the money supply is also inflation[1]. I would strongly recommend people not use the term "inflation" that way unless you're careful to distinguish the sense in which you're using it, since you'll usually just end up confusing everybody otherwise.

[1]http://en.wikipedia.org/wiki/Monetary_inflation

This has always irritated me. Normal people and economists use the same word to describe two different albeit somewhat related things. If you include debt (and I think you have to), we had some pretty severe deflation starting 2008. But the prices people pay for the things they buy went up during that time period, something that can happen while you're in a deflationary economy.

>Normal people and economists use the same word to describe two different albeit somewhat related things.

It's actually worse because economists themselves use the same word to describe the two different concepts.

I agree with Symmetry above that the simplest 90% solution is just use "inflation" for general rise in price levels regardless of cause, and "monetary inflation" for money supply expansion.

An increase in the volume of a helium-filled balloon is also "inflation." As an economist, I can assure you that I mean "price inflation" when I say "inflation" without a qualifier. So does everyone I talk to. It doesn't need to be confusing.

This is a nitpick I have about economics - the language you use for this doesn't distinguish the causes of inflation, just lumps them all together.

Obviously it works well enough for mainstream economics, but why does no one explicitly qualify inflation as "price inflation", "demand inflation", or "monetary inflation"?

Economists do distinguish and discuss the causes of inflation. Search for "demand pull inflation", "cost push inflation" or "imported inflation". You won't see "monetary inflation" that much in modern economics discussions because it simply isn't that relevant empirically for understanding the development of the price level.

Was Friedman wrong then? Is inflation not always and everywhere a monetary phenomenon?

Essentially, yes. An overview is here:

http://www.econbrowser.com/archives/2007/02/how_paul_volcke....

and the original interview is informative too. (tl;dr: Great Inflation)

He was wrong. Certainly even the bit of truth that is left in his statement is mostly misleading. Inflation is always better understood by looking at prices: What is it that leads businesses to change their prices? Why do they raise prices, and why do they get away with it?

For a bit of back story: What this quote of Friedman is intended to convey is the incorrect idea that there is always a causal link from an increase of the money supply to a rise in the price level. The rise in the price level is explained by a prior increase of the money supply, and this increase of the money supply is supposed to be the prime cause.

This is wrong on several counts: (1) there can be a causal link from the price level to an increase of the money supply, because money is endogenous; (2) as neither the real size of the economy nor the velocity of money (Q and V in MV = PQ) are constant, the price level and the money supply can move independently from each other; (3) in practice, growth in the money supply and rises in the price level are both caused together by other causes (such as rising cost of imports or institutionalized wage increases).

The most important thing to understand is that our monetary system is endogenous: How much money is out there is decided by banks and debtors. Every time a business goes to a bank and takes out a loan, the money supply grows. Every time a business pays a loan back, the money supply shrinks.

This explains why the causality tends to go the other way from what monetarists believe: When wages rise or the cost of inputs of production rises, businesses take out larger loans to cover their upcoming production, hence the money supply grows as a consequence of inflation.

Friedman and other monetarists are very much working from a gold standard and hence exogenous money mind set, so it is no surprise that they get this wrong: they are starting off from incorrect assumptions about how our monetary system works.

That is not to say that it cannot go the other direction. It can go both ways. Which is why what one should really look at is how prices are set in the economy. Since most prices are administered somehow, usually controlled by longer term contracts, you need to understand how the negotiation of those contracts works.

Great explanation, thanks for the writeup.

There's clearly a need for a word that means, "increase in the price level" and that word is "inflation." Your nitpick almost reads like a criticism of the word "fever": it doesn't distinguish the causes of the fever but lumps them together.

Economists have been studying inflation long before they really understood its causes and there are surely more refinements that are left, so it's vital to be able to talk about the observed phenomenon in a cause-agnostic way. Just like it's vital that doctors can talk about "fevers" without having to know about the exact underlying cause.

> Inflation is defined as the expansion of the money supply

That's not accurate. Inflation is the expansion of the money supply WITHOUT also the expansion of the money demand (from population growth and economic expansion).

Which is why the gold standard is so problematic - it would freeze the money supply, but the demand keeps going up, so gold would cause deflation with all it's concomitant problems.

Inflation was a net 0 up until 1914, when the US switched to a fiat money system. There was about 85% inflation between 1914 and 1929, yet the government maintained a fixed exchange rate between the dollar and gold.

This imbalance I'm pretty sure led to all the runs on the banks in the banking collapse, as people finally realized they could nearly double their money by converting it to gold. This collapse continued until the government suspended gold exchanges.

What I find peculiar is I never see this mentioned in explanations for the banking crisis.

It's the same reason that you never see the press mention congress's role in the subprime meltdown.

Politicians that are liked by the media say "Bankers! Wall Street!". That's what gets shown on the nightly news and repeated. Most voters don't care to dig further. Partly because the truth is more complicated. Partly because it causes cognitive dissonance to think contrarily to the narrative being told in the media. Mostly because looking into details would take people away from Monday Night Football, American Idol, and Dancing with the Stars.

As one who works "on Wall Street" (remotely) I can assure you that we caused the financial crash deliberately. I personally spent a lot of time working on it and I am now back at it again! You just wait 10 years for the next cycle!

Sarcasm...

So true. The reason the head of Coca-Cola, a successful major corporation would do something as apparently outrageous as to agree to sell syrup at a price guaranteed forever was that the history of the US currency from its creation to 1899, when he made this contract, was one of a rock-solid dollar. According to the Federal Reserve itself (http://www.minneapolisfed.org/community_education/teacher/ca...), prices for goods fell over the decades as the dollar stayed solid and the industrial revolution increased productivity every year. It was clear to any intelligent person that, while prices for specific things fluctuated with supply and demand, a constant, reliable dollar combined with increasing productivity (due to technological improvements) made overall prices something that would go down over the long run forever. Why not agree to sell at today's prices forever?

Then the Federal Reserve was created in 1913 to allow the Federal Government to play a more active role in the economy and all that "solid as the US dollar" stuff became a quaint historical relic. According to the Fed itself (link above), prices that had gradually come down from $50 (for a basket of goods sized to show the index value as dollars) in 1800 to $29 when the Fed was created, suddenly turned around and shot up to ABOVE $700 today (est. Nov. 2012 value).

In other words, since the Federal Government decided to take a more active role in "managing" the dollar instead of merely guaranteeing it, they have managed to destroy more than 95% of its value.

It wasn't the CEO of Coke who was incompetent at managing finances; it was that he couldn't imagine a day when the US Federal Government would become so utterly incompetent at managing finances.

Your premise that inflation ("DESTROYING THE VALUE OF THE DOLLAR!") is always bad is hardly accepted enough to just throw out there and assume that everyone will agree with you. How many libertarians are there in this country? Not a majority.

Something you gold fetishists might like to keep in mind is that for the first century of the US (and arguably quite a bit longer), the country was benefitting from massive amounts of virtually free capital, if you discount the fairly minor cost of driving Native American tribes off the land. When the US government needed to raise money in earlier times, it just sold off vast tracts of land for cheap. Obviously, this strategy couldn't go on forever, and by the time the west coast was properly settled the country needed to switch to a more conventional form of public financing, ie a central bank.

Seriously, if you have an entire continent at your disposal, running an economy is easy. Likewise, after WW2 most of the the rest of the developed world was in a shambles, and the US was the only industrial economy that hadn't been bombed heavily. Unsurprisingly, a long period of great economic growth followed, in time with the Bretton Woods system but not necessarily because of it.

I'm very interested in monetary theory, but a lot of gold fans seem to attribute stability or growth to the use of gold rather than extremely favorable economic conditions. If you back and read the the Wealth of Nations, there's a very worthwhile (if long-winded) explanation by Smith of how hard currency can act as a limit upon economic growth, as well as being corruptible in its own right.

Seriously, if you have an entire continent at your disposal, running an economy is easy.

Which is why Australia has such a remarkably stable economy, right? Oh, wait... http://www.abc.net.au/news/linkableblob/3873450/thumbnail/je...

See http://www.abc.net.au/unleashed/3872646.html for context, and in particular the bit about "mad boom and bust cycles".

The vast majority of the Australasian landmass is desert.

Australia has a tiny population relative to its landmass. While it's rich in extractive resources (mining, minerals) from which much of its present wealth derives, it lacks both water and fertile land for agricultural production.

This itself is interesting: because Australia is an island continent, with few or no internal volcanoes or rift zones, the land is, literally, ancient, with many nutrients vital for ag production missing (one estimate I saw was that seeding land with an infinitesimal amount of iron would greatly increase production). Much productivity is due to windblown dust from the Indian subcontinent and south-east Asia. Even where irrigation is possible, evaporation causes accumulation of salts which degrade ag values. The first settlements in Sydney very nearly starved due to difficulties in producing sufficient food.

I do not even how you can call paper dollar a currency. You cannot use something as a currency if: - it can be manufactured easily - it can change value from one day to another - it is not dense in physical space (i.e. you do not need to carry buckets of it to buy something).

The paper money clearly does not respect ANY of these principles nowadays. The FED can print (and does) as much as they want to buy back toxic assets (remember the Krugman clown advising after the Net bubble in 2001 that we should create a housing bubble to stimulate the economy ? That really worked well for everyone, did it not?). The US Dollar is constantly losing value versus Gold since its parity was dropped for good in the 70s, and now you have such a galoping inflation than looking at movies 30 years ago make you feel old: then the bad guys were asking for "a million dollars" as something highly valuable/desirable, while nowadays if you do not cross the billion mark it is not considered as much anymore (Austin Powers made this very good point in a clever way).

Why do you think China is buying all the Gold it can currently to replace its stinky dollars?

Another instance of Poe's Law...

> I do not even how you can call paper dollar a currency. You cannot use something as a currency if [...]

Currency is based entirely on concensus. Anything (ivory, sheep, even bits of paper) could be currency; the only requirement is that there are people willing to use it as a basis for trade. In other words, it doesn't really matter if you don't believe in paper currency as long as everyone else does.

Well, currency is based on consensus, certainly, but that is not enough to create value. A paper has not value intrinsically speaking. Gold and other metals have always had value for various reasons (either because of their physical/chemical properties or because of their rarity). So, the day the Dollar loses its consensus, you are left with worthless paper and you might as well use them in the toilet. The day Gold, Silver and other lose all actual value is not in sight. Net, you are safer saving some of your assets in those.

It's meaningless to say that the value of a dollar has been destroyed, because a dollar does not have a value. It is merely a unit for denominating, measuring, and comparing value. Only actual assets have value, like gold, or real estate, or companies.

That the size of the unit has changed over time does not mean than any value has been destroyed. It's like saying that the creation of the centimeter destroyed the length of the inch.

> This imbalance I'm pretty sure led to all the runs on the banks in the banking collapse, as people finally realized they could nearly double their money by converting it to gold.

Indeed:

> under the gold standard America had no major financial panics other than in 1873, 1884, 1890, 1893, 1907, 1930, 1931, 1932, and 1933.

http://krugman.blogs.nytimes.com/2012/08/26/golden-instabili...

More to the point:

> Countries that were not on the gold standard in 1929--or that quickly abandoned the gold standard--by and large escaped the Great Depression

> Countries that abandoned the gold standard in 1930 and 1931 suffered from the Great Depression, but escaped its worst ravages.

> Countries that held to the gold standard through 1933 (like the United States) or 1936 (like France) suffered the worst from the Great Depression

http://web.archive.org/web/20110103092958/http://www.j-bradf...

Advocating a return to the gold standard is historically and economically illiterate.

That's not what I said. I suggested that trying to maintain a fixed gold standard while inflating the money is going to cause a collapse.

I should add that many countries have tried to do something similar - pegging their currency to another, and then inflating their own currency. It always leads to a collapse.

Correlation does not equal causation.

There was a world war going on in the period from 1914-1917, when inflation of the dollar was at it's highest ever [1]. It's possible that the effect could have been much worse if we were still on the gold standard, as total war tends to drive up the price of precious metals.

Fiat currency isn't a bad thing. You can't build the largest economic empire in history when your currency is tied to the price of shiny rocks.

[1] http://www.usinflationcalculator.com/inflation/historical-in...

That's a fairly narrow part of the story as there was also ~85% inflation between 1914 and 1942. Due to significant deflation in the 1930's.

Basing dollars on gold is most definitely the reason why the price stayed the same, and why it started rapidly rising afterwards.

Except that if you actually look into the story that's almost definitely not what happened. The operators of Coke were dismissive of bottling and sold unrestricted bottling rights for a pittance, then, to keep prices down to prevent themselves from getting squeezed on the value chain by bottlers, they launched a nationwide advertising campaign to fix the price at a nickel, and finally their sales shifted from fountains to vending machines during at time at which a nickel was the only viable price point for the vending machine technology we had.

They discuss inflation more and talk about a lot of other stuff in the longer version of this story.

http://www.npr.org/blogs/money/2012/11/13/165046113/episode-...

One interesting thing they didn't include in the short version for Morning Edition was that Coke experimented with the idea of something called the Single Coin Plan to resolve the nickels-only vending machine problem by leaving every ninth bottle in the vending machine empty. If you got the empty bottle when you paid, tough luck. On average this increased the price by .625 cents. Clever idea but I think they realized this would just infuriate their customers.

Another thing to consider is that a 'dollar' was consistent in name only over that period.

until 1900: A dollar represented a weight of gold and silver 1900: $20.67 / oz gold 1933: $35 / oz gold (internationally only, domestically it was just a piece of paper) 1971: (outside of the 70 year range) USD represents only the full faith and credit of the USG

So observing that a coke cost a nickel throughout that period is interesting - but the dollar isn't really a static denominator of value over time that it might appear to be. Certainly using basket of goods is necessary after 1971 because since 1971 a dollar is nothing more than an idea in people's heads. It has no guaranteed exchangability for something (real) from the currency issuer, it's value is only derived from what other people are willing to exchange it for that day.

The fixed price syrup story is interesting though - just goes to show how a different mindset on the inflation risks of the currency were back then.

I think the answer really is that the steadily increasing cost of raw materials for soda (which remained stable in real terms for most of those 70 years) was countered by other efficiencies.

For example, in 1886, 1,000 cases of coke were delivered by a bunch of coachman with a horse-driven wagon serving customers in a limited area. In 1936, 1,000 cases of coke were delivered by a much smaller number of truck drivers serving more customers in a wider area.

8 oz bottles of coke were also re-used. So the machinery used to wash those bottled became more efficient throughout those 70 years.

Another key factor is alternate delivery mechanisms. At some point, soda fountains became a common and higher margin channel for selling Coke. The margins on bottles were tighter, but the bottles probably helped drive sales at the fountain.

Remember that Coke the trademark owner is distinct from Coke the bottler/distributor. The Coke bottler owned the relationships with stores and restaurants, and probably had the ability to sell complimentary products (pretzels, etc) when they were dropping off the Coke order.

I'm going to go out on a limb here and assume that the primary materials cost for Coke over this time period is sugar.

There are other costs (production, distribution) but over that time period, those were benefiting from decreased cost through industrialization, etc.

This link gives a history of the sugar price (only back until 1912): http://www.tradingeconomics.com/commodity/sugar

Basically, sugar did not increase in price over that time span - except for a dramatic spike around world war I and relatively minor fluctuations.

That spike put Pepsi into bankruptcy, the company was sold at auction, reorganized, and after the great depression started selling a DOUBLE-SIZE (12oz) bottle for ... wait for it... $0.05).

http://suite101.com/article/soda-pops-of-the-1800s-1900s-20s...

I wonder how much of the cost of Coke was materials cost, and how much logistics and mark up for the retailer.

The original source is Planet Money on NPR:

http://www.npr.org/blogs/money/2012/11/15/165143816/why-coke...

I have no idea what "weku.fm" adds to the mix

There is a version that is 5 times longer Planet Money did for their regular (excellent) podcast.

http://www.npr.org/blogs/money/2012/11/13/165046113/episode-...

Levy, the main author of the academic article behind this story, is one of my mentors. We taught a class together while I was a PhD student in economics at Emory. I first heard the Coke story during his presentation during a fly-out weekend before starting graduate school, and it is to date still one of the most interesting economic stories I've ever been told. The question is simple, thought provoking and appealing to almost anyone.

The poster (Symmetry) that said "the relevant basket of goods is the inputs in materials and labor that go into a bottle of Coke" is absolutely right, and that's exactly what Levy/Young point to in the academic paper. However, the puzzle that remains is that input costs still don't explain the [lack of] variation in the price of coke over the relevant 5 cent years.

Although the CPI/inflation answers seem to be the reasonable explanatory variables here, the most explanatory factor is pretty simple: menu costs + marketing contracts/agreements.

Menu costs, which are the costs associated with changing your prices, used to be a pretty popular topic in macroeconomics. However, as time has gone on and with the rise of the Internet, menu costs have lost a lot of their explanatory power since they are far less significant in a digital age. But of course, in the early 1900s changing your price, especially for a good which was widely distributed at the time, was a pretty costly matter. Tack that onto that the agreements over price (but not quantity) that were made when the early licensing deals were made and you have a completely reasonable explanation for the sticky price of Coke.

Menu costs and fixed contracts are not necessarily sufficient to explain what happens in such cases - they may be sufficient in the coke bottle example here, but they are insufficient for a similar story here in Germany.

Prior to the introduction of the Euro, the price of a standard bar of chocolate has remained constant for around 50 years. The size of those chocolate bars was also fixed, unlike the Hershey's example somebody else mentioned.

The single most relevant factor explaining this is psychology: the price of chocolate was very much ingrained in people's minds, and people simply rejected the standard bar of chocolate above a price point of 0.99 DM.

Chocolate manufacturers had to squeeze the last bit of efficiency out of their production lines, and turn to larger chocolate bars with special gimmicks or other chocolate-related products for making a decent profit.

Who writes these things?

" In 1886, a bottle of Coke cost a nickel. . . . . In 1899, . . . Coke was sold at soda fountains. But the lawyers were interested in this new idea: selling drinks in bottles."

So was Coke sold in bottles in 1886 or not?

No; according to Coke's historians, the first bottle of coke was sold in 1894. The author of this Planet Money summary probably just misspoke, or meant "the price of a bottle's worth of Coke".

That had me scratching my head as well... Ugh.

Can anyone actually shed some light on this conundrum?

Price change is not fundamental to economics. It is fundamental to a post-Fed inflationary policy that seeks for a low (or at least a consistent) unemployment rate. That being said I think this is a great case study of "menu costs" on steriods.

Kudos for pointing out that this is a classic example of menu costs, but price changes occur for many reasons besides the Fed. Even if you had a fixed supply of gold coins and nobody could ever mine new coins, the value of those coins would change in proportion to the value of the overall economy, and that will tend to change for all sorts of reasons such as population growth.

But there isn't a fixed amount of gold. More gold gets mined when the demand for currency rises relative to the price of energy. The price of oil roughly tracks the price of gold not because gold is a magical denominator, but because an ounce of gold represents a certain amount of sunk energy that mined it.

Au contraire - price change is a fundamental aspect of economics. Why would a new competitor selling the same commodity ever expect to be successful? Because they've figured out how to provide the same product for less expense. So even ignoring expected price decreases due to technological progress, we'd still expect to see prices occasionally decreasing due to organizational progress.

And a decrease in the cost of one good can lead to an increase in the price of complementary goods.

Not to contradict, but to add detail: land, labor, capital, material resources and market seldom exist in the same location for any specific good/service, and the cost of distance (and the cost to overcome those distances) affects market bearable prices. It need not be technological progress that makes one competitive, it may just simply be favorable proximity to resources and markets that gives you an edge.

Coca-Cola (the syrup) is produced IIRC in only one place, and bottled/canned with local waters in regional centers because the cost of shipping a product that is mostly water around the country/world will drive costs up.

Many auto-makers in the US became "competitive" by closing factories where labor costs were high and opening them where they were lower. Many foreign producers of cars opened factories in the US to offset the increases of labor costs in their own countries while also decreasing shipping costs (especially for Asian car makers who cannot as easily ship to the Eastern US) and nullifying punitive tariffs.

The way/speed/reason/etc for a change in a price is certainly one of the most fundamental topics to economics. For one, it's a topic that grabs the mind share of both macroeconomists and microeconomists, and there aren't many of those!

Whenever an article with price/inflation implications hits HN, it's like the gold-bug bat signal goes off.

Fake account, but I wanted to say that I think Marijuana has been $10/gram for as long as I can remember. People do alter price based on different parameters, but $10/gram has been a long standing unacknowledged truth.

Didn't purity change quite a lot in different places over time?

It even has a name: https://en.wiktionary.org/wiki/dime_bag

I think the weight may vary depending on the cost of production/risk but it gets sold at the same price.

The idea of paying $10.50 for something like that due to inflation does seem a bit strange :)

>So they asked the U.S. Treasury to issue a 7.5-cent coin. At one point, the head of Coca-Cola asked President Eisenhower for help. (They were hunting buddies.) No luck.

I don't get it. Wouldn't a .5 cent coin make more sense?

The vending machine could only accept one coin.

Because the federal reserve wasn't printing money like crazy and devaluing the currency. When comparing the price of a Coke with real money - gold or silver the price hasn't changed

Actually, it did. Coke remained fixed in USD, so it had to change relatively to "real money".

EDIT: I was wrong, sorry. I got the wrong impression from the podcast.

Nope.

Throughout the relevant 70 year timespan, Coke was priced in an environment of first, the gold standard, and second, Bretton Woods.

The USD was not fully disconnected from gold until 1971, which is after the timespan the article talks about.

beat me to comment the same thing - the gold standard. I don't understand why he question marked "real money", i think he thinks the paper money he holds is money and not gold. Let's wait a couple of years

You're right, I got the wrong impression from the podcast, which is stupid since I knew about the gold standard and price stability of the time.

As for the "scare quotes", I'm aware of the drawbacks of fiat money, but it's still money. Gold is just non-fiat money.

Someone posted that an ounce of gold was $20.65. If we say a bottle of coke is $1.00 today, then gold must be hanging around $412.00 an ounce?

Yes, it's only about four times that.

It certainly is interesting to think about how, when you're dealing with nickels, the concept of 2.77% inflation has no real meaning for price for a good 7 or so years!

I'm surprised the bottlers didn't try to bottle different sizes and charge pricing differences on the larger bottles that Coke wasn't advertising for. Maybe this would have cut into their distribution/packaging costs though since the bottlers would be typically making a smaller margin on the larger bottles?

It would also decrease their benefit from the free advertising.

I always assumed that the syrup being sold to bottling plants was done for Tax Avoidance purposes, like Starbucks does now. (i.e. bottling plants make a loss because of high cost of the syrup, so no taxes to pay).

I see a great analogy with the whole Nexus strategy. The break-even approach doesn't make economical sense at first sight but Google is selling Android bottles for a nickel until there are no competitors left.

When trying to make my own version of coke it was interesting to learn that the real secret is the flavorings, which are then mixed with sugar and caffeine etc to form the syrup, which is finally mixed with carbonated water to produce the final product.

As the flavorings are such a minor portion of the actual drink (<0.1%) it's really hard to reverse engineer

The vending machine part of the story is a bit strange. Why did they not make a machine that would accept a dime and return a couple pennies with the coke?

IIRC Hershey kept the price of their flagship chocolate bar constant for a long time by making the size smaller until it was no longer a practical option.

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