“The strength of a nation’s currency is based on the strength of that nation’s economy, and the American economy is by far the strongest in the world. Accordingly, I have directed the Secretary of the Treasury to take action necessary to defend the dollar against the speculators. I have directed Secretary Connolly to suspend the convertibility of the dollar temporarily into gold or other reserve assets, except in amounts and conditions determined to be in the interest of monetary stability. And in the best interest of the United States.” These famous words uttered by President Nixon brought about the creation of the current financial system.
INTRODUCTION
August 15, 1971, will stand as an important event in economic history for many generations. Hundreds of years from now, people will look back to that day.
The sun rose, as it had a million times before, commuters traveled to their offices to begin the day’s work, farmers tended to their crops, construction workers built new infrastructure, it was a day like any other, or was it? In the year 2008, the world experienced one of the greatest financial turmoil in history. Markets worldwide started crashing, and major financial institutions, once thought to be invincible, started showing signs of collapse. Governments responded quickly, issuing massive bailouts and stimulus packages in an effort to keep the world economy afloat. And it worked. The global economy recovered much quicker than most predicted. And soon, it was back to business as usual. And yet, something still was not quite right. A growing sense of unease filled the population in the world of finance, indeed, in all facets of modern life, cracks had started to appear.
I don’t know what is causing all this economic turmoil, the common person wondered. But this just doesn’t feel normal. The government is running a trillion dollars’ worth of deficit. Why isn’t the economy improving? The government’s going to spend almost $3.7 trillion. Why don’t I have a job? Why is the unemployment rate at 9%? (Likely an understated number)
A lot of people are feeling unsure about the world today. Concerned that something terrible is waiting in the wings. We were told that the global financial crisis of a few years ago has been fixed. But what if the crisis is not the cause of the anxiety so many people feel, but rather the symptom of a much deeper problem.
The story of the demise of the Dollar begins in 1944. With World War Two comes to an end, the allied nations met at Bretton Woods, New Hampshire, to create a new financial system that would stabilize the world once the war ended. With America poised to enter a golden age of prosperity, the U.S. dollar was chosen as the world’s reserve currency.
The Bretton Woods
Bretton Woods system was created after World War II at the Bretton Woods Conference in New Hampshire. The dollar was chosen because back then, it held the same value as gold. Rather than using gold as the means of exchange between countries, as was the case under the old gold standard, the Dollar was going to be used.
Under this new system, countries agreed to fix their currencies to the U.S. dollar, and the U.S. dollar would be tied to gold at $35 per ounce. This meant that countries around the world could trade their currencies for U.S. dollars, which they could then exchange for gold. This created a system where all currencies were essentially backed by gold to avoid the logistics of shipping physical gold across the world. When countries exchanged their currencies for gold, it was usually stored safely in the U.S.
Under the Bretton Woods system, you could exchange your currency or dollars for gold, which only applies to foreign countries and central banks. Thus, we began to run budget deficits. A budget deficit occurs when expenses exceed income, or in this context, money printing exceeded the gold reserves. The U.S. was running the Great Society program under Lyndon Johnson and fighting a war in Vietnam. Suddenly, we were running these deficits, and countries were changing their dollars for gold.
With all the new spending programs in the United States, other countries became concerned that the U.S. was spending more money than it had gold reserves. They started exchanging their dollars for gold and demanded physical delivery, as they felt that more dollars were being printed than the gold-backed it. President Nixon called for an emergency suspension of the gold convertibility system to prevent this outflow of gold from American vaults.
The Biggest Gold Heist
“I have directed the Secretary of the Treasury to take action necessary to defend the dollar against the speculators. I have directed Secretary Connolly to suspend the convertibility of the dollar temporarily into gold or other reserve assets” (Nixon, 1971).
All of the problems we see today in the monetary system directly result from the decision made on August 15, 1971, that abandoned the Dollar’s fixed link to gold. What gold did was that it provided discipline on governments and governmental spending.
Under the old system, if you run a budget deficit, then what would happen is gold would flow out of your country until there was a balance again. Well, without any gold backing, the countries ran perpetual deficits. For example, in the U.S., from 1971 onwards, the U.S. has never run a surplus. Ever since we went off the gold standard, it has just been a perpetual stimulus. In good times or bad times, the U.S. always ran a deficit.
Although Nixon stated that going off the gold standard was a temporary measure, we are still waiting to get back to the gold standard 40 years later. During the 1960s, the U.S. was in a never-ending conflict in Vietnam and funding manned missions to the moon and the whole space program. To achieve this, the U.S. was creating money out of thin air without having any backing of gold or any other reserve asset. Foreign creditors saw this and began to demand gold rather than their federal reserve notes because they sensed that Washington simply didn’t have enough gold to make its commitment to back the Dollar.
By removing the link between gold and the U.S. dollar, President Nixon created a system where all currencies were backed by nothing. Such currency is known as a fiat currency.
Currency Vs. Money
Fiat currency is a currency that’s backed by nothing except government promises. The word Fiat is Latin, and it means the currency that’s circulating by force. If people have confidence in that currency and enough government force, that will enable the currency to circulate for some time until people lose confidence in the currency.
No nation on this planet currently uses money; we all use the currency. Eventually, we will all know the difference between the two.
Money is a medium of exchange. It has evolved because it has always held some intrinsic value until the modern age when the politicians say, all we need is a political decree, and they can say this piece of paper is money. Now, money has a new characteristic. But underneath it all, there’s the same concept in place that nobody ever seems to challenge, which is that governments have a right to declare something of no value to be money, and you must accept it. That’s the problem, and it is still the problem today, leading to the economic destruction of the world.
With currencies no longer backed by anything real or tangible, their value was measured only in relation to each other. Because countries with relatively weak currencies can make products cheaply, countries devalue their own currencies to make them desirable trading partners.
Every paper currency measures itself against the Dollar. So, if the dollar goes down, the other central banks respond to that. They intervene in the foreign exchange markets to ensure that the impact doesn’t hit their domestic economies.
THE PONZI SCHEME
What is a Ponzi scheme? A Ponzi scheme is a fraudulent investment scheme that promises high returns for investors with little or no risk. Sounds too good to be true, right? That’s because it is in a legitimate investment scheme. The money invested is used to build wealth, typically through low-risk ventures like stock or real estate portfolios. Over time, this generates enough income to pay the investor back their initial investment plus some profit.
A Ponzi scheme, on the other hand, promises massive returns quickly. How does it accomplish this? Instead of using the money invested in building a Well, a Ponzi scheme simply allows more investors to pay off the previous investors. Because these new investors have also been promised significant returns, the scheme must find an even bigger group of investors to pay them off, while the scheme’s creators are skimming cash from each group of investors. Because the Ponzi scheme doesn’t generate any wealth itself, it must constantly bring in larger and larger groups of investors to keep functioning. Eventually, no more new investors can be found, or large numbers of previous investors all cash out simultaneously, and the scheme collapses in on itself.
By this time, the scheme’s perpetrators have siphoned off tremendous amounts of money for themselves, while the investors are left out of pocket and out of luck. Without a fixed link to gold, the U.S. Treasury has been able to borrow and spend as much money as it wanted. When the U.S. government needs money, it takes out a loan with the Federal Reserve. The Federal Reserve prints the currency required for the loan, and in return, receives an IOU from the U.S. Treasury.
These IOUs are called government bonds. With the money provided from these loans or bonds, the U.S. government pays its bills and obligations. Meanwhile, the U.S. Treasury and the Federal Reserve worked closely together to sell these bonds at auction, where foreign central banks, pension funds, and even individuals buy these U.S. government loans. They are more than happy to do this because loaning money to the U.S. government is a virtually risk-free investment. But if the loans are spent on bills and paying off previous loans, where does the government get the money to pay back the current loan and the charged interest? The question arises, is investing in a U.S. government bond simply one small part of a giant Ponzi scheme?
The Federal Reserve System is a Ponzi scheme. There’s no question about it, they go through the appearance of lending money to the governments, and the governments agreed to pay back the money plus interest. So, this money comes into being created just to loan it to the governments, and the Federal Reserve (central bank) has virtually created this out of nothing by clicking a few keys on a keyboard of the computer. Therefore, the treasury of the United States government now has another trillion dollars it can spend. These loans create a liability on the part of the federal government to pay it back plus interest. Now think about that plus interest. When it comes time to pay it back with interest, but sadly they cannot pay it back. They certainly cannot pay it back plus interest. Therefore, they borrow more to cover the original loan plus the interest, and the debt just keeps exponentially increasing.
Since 1971, the United States has been running trade deficits with the rest of the world, meaning we’ve been buying a lot more products from the rest of the world than they have been buying from us. The Japanese and Korean sell us cars and electronics. The Middle East sells us oil, and the Chinese seemingly sell everything on our Walmart shelves. The U.S. pays for these products with U.S. dollars, and everyone is happy. But if countries were to convert these U.S. dollar profits back into their currencies, their currencies would rise in value, making their economies less desirable to trade with. Instead, countries invest their dollar profits by buying U.S. government bonds. So countries around the world sell their goods to the U.S. in exchange for U.S. dollars, which have been borrowed through the Federal Reserve creating IOUs, and countries then loan their U.S. dollar profits back to the U.S. by buying more IOUs. The money from these loans is spent on paying government expenses and paying back previous IOUs. But to do this, more extensive loans must be made to pay back the principal and the interest. By paying back old loans with new and larger loans, it would appear as if the entire world has been investing their hard-earned money into a Ponzi scheme of epic proportions.
In this business of creating money for federal governments and national governments around the world, they have to keep creating new money in larger and larger amounts; otherwise, the whole thing would crash, because that’s where the money comes from, to pay off the previous loans as the new loans. Hence, it’s a classic Ponzi scheme. For the U.S. economy to function, we have to borrow more and more money from the rest of the world. The more money they loaned us today, the more money they have to loan us in the future. If they ever stop loaning, the whole thing collapses, and we can’t pay them back.
