From a long-term perspective, the pre–World War II orthodoxy implied zero inflation over long periods. A dollar in the 1930s had the same purchasing power as a dollar in the 1830s. After World War II, the world began an experiment with fiat money and countercyclical fiscal policy that has been hugely successful when judged by the collapse of GDP volatility shown in Exhibit 5.7. Nevertheless, it took time to learn how to manage this new fiat-based monetary policy and fiscal deficits.
