avatarStanislav Kozlovski

Summarize

50 years and 21 million

A brief look into the history of the world’s greatest monetary experiment.

Intro

It has officially been 50 years since the Nixon shock — August 15, 1971, also a Sunday, when president Nixon went on national television to announce the historic change that the US dollar will no longer be pegged to gold.

Perhaps little people knew how tremendous of a decision that was in the time, and little people realized the vast consequences and second order effects such an action could have.

Regardless, it happened. And we’re here — 50 years later.

History

The rise of fiat currency did not start in 1971 — it was brewing for decades earlier, with the real catalyst being World War I. Fiat currencies, along with taxes, have a history of being linked with war.

Gold constricts what governments can do with money. If your money is pegged to gold, you cannot profit from seignorage — a useful tool in any government’s toolbox, especially when you’re going into war.

That’s right - the fiat currency system was mainly introduced to fund war.

This was evident by how most countries had immediately paused it when entering World War I. At the time, it was accepted that the standard could be temporarily suspended in times of crisis, but was expect to be restored again as soon as possible — the U.S civil war saw a similar temporary suspension.

Gold Standard between the First and Second World War

And so it was. But throughout this period — another crisis emerged — the Great Depression in the U.S. forced it to perform one of its most draconian acts in its history — the Emergency Banking Act, which outlawed personal possession of gold and forced all Americans to convert their gold coins, bullion, and certificates into U.S. dollars, at a price of $20.67 per ounce.

It was argued that the free circulation of gold is unnecessary and is only essential for payment of international trade balances.

“We have gold because we cannot trust governments” — President Herbert Hoover

In 1944, the U.S and 43 other countries met in Bretton Woods to decide on a new reserve currency order — the result was a quasi-gold standard, where the U.S dollar was picked as the world’s reserve currency. Every world currency had a fixed rate to the dollar, and the dollar itself had a fixed rate to gold. This time, the price was $35 per ounce (already showing a 40% devaluation in the dollar’s purchasing power).

And then, we arrive in 1971, when Persident Richard Nixon closed the gold window after announcing that the U.S. would no longer convert dollars into gold. It’s worth noting that like many other government promises, this was initially supposed to only be temporary — but by 1976 it was officially stamped.

During the same decade, Gold experienced a huge surge — from $35 per ounce to $850 per ounce.

Gold chart for the last century

This chart shows a rough view of the devaluation of fiat currency, but cannot be solely trusted, as entities are famously suspected of manipulating the price of gold through the use of derivatives, rehypothecation and other means. Note that this is not unprecedented, as even central banks have been known to influence the price, as is the case with England’s central bank.

Consequence

The consequences of this 50 year anniversary are multifold, but can succinctly be described by a massive rise of:

  • centralized control
  • government spending (and, consequently, government size)
U.S. Government spending, in USD Billions
  • inflation

As well as other second-order effects, like rich-poor divide substantially increasing as well as the median person becoming poorer or high-time preference thinking.

I strongly recommend you open https://wtfhappenedin1971.com/ for a more detailed outlook.

Solution

“No force on earth can stop an idea whose time has come” — Victor Hugo

The solution presented itself in Bitcoin.

As a superior alternative to gold, it most importantly greatly improved upon the portability and verifiability aspect of a store of value — two properties that largely held gold behind by leading to its centralization and subsequent failure as the base layer of the global monetary system.

However, despite gold’s demise — the first principles thinking that made sense for gold to serve as money still remain.

Our productivity is rewarded with money, and any excess productivity that we cannot immediately spend, we save in the form of money. Money can therefore be looked at as stored human time and energy, linked to what is your most scarce resource — energy and time left to live.

Eroding the value of money through inflation is essentially an indirect drain of the value of human life.

The ability for a government to have total control over the money supply is ridiculous, because it gives them indirect total control over said humans’ life force.

Power corrupts, and absolute power corrupts absolutely.

Conclusion

Since 1971, we’ve lived in humanity’s greatest monetary experiment. While it has not yet lead to catastrophic events, the way monetary policy is evolving has us understandably wary of the possibility of such.

There are many reasons to believe that the trajectory we are on right now is neither healthy for the prosperity of humanity nor sustainable.

The return to a sound money standard, as well as a subsequent evolvement to a sound finance standard, promises to lead the world toward a better financial future for all. This is something that every human can stand behind.

2009 brought with it light at the end of the tunnel. While prior to that year, we could only commemorate anniversaries of the Nixon shock with mixed feelings, today we can observe the date with a newly-found hope.

~Stan

Thanks for taking the time to read this.

Finance is complex, and there is certainly more that can be said to many of the claims in this piece. For a more nuanced view into my thinking, see this page.

Bitcoin
Monetary Policy
Inflation
Fiat Money
Politics
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