Western decline and the Gold Standard
Updated: Sep 16, 2021
This brief essay explores some of the consequences from leaving the gold standard in 1971.
The Inflated States of America
August 15, 2021 will be recorded as the day when Taliban took back control of Afghanistan and humiliated the self-image of the West. The very same day is also the anniversary of another historical event, also shrouded in political dishonesty and humiliating political defeat. 50 years have passed since President Nixon took the US off the "gold standard", thereby defaulting on the Bretton Woods agreement where foreign central banks could redeem dollars at a fixed rate of $35 per ounce of gold.
Foreign governments, particularly France by Charles de Gaulle, realized already in the sixties that the US had spent too much money on wars and welfare programs. Europeans sat on dollars losing value and several governments started to redeem dollars for gold. This created fear in the White House that the Fort Knox gold deposits would be emptied within few years. When finally the UK requested to swap dollars for 2666 tonnes of gold, President Nixon closed the gold window August 15, 1971. This event was celebrated as a Keynesian victory over disciplined monetary theory represented by the school of Austrian economics. The Keynesians advocate deficit spending to aggregate demand, an idea that emerged as a response to the 1930s depression. Nixon promised this would only be a temporary measure, but as with temporary taxes – they have a tendency of remaining for perpetuity.
President Nixon's decision severed the USD's last tie to gold. From this day, USD and all other currencies became fiat, backed by nothing else than government promises. Central banks were set free to engage in unchecked money printing. In my opinion, this marks the beginning of the Western decline, a decline bearing many similarities to the fall of the Roman Empire. Despite many opportunities to act responsibly after 1971, Western governments of many political inclinations refused to do so. Politicians understood that future election winners would be the ones who promised the biggest handouts. Since then they chose to kick the can down the road hoping the ultimate financial collapse would not happen on their watch.
History shows that government monetary manipulation can destroy empires and states. Decline often starts with deficit spending, debasement of sound money as precious metals like gold and silver, followed by more bureaucracy and less freedom. Individuals and businesses face increased burdens by more regulations and higher taxes. Finally, hyperinflation and the ultimate collapse of the social and economic structures.
Let us compare the US and Roman Empire timelines.
Signs of falling Empires
This simplified timeline suggests that the West has indeed left the prosperous era of domestic unity and monetary stability. All Western nations have de facto lost border control. Our institutions are occupied by the progressive left and are no longer politically independent. Loss of public trust is escalating, and governments are on a spending spree never seen in modern history. Unfortunately, the response from political elites is more government intervention which exacerbates the problems. It took the Fed 107 years to accumulate $4.1 trillion on the balance sheet but they have printed the same amount of paper currencies in the last 1,5 years. President Biden is unchallenged as the most reckless deficit spender of all time.
Wagers losing out
Trade Deficit and Debt show that the decline started shortly after the US went off the gold standard in 1971 and accelerated when President Clinton invited China into the WTO, believing China would bring more jobs to the US. How wrong he and the Washington elites were. Jobs and intellectual capital flowed rapidly out of America and Europe while China flourished. US national and private debt levels have since soared, with no end in sight.
US Debt and Trade Balance
The cost of living rose sharply after 1971 while wages remained flat. Most American families got by with only one income until the 1980s. Rising inflation made this an unaffordable arrangement for a majority of families. The apparent consequence forced dad to work more overtime while mothers joined the workforce in increasing numbers. The middle class started to lose their proportional share of the total economic output while owners of appreciating assets did better. Loss of jobs and purchase power have wiped out wagers and savers. This may explain why many US pensioners are forced to take jobs after reaching retirement age. Who hasn't been greeted by a geriatric Walmart minimum wager well beyond retirement age?
It stands to reason arguing that the US and the West peaked socially and economically just before President Nixon left the gold standard. Since then, the American middle class has footed the bill from reckless government deficit spending and unchecked printing of fiat dollars.
Deficit spending and money printing
Our parents and grandparents had to make tremendous sacrifices to overcome the thirties and WW2. Today, we take civil liberties for granted, and populations are simply unwilling to accept any sacrifices to fix the problems. Like the Roman emperors offered free bread and circus to keep the population docile and happy, our elites are propping us up on virtual reality and cheap credit, spiced up with false promises from corrupt authorities who pretend to solve our problems.
The US and Western Europe are facing many challenges in the domestic and global arena. Still, it seems evident that governments are unable or unwilling to let capitalism play out. 50 years of excessive political intervention in the economy has compounded the problems. Fiscal and monetary discipline is political suicide because it will cause temporary pain to voters. Therefore, the only policy is to continue the madness by currency printing.
Printing of paper to fund government wars and social programs is legalised counterfeiting and increases the wealth gap. I think it is simply immoral, but all Western central banks are involved in the scheme. The US has tripled national debt since Obama. If the interest rate was raised to 5% to fight inflation, half the (2019) fiscal revenue would be spent on interest payments. We may have passed the point of no return.
A corrupt corporate media helped Mr Biden into the White House, with no other merit than not being Donald Trump. Now, the chickens are coming home to roost. The Biden Administration promotes utopian visions and acts increasingly authoritarian. This includes lockdown mandates and restrictions on economic participation for unvaccinated. Mumbling and defiant President Biden displays such a cognitive state that he has now become the ultimate symbol of Western economic and cultural decline.
Mr Biden may already be on his way to a nursery home. Meanwhile, the White House is grooming the insecure and helpless Kamala Harris for the Presidency. If so, the American nation will suffer the ultimate embarrassment and ridicule, in both the domestic and global arena. Americans may soon find themselves lifted out of the frying pan into the fire.
The future looks bleak but we should not despair. Sir Winston Churchill said Americans will always do the right thing, but not until all other options are exhausted. More insanity from authoritarian governments is on the way. Protect your wealth the best you can.
US CPI Trend
US working couples
US income growth stopped in 1971