Once upon a time, before 1971, the US had a sound money system based on the gold standard. Every dollar was redeemable for its equivalent value in gold. Then in 1971, Nixon abolished the gold standard, rendering the US Dollar a pure fiat currency, without any real or implied convertibility. As a result, the Fed was free to increase or decrease the money supply as it pleases.

What happened after this unprecedented move? First of all, unburdened from a fixed convertibility to gold, the Fed started printing more money – a lot more money. Above is a chart of the evolution of the US M1 Money Supply. As you can see, 80% of all USD were printed in the last 2 years. This sounds crazy – because it is.

What is equally unbelievable, is the explosion in US national debt after 1971. It ballooned by a scarcely believable 7113.9% - yes, that is 71x in just 50 years - from 0.4 trillion USD in 1971 to 30.4 trillion USD in 2021. To put this into perspective, the US has amassed more than twice as much national debt per capita (€91k, 2022) than Greece (€37k, 2022), whose debt crisis dominated much of the financial news in the last decade. Admittedly, debt to capita does not paint the full picture given USA’s economic output per capita is much higher than Greece’s. USA’s debt to GDP ratio of 127% is still some way from Greece’s 193%. However, it is the highest debt to GDP ratio since WWII, and compares unfavorably to other major economies (Germany - 69%; UK - 95%; China - 67% (2020)).

This unprecedented monetary experiment has changed our economy in a profound way. Firstly, inflation has accelerated. Secondly, Real GDP has fast outpaced average real wage growth. Hourly wage growth roughly increased with productivity growth until 1971, after which it decoupled. Hourly wages have barely increased since 1971 on an annualized basis (just 0.6% per year). Until 1971, we had a healthy economy in which both the employee and the business owner benefited from economic growth. After 1971, the employee was left behind.

Inflation, silent assassin of the middle class, has eroded the buying power of the majority of Americans. This has created a huge gap in economic fortunes between people with financial assets, i.e. the rich, and people who depend on labor income, i.e. the middle class. The rich suffer less from inflation because stocks and real estate tend to provide adequate compensation in inflationary environments. Wealth inequality has increased to levels unseen in the history of the US, leading to several periods of civil unrest in the 21st century (e.g. occupy wall street). Most of these protests are usually aimed at capitalism. Given inflation, and our monetary system, is so poorly understood, this is not surprising. However, the question can be asked if our capitalist system requires fixing, or our monetary system. The question deserves further economic research, given much of the data we have discussed indicate that the US capitalist economy was doing just fine before 1971, with similar economic growth levels but much lower inequality.

This also has real, lifechanging consequences for the younger generations. It takes 6.9 annual salaries to buy a home in 2020 compared to 2.4 in 1970, which is simply unaffordable for many. As such, it is depriving newer generations from the same opportunity to build out a life, start a family and pursue early retirement. A similar picture is painted by the number of annual salaries required to by the S&P 500, which increased from roughly 30 in 1970 to roughly 120 in 2020. The conclusion is almost cynical: even if you know that the upper class suffers less from inflation due to ownership of financial assets and real estate, the price of admission becomes higher and higher.

‍To end off on a positive note, herewith a quote from F.A. Hayek: “I don’t believe we shall ever have a good money again before we take the thing out of the hands of government, that is, we can’t take it violently out of the hands of government, all we can do is by some sly roundabout way introduce something that they can’t stop.” Challenging the current monetary system, however, seems more difficult than ever. A return to the gold standard is close to impossible given USA’s current debt levels and monetary base. However, many see in Bitcoin (and other cryptocurrencies) a 21st- century challenger to fiat currencies such as the US dollar.

What are your thoughts about this? Let us know in the comments (just kidding, we don’t have a comment section yet). ‍

PS: Charts courtesy of the amazing https://wtfhappenedin1971.com/ - visit their website for more.