Common Sense on Mutual Funds, Updated 10th Anniversary Edition

by John C. Bogle

The high rate of inflation in our modern era is in large part the result of our nation’s switch from a gold-based monetary system to a paper-based system. Under the gold standard, each dollar in circulation was convertible into a fixed amount of gold. Under our modern paper-based system, in which the dollar is backed by nothing more (or less) than the public’s collective confidence in its value, there are far fewer constraints on the U.S. government’s ability to create new dollars. On occasion, rapid growth in the money supply has unleashed bouts of rapid price inflation. The effect on real long-term stock returns has nonetheless proved neutral. Even as nominal returns have risen in line with inflation, the rate of real return has remained steady at about 7.0 percent, much as it did through the nineteenth century.