How Much Did It Cost to Build the Titanic

I recently received a link to an article in The Vintage News with an eye-catching headline: “The replica Titanic cost $435 million & is set to launch in 2018”. I was intrigued, so I couldn’t resist reading the article.

It reported that an Australian billionaire was building a full-size replica of RMS Titanic, famous of course for being one of the worst commercial maritime disasters in modern history. Building Titanic II was such an audacious idea I decided to do some digging to learn more.

Not surprisingly, the project has been abandoned; so don’t plan on booking tickets. But there was a statement in the article that caught my attention:

“The new ship is going to cost around $435 million. This is around ten times the original cost. In today’s money, the original Titanic would have cost $44.57 million.”

That assessment of costs did not seem plausible in my view for two reasons. I’ve read about private yachts less than half the size of the Titanic costing that much to build. So $435 million seemed insufficient to build a 292-metre ocean liner with 840 staterooms, of which 416 first class rooms were as well embellished as any private yacht today.

Second, it didn’t seem reasonable that the replica could be built for only 10-times the cost of the original. The dollar has lost more purchasing power than that over the last 100 years.

So I decided to continue digging. The result was interesting, and I am sharing here what I learned. My objective is to show how bad the comparisons can be between historical and present day prices, and more importantly, to provide the methodology that explains how price comparisons should be calculated to achieve an accurate result.

Comparing Historical to Present Costs

The original Titanic construction cost was £1.5 million. At the GBP/USD 4.86 exchange rate prevailing when it was completed in 1912, the cost was approximately $7.3 million, but we know that a dollar today purchases a lot less than a dollar did 100 years ago. So we need to adjust for this devaluation of the dollar’s purchasing power.

The calculation to express historical prices in current dollars is typically done with the Consumer Price Index. Unfortunately, the CPI is tweaked and tinkered with to achieve political objectives rather than accurate measurements of the true cost of living. So instead I use gold to make historical price comparisons.

Gold is a consistent measuring stick. An ounce of gold today is the same as an ounce 100 years ago. Like a meter, yard, liter or pint, an ounce or a gram of gold are units of measurement that do not change over time, in contrast to national currency ‘measuring units’ like the dollar and the others, all of which devalue over time. What’s more, gold preserves purchasing power over long periods of time,[2] but using gold introduces a complication.

Not only has the dollar been devalued – with less purchasing power today than a dollar in 1912 – the dollar has also been debased relative to gold, a fact almost always overlooked when using gold to compare historical and current prices. Though overlooked, we cannot ignore the reality that when viewed in terms of gold, the dollar is of lesser quality than it was 100 years ago. It is less ‘sound’, as the saying goes, which has implications for the purchasing power of gold.

Therefore, it is also necessary to factor this debasement of the dollar into our calculation. So a 2-step process accounting for devaluation and then debasement is required to make an accurate comparison between historical and current prices.

Step One: Calculating the Devaluation of the Dollar

The US dollar in 1912 was defined as 23.222 grains of fine gold, which equates to $20.67 per ounce. So the $7.3 million it took to build the Titanic equates to 353,169 ounces of gold.

At the current exchange rate of $1,175 per ounce, that weight of gold for the Titanic’s construction cost equals $415 million, which is close to the replica’s reported $435 million cost. But the calculations don’t end here. Having accounted for the devaluation of the dollar, we now need to factor in the dollar’s debasement.

Adjusting for the Debasement of the Dollar

Debasement is the process by which the quality of currency is reduced. I explain debasement more fully in The Money Bubble[3], but it is necessary to provide some brief background information here to explain this insidious practice.

History books explain how debasement occurs when base metal replaces precious metal in a coin without changing the coin’s face value, even though the reduction of gold or silver in the coin perforce means that the coin has less purchasing power. Roman emperors and medieval kings in need of money victimized the populace with this practice, hoping to fool people that the value of the debased coins had not changed because they still looked the same. President Johnson did the same thing in 1965 by using copper and other base metals to reduce the silver content of US coins.

Coins are no longer a meaningful component of currency in circulation, but that does not mean debasement of the dollar has ended. To explain why, we need to look into the essential nature of a dollar, which is that every dollar is a liability of some bank, whether cash-currency issued as paper notes by the Federal Reserve or deposit-currency that circulates among commercial banks as bookkeeping entries on their balance sheets.

These bank liabilities that we call “dollars” have value as currency because the assets on bank balance sheets have value. These assets consist mainly of loans and government debt instruments, and to a much lesser extent, gold. This link to gold exists because US Treasury gold certificates are an asset on the Federal Reserve’s balance sheet. These give the Federal Reserve the first claim to the entire US Gold Reserve, which is reported to be 261 million ounces.

So instead of base metal replacing precious metal in coins, today debasement occurs by altering on bank balance sheets the asset mix that gives value to bank liabilities, i.e., dollar currency. When loans and debt instruments comprise an ever-greater portion of bank assets, thereby reducing the gold component of those bank assets, the dollar is debased. Like a debased coin, dollars today have less gold ‘content’ in the sense that there is less gold backing the dollar today than there was in 1912. We therefore need to adjust for this debasement, and more to the point, examine the impact this debasement has had on the purchasing power of gold.

In ancient times when coins were debased, it took a while for the populace to realize that the coins had less precious metal. Eventually though the debased coin would circulate at a discount to the weight of uncoined precious metal the coin was supposed to contain. But until the discount arose, the debasement meant that the purchasing power of all precious metal was diminished.

In other words, for a period of time those Roman emperors and medieval kings could spend debased coins with less precious metal content and achieve the same purchasing power as they could before the debasement. Similarly, the weight of uncoined precious metal equal to what was supposed to be contained in the coin would have the same purchasing until there was awareness of the coinage debasement.

So the purchasing power of gold and silver – whether or not coined – was diminished during this interim period that lasted until the discount appeared as a result of the debasement becoming known. The same result occurs today, which means that the dollar like those debased coins of ancient times has an undeserved amount of extra purchasing power, while gold has less.

So to accurately state historical prices and thereby make them understandable in terms of the currency we now use, we need to determine the equivalent purchasing power of gold today compared to what it was in 1912 in order to account for the dollar’s debasement.

An ounce of gold today is not valued as highly as it was in 1912. Gold was in much greater demand back then because the world was on the classical Gold Standard. As a result, gold’s present purchasing power is less than its historic purchasing power, which means that it would actually take more than 353,169 ounces of gold – or if expressing the cost in dollars – more than $415 million to build a replica of the Titanic today.

The Fear Index

To account for this debasement, I use my Fear Index, a reliable indicator I created that is the weight of the US Gold Reserve times its market price divided by M3, which is the total quantity of dollars in circulation. The Fear Index is expressed as a percent.

In 1912 the Fear Index was 8%. In other words, 8% of M3 was backed by gold. The other 92% was backed by the loans and government debt instruments recorded as assets on bank balance sheets, which highlights another point requiring some background explanation.

Clearly, these two assets backing the dollar are very different. Because gold is a tangible asset, there is no counterparty risk. Gold is money that you own. In contrast, loans and debt instruments are simply promises. They are financial assets with counterparty risk.

Given that every dollar is a liability of some bank, this different risk of bank assets is important. Specifically, dollars backed by physical gold are inherently different from dollars backed by promises, even though all the dollars comprising M3 are interchangeable and deemed by law to be equivalent.

We know from the Fear Index that 8% of those dollars in 1912 were in essence very different from the other 92%, and we have to account for this reality. Their different backing means that dollars were of different quality, which is a feature that becomes quickly apparent in a banking crisis.

This difference may not be clear to many today, but it would be obvious to any American 100 years ago. Having just lived through the Panic of 1907, they all would readily acknowledge that a $20 gold coin in their hand was fundamentally and completely different from a $20 gold certificate supposedly redeemable into gold in 1912, namely, if the bank had the gold on hand to meet their demand. Further, a $20 gold coin was also very different from $20 deposited in their bank account, even if their dollars weren’t deposited in the failed Knickerbocker Bank that caused the crisis.

Step Two: Calculating the Debasement of the Dollar

Today the Fear Index is 2%. So only 2% of the dollars comprising M3 are backed by gold, with the remaining 98% backed by loans and other debts owed to banks[4].

Even though dollars are no longer redeemable for gold as they were in 1912, they are exchangeable into gold 24/7. So the assets backing the dollar still determine to what extent the dollar has been debased since 1912, and this debasement must be taken into consideration when using gold to obtain an accurate historical price comparison.

To account for this difference in the Fear Index between today and 1912 and thereby factor in the debasement of the dollar, we need to make an adjustment to the $415 million amount calculated above to get a true measure of what it would cost to build the Titanic in terms of today’s dollar. Because the Fear Index was 4-times greater in 1912 than today, we adjust the $415 million by multiplying it by four. So the 1912 cost of building the Titanic was $1.66 billion in today’s dollars.

To obtain the gold price for building the Titanic, when factoring in gold’s diminished purchasing power today compared to what it could buy in 1912, we again need to multiply by four. So the cost would be 1.4 million ounces.

These are staggering sums but are much more realistic than the dollar amount reported in The Vintage News article. More importantly, this methodology can be used to express any historical price and make it understandable in terms of today’s purchasing power of the dollar or gold.

[2] Gold’s purchasing power is consistent because the supply and demand of gold is stable when viewed over long periods of time. See my analysis in: “The Aboveground Gold Stock: Its Importance and Its Size“

https://wealth.goldmoney.com/research/goldmoney-insights/the-aboveground-gold-stock

[3] The Money Bubble: What To Do Before It Pops, James Turk and John Rubino, Dollar Collapse Press (2013).

[4] For the purposes of this analysis, I am assuming that the loans and debt instruments owned by banks today have the same risk of default as they did in 1912. In fact, they are probably even more risky today, but that analysis is beyond the scope of this paper.