Favoritism in the Monetary System
Want to know how the rich got richer? Want to know how Wall Street made so much money?
We didn’t think so.
But we’ll tell you anyway. The post-1971 US dollar-based monetary system permitted an explosion of credit, which naturally favored the credit industry directly, and the entire financial asset-holding investoriat, indirectly. At the expense of the middle and lower classes. In other words, the expansion of credit, caused by a flexible, expandable money regime, set the whole economy ablaze. The middle and lower classes went deeply into debt to buy things. The “rich” — or at least those who owned stocks and bonds — got richer, as consumer spending lit up the business world, and particularly the financial industry itself. Profits from the financial industry were only about 10% of the total profits on Wall Street in 1970. By the time the credit bubble blew up in 2007 they had grown to 40%.
Wages for working stiffs were flat for 40 years. But earnings on Wall Street soared. In 1970, the typical salary in the financial industry was about the same as for equivalent positions in the rest of the economy. But, by the 21st century, Wall Street salaries were nearly twice as high.
People who complain about “greedy” executives and rich people miss the point. People — rich and poor — are always greedy. But they don’t always have a monetary system that encourages debt and favors investors over working people. This money system was created in 1971 by the Nixon Administration, which probably didn’t know what it was doing…and it was later perfected by subsequent Federal Reserve chairmen.
In addition to stretching the gap between rich and poor, the non- gold monetary system had one other notable consequence. It undermined the working classes’ ability to compete in the modern world. This it did by moving more and more production to the emerging markets. In pre-1971 days, nations had to settle up on their trade balances. That is, when one nation sold more to a neighboring nation than it spent with it, the nation in surplus ended up with an excess of the neighbor’s currency. This surplus currency was then presented to the deficit country. The accounts were settled by transferring gold — the monetary system’s reserve at the time — from the deficit country to the surplus country.
As the gold left, it had a chilling effect on the deficit nation’s economy — either because investors caused interest rates to rise or because the central bank pushed them up. This resulted in slower economic growth and less spending, thereby correcting the outflow of funds to the neighbor.
It was precisely this self-correcting mechanism that the feds were determined to stop when the Nixon Administration “closed the gold window” at the Treasury department in August of 1971. The US had spent too much on the Vietnam War. French banks, which were still very active in Vietnam, tended to be the recipients of the money…which flowed to the Bank of France. The French, anticipating a problem with the dollar, wanted to exchange dollars for gold. This was the proximate cause of the Nixon Administration’s reaction — an actual default on its financial obligations. It was also the cause of the subsequent run up of the price of gold…which was followed by a bust in gold…and thereafter, a huge boom, in which ordinary Americans were lured into debt and coaxed towards poverty.
The rich got richer; the poor got poorer. The middle classes got poorer too. Between 1975 and 1992, the wealth of the richest 1% rose from 22% of total national household wealth to 42%. Why? Were the richest more productive? Had they become smarter? Of course not…the playing field had been tilted in their direction!
The “ciompi” revolted in the 14th century. They were wool carders in Florence…the “popolo minuto” — the little people — without power or money. They rose up in June 1378, attacked government buildings and by July they were in control of the government.
But then, other trade groups got jealous. In August, the butchers attacked them at the Piazza della Signoria. After that, the power of the ciompi declined…until things were back to normal.
This was just one of many uprisings of the lower orders in Europe. In France, a peasant named Jacques led a revolt against the authorities in the 14th century. That was just the beginning of a long list of uprisings — Jacqueries — that didn’t end until the 18th century.
One of the most wrongheaded ideas of the entire 20th century came from Francis Fukayama, who asked — apparently in earnest — if we had reached “The End of History?” He thought modern democracy and modern capitalism had reached such a point of perfection, after the fall of the Berlin Wall, that no improvement was possible. History had come to an end.
Jacqueries — he believed — were no longer necessary. Because modern democracy adapted naturally to the challenges it met. If the people had a grievance, all they had to do was to put in a call to their elected representatives. The politicians would discuss the matter and come to a solution, right?
Ha, ha, ha….Fukayama misunderstood everything. Democracy. Capitalism. History. Politics. Everything. As an institution matures, little by little it shifts from serving its original purpose to serving the ends of those who control it. It becomes rigid — digging in its heels and resisting any change that would diminish the power and wealth of the controlling groups. The longer the institution remains unchanged, the more parasitic and arthritic it becomes. It drains resources away from honest production and redirects them towards favored groups of leeches.
Then…history returns. Then cometh the revolution.
for The Daily Reckoning