The Illusion of Wealth & How to Beat Inflation: A 100-Year Perspective
We tested 30 ideas about how to beat inflation against 100 years of US money supply data, from gold and housing to savings, the S&P 500 and Bitcoin.
Topic
Inflation and the Money Supply: The 6.56% Hurdle
Most inflation figures you see are CPI, which tracks the price of a basket of goods, but our research measures something underneath that: how fast the US money supply itself grows.
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Over the past century M2 went from $43.7 billion to $22.8 trillion, an average of 6.56% a year, and we treat that as the hurdle an investment has to beat just to keep its share of the money pool.
Seen that way, a lot of familiar results change. Savings earning the long-run average of 3.4% lost about 95% of their purchasing power over 100 years, US house prices lost about 83% relative to M2 and even the S&P 500 on price came in slightly behind. The four articles under this topic go through it in order, and if you want to try the numbers on your own savings, the calculators on our inflation tracker do the same sum.
- 522x US M2 growth since 1926 From $43.7 billion to $22.8 trillion, as set out in the series overview.
- 6.56% Average yearly M2 growth The hurdle rate an investment had to beat to keep its share of the money pool.
- 3.4% Average savings return Savers lost about 95% of their purchasing power over 100 years.
Articles on Inflation
4 articles from our research on this topic.
Historical Asset Class Returns: The 100-Year Scorecard
Historical asset class returns since 1928 for nine investments, from small caps to T-bills, and why only three of them grew faster than the money supply.
Stocks vs Inflation: Does the Stock Market Beat Inflation? Avoid the Savings Trap
We test whether the stock market beats inflation once money printing counts, using the S&P 500's 468x rise since 1926 and savings that fell to 4.3 cents.
Gold vs Real Estate Returns & Which Asset Beat Inflation? The 100-Year Performance
Gold rose 168x and US house prices 83x after 1926, while the money supply grew 503x. We compare gold vs real estate returns to see which kept its value.
Plain-English definitions
Key terms for inflation
- M2 money supply
- The Federal Reserve’s measure of cash, current accounts and easily accessible savings in the US. We use it to see how quickly new money is being created.
- CPI
- The Consumer Price Index tracks the price of a basket of everyday goods and services. It measures prices rather than the amount of money in circulation.
- The 6.56% rule 6.56% a year
- The average annual growth of US M2 over the last century. Assets compounding faster gained ground, slower ones lost it. More about The 6.56% rule
- Monetary dilution
- The loss in each dollar’s share of the total money pool as new money is created, whatever happens to shop prices.
FAQ
Questions about inflation
Answers drawn from the figures in our research. Educational only, not financial advice.
Why use M2 instead of CPI to measure inflation?
Because CPI answers a different question from ours. It tracks what a basket of shopping costs, and when we started on the series we wanted to know whether an asset had grown in value or had been carried along by new money, and for that we needed the money itself.
M2 went from $43.7 billion in 1926 to $22.8 trillion, so a dollar from 1926 now stands for less than one-fifth of a cent of the total pool, and $100 put away in 1928 had to become about $47,300 just to hold its share. Once we saw those numbers we stopped treating CPI as the bar, because an investment can keep pace with it and still lose ground against the money pool.
What return do you need to beat inflation?
On our measure, about 6.56% a year, compounded and never withdrawn, since that is the average annual growth of US M2 over the last century. We used the 3-month T-bill in Part II as a stand-in for the best safe savings rate, and it averaged 3.17% against M2 growth of 6.66%, a gap of 3.48% a year that compounded for a hundred years, so $1 saved in 1926 with all its interest reinvested was worth 4.3 cents in M2 terms by 2025.
Savings at the long-run average of 3.4% fell short too. The assets that cleared the bar mostly did it by reinvesting their income: the S&P 500 with dividends, real estate with rent reinvested at about 9.3% a year, farmland at a similar rate and Baa corporate bonds, which only just made it at 6.4%.
Sources