One significant economic transformation that has shaped the world has been the move from gold-backed to policy-driven money supply.
That shift, crystallised in 1971 when the US ended dollar convertibility into gold, changed everything from inflation patterns to asset prices. Before 1971, money was scarce, inflation was low and real interest rates were positive. For the first half of the 20th century, money supply across major economies grew roughly 2–4% a year. With gold acting as the anchor, countries couldn’t create money faster than they accumulated reserves. Money supply to GDP in the 1950s–60s was around 50–60% in advanced economies with average inflation around 1.5-2% and real rates of 2-4%. This was a world with low long-term inflation and strong purchasing power but also one which was more rigid because central banks had limited ability to expand liquidity.
After 1971, the era of fiat money began. The bulk of modern money is deposit money, created primarily through the banking system. Central banks now control money supply through interest rates and open market operations. Once money was decoupled from gold, broad money began expanding much faster that output. Money supply to GDP went up in advanced economies from 70-80% in the 1980s to 100-120% in the 2000s to 140-150 % in the 2020s. Average inflation post-1971 has been higher and real interest rates have been cyclical. This era has enabled growth and flexibility, but also amplified asset inflation and inequality.
Two moments altered global money viz the 2008 GFC when Central bank balance sheets jumped from ~$5 trillion to $15 trillion and the pandemic when global central bank assets crossed $30 trillion. This flood of liquidity powered asset markets and distorted real interest rates.
As a result, Inflation is structurally higher than in the gold era. Inflation erodes the real value of money and bonds, rewards borrowers and punishes savers. Money supply growing faster than GDP means liquidity drives asset markets. Economies become more sensitive to interest rates. We see bigger, more frequent booms and busts. Finally, we see faster wealth growth for people who own assets vs those who rely mainly on wages, worsening wealth inequality.
Since 1971, India’s money supply has grown faster than its real economy. Broad money in India has expanded at 10–12% per year since, while real GDP growth averaged 5–6%. This has lifted India’s money-to-GDP ratio to~ 85% today, reflecting financial deepening and formalisation. This contributes to India’s structurally higher consumer inflation compared to developed nations. Unlike the developed world though, a large share of liquidity has flowed into productive sectors rather than into financial assets.
That said, India is gradually converging with global patterns. Future money growth will have stronger asset-price effects unless directed to finance productive growth.
