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UNLOCKED: Part 2- The Post WW 2 Expansion Fiat Experiment Begins

Recently we read a long thorough piece from a Bitcoin advocate. Frequently these can be dismissed as proselytizing for a new religion. We re-posted it in full on Zerohedge where it got a lot of “Too Long, Didn’t Read” (TL/DR) type comments. Determined to make it accessible, but not dumb it down, we decided to break it into 5 parts for our readers. What it is:
  • a chronological take on how the west got to where it is fiscally
  • a PR piece for Bitcoin that is not heavy handed
  • An accurate accounting to our knowledge of key moments in history
  • An (unintentional) affirmation of the reasons why Gold continues to be bought by central banks and investors
  • plainly written for the most part.
Other than a few comments, highlighting and insertions of related things in bold, we’ve made no changes. Enjoy!
Part 2
THE FIAT-CURRENCY EXPERIMENT
Toward the end of World War II, in an agreement hashed out by 44 Allied countries in Bretton Woods, New Hampshire, the value of the U.S. dollar was formally fixed to 1/35th of the price of an ounce of gold. Other countries’ currencies, such as the British pound and the French franc, were in turn pegged to the dollar, making the dollar the world’s official reserve currency.
Excerpt From: What Exactly Happened in 1971?The Timetable From WW2 to 1974
“Then : Gold > USD > PetroDollar Create Gold Demand: 1944 we steer world towards gold for good reason (we have it, and Germany’s lack of Gold was the cause for WW2) Inflate Debt: 1971 we have to monetize debt to pay for wars in Vietnam and Korea > go off gold standard Create USD Demand: 1974 cut Arab deal USD for Oil > we sell them military arms, they buy UST” At the time of agreement of Bretton Woods, 1944, The United States controlled two thirds of the worlds gold and insisted that the act rest on the gold standard. THAT was total power of the world financial system. 2011, U.S. broke, Ben Bernanke says gold is not money. How times have changed.- SOURCE
Under the Bretton Woods system, foreign governments could retrieve gold bullion they had sent to the United States during the war by exchanging dollars for gold at the relevant fixed exchange rate. But enabling every major country to exchange dollars for American-held gold only worked so long as the U.S. government was fiscally and monetarily responsible. By the late 1960s, it was neither. Someone needed to pay the steep bills for Lyndon Johnson’s “guns and butter” policies — the Vietnam War and the Great Society, respectively — so the Federal Reserve began printing currency to meet those obligations. Johnson’s successor, Richard Nixon, also pressured the Fed to flood the economy with money as a form of economic stimulus. From 1961 to 1971, the Fed nearly doubled the circulating supply of dollars. “In the first six months of 1971,” noted the late Nobel laureate Robert Mundell, “monetary expansion was more rapid than in any comparable period in a quarter century.” That year, foreign central banks and governments held $64 billion worth of claims on the $10 billion of gold still held by the United States.
It wasn’t long before the world took notice of the shortage. In a classic bank-run scenario, anxious European governments began racing to redeem dollars for American-held gold before the Fed ran out. In July 1971, Switzerland withdrew $50 million in bullion from U.S. vaults. In August, France sent a destroyer to escort $191 million of its gold back from the New York Federal Reserve. Britain put in a request for $3 billion shortly thereafter.
Nixon Ends Bretton Woods International Monetary System
Excerpt: What Exactly Happened in 1971?
The Gold standard alone will not bring back middle class prosperity. it is not the main reason why the middle class got destroyed in the last 50 years. But it did set the stage for the demise of the working class by other means. GoldFix GoldFix Weekly: What Exactly Happened in 1971? - Analysis VBL @vlancipictures Welcome. GoldFix Weekly is original content. The goal is to give you, the reader, some basis for looking at markets as you prepare your own trading week. Second, it aims to give you more tools, or at least the basis for developing your own tools to navigate markets. To that end we expect there will be changes based on feedback. Gold is…… Read more3 months ago · VBL When Nixon abandoned the Gold standard for the US Dollar, this was a small part in a much more important plan for the US economy. By the time the Gold standard was rescinded, The US economy was no longer able to sufficiently recycle its labor and finished good surpluses to export to Europe and Asia for profit. By the end of the 1960s, the growth in exports was ending while overseas exports to the US began increasing. Those parts of the world had recovered their manufacturing capability and began selling goods to themselves and the US.
Finally, that same month, Nixon secretly gathered a small group of trusted advisors at Camp David to devise a plan to avoid the imminent wipeout of U.S. gold vaults and the subsequent collapse of the international economy. There, they settled on a radical course of action. On the evening of August 15th, in a televised address to the nation, Nixon announced his intention to order a 90-day freeze on all prices and wages throughout the country, a 10% tariff on all imported goods, and a suspension — eventually, a permanent one — of the right of foreign governments to exchange their dollars for U.S. gold.
Knowing that his unilateral abrogation of agreements involving dozens of countries would come as a shock to world leaders and the American people, Nixon labored to re-assure viewers that the change would not unsettle global markets. He promised viewers that “the effect of this action…will be to stabilize the dollar,” and that the “dollar will be worth just as much tomorrow as it is today.” The next day, the stock market rose — to everyone’s relief. The editors of the New York Times “unhesitatingly applaud[ed] the boldness” of Nixon’s move. Economic growth remained strong for months after the shift, and the following year Nixon was re-elected in a landslide, winning 49 states in the Electoral College and 61% of the popular vote.
Nixon’s short-term success was a mirage, however. After the election, the president lifted the wage and price controls, and inflation returned with a vengeance. By December 1980, the dollar had lost more than half the purchasing power it had back in June 1971 on a consumer-price basis. In relation to gold, the price of the dollar collapsed — from 1/35th to 1/627th of a troy ounce. Though Jimmy Carter is often blamed for the Great Inflation of the late 1970s, “the truth,” as former National Economic Council director Larry Kudlow has argued, “is that the president who unleashed double-digit inflation was Richard Nixon.”
In 1981, Federal Reserve chairman Paul Volcker raised the federal-funds rate — a key interest-rate benchmark — to 19%. A deep recession ensued, but inflation ceased, and the U.S. embarked on a multi-decade period of robust growth, low unemployment, and low consumer-price inflation. As a result, few are nostalgic for the days of Bretton Woods or the gold-standard era. The view of today’s economic establishment is that the present system works well, that gold standards are inherently unstable, and that advocates of gold’s return are eccentric cranks.
Nevertheless, it’s important to remember that the post-Bretton Woods era — in which the supply of government currencies can be expanded or contracted by fiat — is only 50 years old. To those of us born after 1971, it might appear as if there is nothing abnormal about the way money works today. When viewed through the lens of human history, however, free-floating global exchange rates remain an unprecedented economic experiment — with one critical flaw.
An intrinsic attribute of the post-Bretton Woods system is that it enables deficit spending. Under a gold standard or peg, countries are unable to run large budget deficits without draining their gold reserves. Nixon’s 1971 crisis is far from the only example; deficit spending during and after World War I, for instance, caused economic dislocation in numerous European countries — especially Germany — because governments needed to use their shrinking gold reserves to finance their war debts.
These days, by contrast, it is relatively easy for the United States to run chronic deficits. Today’s federal debt of almost $29 trillion — up from $10 trillion in 2008 and $2.4 trillion in 1984 — is financed in part by U.S. Treasury bills, notes, and bonds, on which lenders to the United States collect a form of interest. Yields on Treasury bonds are denominated in dollars, but since dollars are no longer redeemable for gold, these bonds are backed solely by the “full faith and credit of the United States.”
Interest rates on U.S. Treasury bonds have remained low, which many people take to mean that the creditworthiness of the United States remains healthy. Just as creditworthy consumers enjoy lower interest rates on their mortgages and credit cards, creditworthy countries typically enjoy lower rates on the bonds they issue. Consequently, the post-Great Recession era of low inflation and near-zero interest rates led many on the left to argue that the old rules no longer apply, and that concerns regarding deficits are obsolete. Supporters of this view point to the massive stimulus packages passed under presidents Donald Trump and Joe Biden  that, in total, increased the federal deficit and debt by $4.6 trillion without affecting the government’s ability to borrow.
The extreme version of the new “deficits don’t matter” narrative comes from the advocates of what has come to be called Modern Monetary Theory (MMT), who claim that because the United States controls its own currency, the federal government has infinite power to increase deficits and the debt without consequence. Though most mainstream economists dismiss MMT as unworkable and even dangerous, policymakers appear to be legislating with MMT’s assumptions in mind. A new generation of Democratic economic advisors has pushed President Biden to propose an additional $3.5 trillion in spending, on top of the $4.6 trillion spent on Covid-19 relief and the $1 trillion bipartisan infrastructure bill. These Democrats, along with a new breed of populist Republicans, dismiss the concerns of older economists who fear that exploding deficits risk a return to the economy of the 1970s, complete with high inflation, high interest rates, and high unemployment.
EDIT- MMT takes 2 definitions of money to an extreme end. It will, we believe, logically split money into its 2 general qualities. It makes perfect sense if you believe in MMT philosophy to create 2 kinds of money. That which is spent, and that which is saved. More on this another time- VBL
But there are several reasons to believe that America’s fiscal profligacy cannot go on forever. The most important reason is the unanimous judgment of history: In every country and in every era, runaway deficits and skyrocketing debt have ended in economic stagnation or ruin.
Another reason has to do with the unusual confluence of events that has enabled the United States to finance its rising debts at such low interest rates over the past few decades — a confluence that Bitcoin may play a role in ending.
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