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The Nixon Shock: Abolishing the Gold Standard
Our money supply is basically the total money supply created and maintained by the Federal Reserve. This money is used to create new money by the banks using the fractional reserve and debt mechanism. Our government was held to a minimum of 25% real physical gold after WWII (40% before WWII) to print money as long as monetary bases were tied to it.
However, it severely limited the government’s capacity to fund wars and fund benefit programs. In response, the US government separated the dollar from the gold backing of its currency in 2 steps. The “Gold Reserve Requirement Elimination Act” was passed in Congress in 1968. Nixon announced in 1971 the end of the obligation to convert the dollar into gold, which had been established after World War II (the “Nixon Shock”).
This led to the dollar becoming a “fiat currency”. Fiat comes from Latin and means “let it be”. This means that money gets its value from government. The state can declare that something with no intrinsic value, unlike gold, will be considered money. This led to the loss of the true meaning of the monetary system, which makes it possible to increase the amount of money without any restrictions.
The Nixon shock had an adverse effect on our monetary base
Before the Nixon coup, our monetary base, which is the total amount of currency in circulation, was about $75 billion. By June 2021, it had grown 80 times to $6 trillion. These and other Federal Reserve printing activities led to the Fed’s record balance sheet of $8.4 trillion as of October 2021. This is more than 100 times its volume since 1971. The Fed’s interest rate has fallen from a peak of 21% ( 1981) to just above zero (2009), where it has remained roughly the same since then.
The Fed’s accommodative policy of low interest rates allowed banks to transform the money supply into over $85 billion of debt. This represents an $83 trillion increase in the money supply since 1971. This century has seen an additional $56 trillion in new money, nearly $30 trillion more than before the financial crisis. This is almost four times the GDP growth during these periods.
This new flow of dollars essentially reduced their value. However, not all sectors are yet affected by this huge increase in the money supply or the significant rise in the prices of goods, services and other goods.
How the declining dollar combines with the rise of the Chinese economy
Around the same time Nixon introduced fiat dollars to the world, he established US relations with China. China’s low labor costs and depressed economy have made it possible for American businesses to tap into the Chinese economy. Money started flowing east. The Chinese welcomed the printing of dollars and were willing to work for them at wages that were only one-tenth of what equivalent US workers would receive.
Today, the fiat dollar is limited only by the amount of “ink in the Fed’s printers” and the amount of credit banks are willing to provide. Since neither was in short supply, most of the US industrial base began to move to China, where it was possible to produce at a much lower cost. In the late 1970s, about 23% of all employers in the US economy worked in the manufacturing sector. That number is down to about 8.4% today.
The demise of the US industrial sector had a huge impact on the US “industrial nations” and is a historical tragedy where an empire transferred its entire industrial base to another country, financing its growth to become its greatest strategic enemy.
Continued competition from China’s labor market has also seriously hurt the wages of people and communities working in jobs that can be exported to China. But job migration did not affect individuals whose jobs cannot be outsourced (doctors, lawyers and financial professionals). This has created a situation where average household income has increased by only about 29% between 1973 and 2018, while GDP has more than tripled and income has increased by 80% among the top 5%. -the high earners.
The Fed-induced money waterfall therefore flows in two directions: one to China, financing endless imports and taking the US industrial sector with it. The other part flowed to New York and Silicon Valley, creating an unprecedented boom in asset prices, driving the price of assets such as stocks and real estate to unprecedented levels. So, while the purchasing power and wealth building of millennials and the middle class has deteriorated over the past few decades, those lucky enough to own stocks or property have grown in wealth significantly.
The stock of wealth that supports purchasing power relies on scarcity. This is what makes gold unique. But with a fiat dollar, it is possible to create an infinite supply. All of this is done at the whim of the US Federal Reserve, which creates money out of thin air as well as sets the interest rates that feed the debt money creation machine through loans and banks. This is the one-way street that President Nixon steered America down.
2022 marks the 51st anniversary of Nixon’s impeachment. During these years, the US economy experienced a rapid increase in US debt, a sharp increase in income inequality, and a 75% decline in purchasing power. The current trajectory of the US economy and the Fed’s policy of putting itself in a corner makes it reasonable to conclude that “We ain’t seen nothing yet.”
