February 17, 2004

Gold and Price Stability

If you want to know how exceptional the current monetary regime of the dollar standard is, check out the excerpt below from a study by the Office of National Statistics in the U.K. Money stat: for 188 years, prices rose a little over three times. Since 1938 (with the help of FDR and Nixon) they've risen more than forty times. "If there had been decimal currency 250 years ago, a penny then would have bought more than a pound does today, according to a new long-run price index which tracks the path of consumer price inflation since 1750. It shows that between 1750 and 2003, consumer prices rose about 140- fold. "Most of the increase over the period has occurred since the start of the Second World War: between 1750 and 1938 prices rose by a little over three times, but since 1938 more than fortyfold. However, in the earlier period inflation was not constant: prices roughly doubled between 1750 and the end of the 18th century, but were at about the same level over 100 years later, prior to the start of the First World War. The fluctuations during this period partly reflect harvest quality and wars, with a 50 per cent increase in prices over the first ten years of the Napoleonic Wars. "The First World War also had a significant effect on prices, with prices more than doubling during the war and the two succeeding years. But in the period 1921-1934, prices fell in most years, or at most showed very small increases, reflecting the falls in profits and wage costs associated with the Depression. Prices have risen in every year since, with particularly rapid price increases between 1973 and 1981, when prices more than tripled and the inflation rate exceeded 10 per cent in each year except 1978. "This was a time when all the industrialised world was struck by a series of supply shocks, including a quadrupling in the world price of crude oil in 1973." You'll note that 1973 was also time, not coincidentally, that Nixon took the U.S. off the gold standard and launched this modern experiement in floating exchange rates with currencies backed by nothing but current perception of future growth prospects.


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