Back in 1979, Warren Buffett used his annual shareholder letter to issue a stark warning — the value of the U.S. dollar seemed “almost certain to shrink by the day.” At the time, with inflation hitting double-digits and the post-gold-standard era still in its infancy, it was a reasonable bet.

Fast-forward 47 years, and while the dollar has certainly lost purchasing power, the “collapse” many feared hasn’t exactly come to fruition in the way the Oracle of Omaha predicted.

Understanding why Buffett’s alarm bells didn’t lead to a systemic meltdown requires evaluating how the dollar actually functions in a modern, fiat-based global economy.

Buffett wasn’t wrong about the direction, and the dollar has indeed lost value, but he may have been mistaken about the implications of that decline. In the context of modern economics, a controlled loss of value isn’t a bug; it’s a feature.

While it feels counterintuitive to watch your cash have less spending power over time, the U.S. dollar remains highly reliable as a medium for trade and a store of value when compared to any available alternatives. The reality is that a consistent, low rate of inflation is the standard operating model for almost all major economies today. Rather than a sign of weakness, this targeted devaluation is a deliberate goal of the Federal Reserve, which traditionally targets a 2% annual inflation rate.

We often view inflation as a villain, but economists see it as an economic smoothing device. The 2% target is intended to be high enough to encourage spending, since money loses value if held forever, but low enough to maintain price stability.

This system prevents the dreaded deflationary spiral, in which consumers delay purchases because they expect prices to drop, eventually leading to economic stagnation. Since 1971, the dollar has been a fiat currency, backed by faith rather than gold. This gives the government the flexibility to manage crises by adjusting the money supply, a tool that has proven essential during recessions and market bubbles, even if it risks long-term devaluation.

Since Buffett’s 1979 letter, the U.S. Dollar Index ($DXY) has shown that the currency doesn’t just sink; it fluctuates based on complex macroeconomic indicators. When inflation spikes, the dollar’s purchasing power drops, making it feel less valuable. During events like the dot-com bubble, the dollar’s role changes as capital shifts between speculative assets and cash.

It is normal for the value of the dollar to shrink as innovation and the economy grow larger. Crucially, for the average investor, this loss is often offset by market gains. While the Fed targets 2% inflation, the S&P 500 Index ($SPX) has historically provided an annual return of 9% to 12%, more than making up for the currency’s slide.

Perhaps the biggest reason the dollar hasn’t shrunk into irrelevance is its status as a safe-haven asset. In times of global turmoil or recession, investors don’t flee the dollar; they flock to it. Currently, the dollar is experiencing mild value growth while the Iran War continues.

The dollar remains the top holding of foreign reserve currencies globally. Many other countries keep the dollar in their reserves because, despite its controlled devaluation, it remains the most liquid and stable option on the planet.

Warren Buffett’s 1979 concerns were rooted in a period of extreme instability, but the 47 years since have proven the resilience of the fiat system. The dollar is designed to lose value slowly to keep the gears of the economy turning. As long as the U.S. economy continues to innovate and the dollar remains the world’s reserve currency, that “shrinking” value isn’t a warning of a coming crash, but rather just the cost of doing business in a growing global market.

On the date of publication, Oscar Cierpial did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. This article was originally published on Barchart.com