Investing: The Factors Of Inflation Continued

What had happened to Joe Bugleblow?

Joe, and millions o£ others like him, had received a lesson in the impact of inflation! He had found that the general rise in the price level during twelve years had been accompanied by a corresponding decline in the purchasing power of the dollar. The dollar bill still bore the likeness of George Washington and still bore the legend ONE DOLLAR, but it now bought only about 50 per cent of the goods it had purchased in 1940; hence the term "fifty-cent dollar."

The strange thing about inflation is that it has been a new experience to many, yet it is not new at all. There have been numerous past instances of it. For example, a strong inflationary trend began just after the close of the Civil War, prices advancing steadily to about the year 1895 and the dollar in that case losing more than half of its purchasing power. In a similar manner, there have been numerous cases of deflation, such as that which immediately followed the above example up to the year 1920, after which some inflationary tendencies again made themselves known.

As an investor, everyone is interested in the effects of inflation upon his investment program, because he is interested in the preservation of the principal amount as expressed in dollars which he originally invested, and in the income received, which is also expressed in dollars. In neither case is there any particular label put upon the dollars themselves.

Only the nature of the times (the "price level") tells whether the dollars are inflated or not. Obviously, the investor will be seriously concerned if his investments yield him a return in dollars which have lost their purchasing power by 50 per cent; not only that, he may have made a long-term investment (such as bonds) and when the invested capital is returned to him, he finds, much to his dismay, that it is in dollars that are not the same as those which he originally invested.