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The 1970s Boom in Real Assets

The 1970s was a period of “stagflation”, an economic condition in which inflation and economic stagnation occur simultaneously. Coinciding with the end of the gold-based Bretton Woods agreement, the 70s saw an average rate of inflation around 7.7%, peaking in 1979 at 13.3%. By contrast, the average annual inflation rate from 1900 to 1970 was 2.5%.

The U.S. Ends The Bretton Woods Gold Standard

Under the Bretton Woods Agreement, which was created following the Second World War, 44 major industrial nations, including the US and the UK, agreed to fix their currencies at a certain price against a certain quantity of gold. However, in America in the 1960's and 70’s, significant overseas investment by U.S. corporations and the expanding expenditure on the Vietnam War resulted in millions of dollars leaving the United States. Its trading partners found themselves holding increasing amounts of paper U.S. dollars and as they exchanged their dollar holdings for gold with the U.S. Federal Reserve, a torrent of gold began to leave the U.S.

Unhappy with the rate of outflows, in 1971 the U.S. suspended convertibility of dollars into gold. By 1973 the major industrial countries agreed to end the Bretton Woods gold agreement and to let their currencies float freely against one another.

Inflation Accelerates

As the requirement to peg their currencies to gold was lifted, countries began creating un-backed paper money at an unprecedented rate. Rather than pay for their purchases in gold, governments issued paper debt instruments as payment. There was no longer a correction mechanism in place to prevent economic excess, no control in place to prevent inflation.

US Money SupplyUK M4 Money Supply

Following the end of Bretton Woods, the value of money fell and prices rose. But it was the prices of real, tangible assets which benefited the most during inflation, posting returns far in excess of conventional investments like stocks and bonds.

Learn which were the best performing real assets in the 70s inflation >

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