In each country, the price level at the end of World War II was essentially the same as it was 150 years earlier. Since World War II, however, the path of inflation changed dramatically. The price level rose almost continuously over the past 55 years, often gradually but sometimes at double-digit rates, as in the 1970s. Excluding wartime, the 1970s witnessed the first rapid and sustained inflation ever experienced in U.S. history.
The dramatic changes in the recent inflationary trend should not come as a surprise. During the nineteenth and early twentieth centuries, the United States, the United Kingdom, and the rest of the industrialized world were on a gold standard. A gold standard restricts the supply of money and hence the inflation rate. From the Great Depression through World War II, however, the world shifted to a paper money standard. Under a paper money standard, there is no legal constraint on the issuance of money, so inflation is subject to political as well as economic forces. Price stability depends on the ability fo the central banks to limit the supply of money and control the inflationary policies of the federal governements.
The chronic inflation that the United States and other developed economies have experienced since World War II does not mean that the gold standard was superior to the current paper money standard. The gold standard was abandoned because of its inflexibility in the face of economic crises, particularly the banking collapse of the 1930s. The paper money standard, if administered properly, can avoid the banking panics and severe depressions that plaqued the gold standard. However, the cost of this stability is a bias toward chronic inflation.
It is not surprising that the price of gold has followed the trend of overall inflation closely over the past two centuries. The price of gold soared to $850 per ounce in January 1980, following the rapid inflation of the preceding decade. When inflation was brought under control, the price of gold fell. One dollar of gold bullion purchased in 1802 was worth $14.38 at the end of 2001. That is actually less than the change in the overall price level! In the long run, gold offers investors some protection against inflation but little else. Whatever hedging property precious metals possess, these assets will exert a considerable drag on the return of a long-term investor's portfolio.
#Ironically, despite the inflationary bias of a paper money system, well-preserved paper money from the early nineteenth century is worth many times its face value on the collectors' market, far surpassing gold bullion as a long-term investment. An old mattress found containing nineteenth-century paper money is a better find for the antique hunter than an equivalent sum hoarded in gold bars!
Related:
Dr. Marc Faber on the risk of hyperinflation
http://www.youtube.com/watch?v=bsoIYnuF0eY
Marc Faber ger rid of your cash buy commodities while they are still cheap !!!!!!
http://www.youtube.com/watch?v=qE7xrv7-1MU
Marc Faber "U S will default on debt or enter hyperinflation" 02-05-09
http://www.youtube.com/watch?v=loa92ZG1KV8
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