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At about 25 minutes into this, the claim was made that the world was financially stable, currencies were backed by gold, the "real economy" was in balance with amount of money available, until 1971, when the "Nixon Shock" happened. It's somewhat true, but Wikipedia gives a more nuanced story: - There was the Bretton Woods system (c. 1958) which established a kind of gold standard for currencies; the U.S. dollar was pegged at $35 per ounce, and the U.S. owned over half the world's official gold reserves—574 million ounces at the end of World War II. Foreign governments could exchange their dollars for gold. - As Germany and Japan recovered, the U.S. share of the world's economic output dropped significantly (from 35% in 1950 to 27% in 1969). The French called the Bretton Woods system "America's exorbitant privilege" - i.e. the U.S. could produce a $100 bill for a few cents, but anyone else would first need to produce $100 worth of goods to get one. - In February 1965 French President Charles de Gaulle announced an intention to exchange its U.S. dollars for gold. By 1966, non-US central banks held $14 billion, while the United States had only $13.2 billion in gold reserve (with only $3.2 billion available to cover foreign holdings). By 1971, the money supply had increased by 10%. - In May 1971, West Germany left the Bretton Woods system. Other nations began to demand redemption of their dollars for gold (e.g. Switzerland redeemed $50 million, France acquired $191 million). On August 5, 1971, the United States Congress released a report recommending devaluation of the dollar. On August 9, 1971, Switzerland left the Bretton Woods system. - On August 15, 1971, Nixon directed that the convertibility of the dollar into gold or other reserve assets is to be suspended (with certain exceptions) - hence, foreign governments could no longer exchange their dollars for gold (presumably for the time being, at first). From this lay-person's perspective, an improving economy and a growing population would naturally bring about an increase in the demand for money. Gold isn't as constraining on the supply of money as some folks may insist (there were already too many greenbacks for the gold in reserve by 1966). Everyday working Joes will still need some cash in their pockets to purchase their day-to-day needs, and the more such "Joes" you've got the more money you'll need to put some into the newer pockets. For that reason alone, fractional-reserve banking becomes a thing; at the end of the day, a "Joe" has a more immediate need for food-clothing-shelter than for gold. So long as banking clients collectively have other more pressing desires than that for gold, the "virtual gold" of its ledger books could suffice. |