What the hell happened in 1971 (and why the hell is it so important now)?

The account created in March is published several times a week for its growing fan base of 10,500 followers. A typical post includes a graph that shows how inequality has increased in recent years, inflation has skyrocketed, and how ordinary people are losing homes and stocks due to low wage growth. Somewhere on the map there will be a small arrow pointing to 1971, which will be noticed when the rot started.

And it always asks the question, “What the hell happened to wages in 1971?” Or in a graphic that shows the increasing political polarization: “What the hell happened in 1971 and that led to such a divergence in political thinking?“”

His followers notice similar phenomena and contribute to the meme by tagging them. A few weeks ago someone republished an article in the New York Post showing a decline in the happiness of white adults with lower socioeconomic status since the early 1970s and asked, “Gee, I was wondering # wtfhappenedin1971“, Translated into Spanish as”What the hell happened in 1971?“”

Income growth since 1971

So what happened in 1971?

What the hell happened in 1971 (and why the hell is it so important now)?
What the hell happened in 1971 (and why the hell is it so important now)?

The website “WTF happened in 1971” suggests that all of these different effects are related to President Richard Nixon naming the time in the Bretton Woods financial system when he linked the value of the world’s reserve currency – the US dollar – to gold.

The so-called “gold standard” has underpinned world finance since 1944 when the allied nations of World War II, including the US, Canada, Western European countries, Australia and Japan, negotiated the rules of an international monetary system with fixed exchange rates between currencies. This took place at a hotel in Bretton Woods, New Hampshire. At the time, the US controlled two-thirds of the world’s gold and insisted that the system be based on gold and the US dollar.

The system meant that in theory 35 dollars could be exchanged for an ounce of goldAlthough it was actually illegal for American citizens to own gold between 1933 and 1974, the government struggled to support the currency during the Great Depression. However, Foreign governments could exchange dollars for gold at this rate. The government struggled again with gold backing the currency in the late 1960s after printing too much money to pay for things like the Vietnam War and various welfare programs. It is for this reason that Nixon killed the system on August 15, 1971.

Real wages since 1971

Yeah, but it was a good thing

The implications are controversial to say the least. For example, the International Monetary Fund (IMF) suggests that fears that moving away from gold would end the era of rapid growth were misplaced. “”In fact, the transition to floating exchange rates was relatively smooth and certainly timely: Flexible exchange rates made it easier for economies to adjust to more expensive oil when the price suddenly began to rise in October 1973. Since then, fluctuating exchange rates have therefore facilitated adjustments to external shocks“.

For many traditional Keynesian economists, leaving the gold standard behind has given governments the flexibility to use activist monetary and fiscal policies to respond to or prevent economic crises. For example, Without the Federal Reserve’s “unlimited” quantitative easing program this year, the economy may have plunged into such a deep hole that the US would never have come out. And Greece’s inability to break out of its sovereign debt crisis in the years following the global financial crisis was part of the reason it had to put crippling austerity measures into place. Surveys of leading economists suggest that 9 in 10 think a return to the gold standard will be a disaster.

No, leaving the gold standard was a disaster

But the website “WTF Happened in 1971” tells a different story. Several graphs are presented showing that productivity increased from 1971 onwards while wages remained stable. GDP rose, but the part destined for workers collapsed. and real estate prices soared, making Americans’ “savings” inextricably linked with real estate values. This suggests that global episodes of hyperinflation increased, currencies fell more frequently, and the number of banking crises increased. The personal savings rate fell off a cliff, the incarceration rate quintupled, divorce rates skyrocketed, and the number of people in their twenties living with their parents grew exponentially.

Most terribly, the number of lawyers quadrupled.

Population per lawyer since 1971

The website and Twitter account were founded by the former 3D graphic designer Ben’s apprentice and the Bitcoin Podcaster Heavily armed clown – aka Collin from the Bitcoin Echo Chamber. Both live on the east coast of the United States and met when Prentice was a guest on Collins podcast.

Prentice discovered Bitcoin in 2017 and fell deep into the cave of the Austrian economy. That’s a line of unorthodox economics loved by the gold bugs, which suggests that Keynesian economists are wrong, fiat is worthless paper, and gold is the answer. Although the Austrian economy has a great influence among Bitcoiners, it is shunned by leading economists and is often criticized for a lack of scientific accuracy and a lack of reliance on mathematical models and macroeconomic analyzes.

“The Austrian economy is really trying to dispel the logical errors of Keynesian logic, from principles to structure,” says Prentice. However, The couple have a huge difference from the Austrians in that they believe Bitcoin is the answer to what gold never was, he continues:

We believe that gold itself failed as money. And that is difficult for Austrians to achieve because they have been campaigning for gold for a long time. The reason gold failed as money is because we had to invent paper in order to scale it, and we know how many problems paper comes with.

Collin said he was trading penny stocks, switching between pumps and dumps and a value investing strategy “that isn’t really real” when he came across presidential candidate Ron Paul with his “End the Fed Policy”. This led to the work of the famous Austrian economists Ludwig von Mises and Murray Rothbard, who coined the term anarcho-capitalism.

“That’s where we find what we have in common,” says Collin. “Y. Between our economic discussions of history, money, and human activity, we found many turning points in the dates that occurred around 1971. “

The first graphics for the website came from the Wikipedia entry on Bretton Woods, and you kept seeing more and more graphics suggesting the same thing.

“We started collecting these and others,” says Prentice. “We started arguing with the economists on Twitter and eventually I think it was Collins’ idea. It was like, ‘Well, we’re going to put this on a website and just ask what the hell happened?’ And the rest is history. “

So far, the website has had around 400,000 visitors in 2020 and is increasing its audience month by month.

Collin says they carefully considered their arguments.

“P.We grill most of the day especially Ben and I, privately, discussing these things back and forth and sending, you know, trying to poke holes in our ideas.. “

The result is growing inequality

The most obvious effect of the move away from the gold standard was the ability of governments to print as much money as their hearts wanted. As Collin says:

The temptation to print money is the greatest temptation in the whole world.

To illustrate how much this hurts the individual, Prentice uses the analogy of a cake as a representation of the economy, with the pieces representing the money in circulation. “When we print more money, we just take the pieces we have and keep making them smaller,” he explains. “”Each unit is worth less now. Nothing new was created. You still have the same cake, but now your piece of cake is much smaller than it was before.“”

According to Collin, this is causing people to try to store their wealth in other ways, which has led to rampant asset price inflation since 1971.

“When money goes down and depreciates over time, people store their wealth in assets,” he says. “”So it is common financial wisdom to diversify your wealth, invest in stocks, invest in bonds, invest in gold, buy a home. The more assets you own the better it will be in the long run as all of these assets will go up in price due to inflation.“.

The net effect is a massive increase in economic inequality because the richer you are, the higher the percentage of wealth you can afford to hold volatile and illiquid assets. However, Average workers – the median net worth of homes in America is $ 97,300 – spend most of their dollars on rent, groceries, and insurance, and have a larger portion of the depreciation of assets like cars.

“”This system is very, very rich“says Prentice.”A very wealthy person would have 80-90% of their wealth in business interests and stocks, right, and those are bloated. This is the money of the rich, but access to these assets is almost nil for the poorest. “

This would be less of a problem if wages had kept pace with inflation. While average hourly wages in the US have increased roughly in line with the consumer price index, this is just one way of measuring inflation. One of the most revealing graphs on the site shows that the number of hours worked to buy a single unit of the SP 500 has increased from an average of 30.9 hours since 1860 to an all-time high of 126 hours today.

Buy the SP cost since 1971

Depending on the depth of the rabbit hole you want to go into, there are consequences everywhere.

Collin explains that there is usually an economic computation where interest rates fall as capital accumulates in bank savings accounts. “”Then people are more likely to borrow money and try to participate in new productive endeavors“, He says. “The creation of new money and the artificial suppression of the central bank interest rate distort this economic calculation. “

He says our crazy financial system is why hugely profitable companies like Apple still borrow billions of dollars to buy their own stocks.

“”Why should they borrow money that they would later have to pay interest on to buy back their own belongings? The answer is that the replacement cost of assets is higher than the replacement cost of capital.“”

Like the famous Freakonomics chapter that led the Supreme Court ruling of Roe vs. Wade linked access to abortion in the 1970s to the decline in crime two decades later, and some less intuitive consequences are not ignored.

“”We believe that many second, third, fourth, and fifth order effects occur as ripple effects that occur outside of monetary policyCollin explains.

If we look at things like obesity, that’s right, and you say it’s not related to the end of the gold standard. Are you sure? Because people need to eat a lot more subsidized foods than they did 60 years ago, and in America, sugar and corn are the main subsidized crops.

Now they believe that the system is so distorted that it is no longer true capitalism. Collin points out that 52% of young adults are forced to live at home with their parents rather than building their own wealth, buying a house and starting a family of their own. “”You can’t afford to do any of these things and you just look at the system in place and say, this is broken, right? They always believed in capitalism, but now you see that this system that they called capitalism is broken. But Ben and I argue that this is not capitalism, it is something completely different. That is social monetarism.“”

While there are some pretty obvious reasons for the 100 days of protests and unrest in America after George Floyd’s death, mounting inequality has played a big part, says Prentice.

“”I think so, absolutely. I think people take to the streets when things don’t go well. People get frustrated because they don’t feel like this system is working at all and that they’ve been doing shitty jobs all their lives. “

But maybe you are wrong

Collin and Prentice sound pretty compelling, but economics is a frustratingly complex area and even the best economists in the world are often far from where they are. In December 2007, the Wall Street Journal asked 51 economists to predict what would happen in 2008. Not a single economist predicted a recession, let alone the dramatic events of the global financial crisis, despite the fact that the high risk mortgage crisis had started five months earlier.

While the site’s graphics show a strong correlation between the end of the gold standard and a variety of different things, that doesn’t prove that this was causing the problem. Correlation is not a cause: For example, the number of films in which Nicolas Cage appeared between 1999 and 2009 correlates strongly with the number of people who drowned when they fell into a swimming pool during the same period. The increase in cheese consumption per capita between 2000 and 2009 almost perfectly matches the number of people who died from tangles in their sheets.

Cheese consumption in 1971

Collin admits that some of the graphs may simply show a correlation.

“”There are many people who think that we are putting things on the end of Bretton Woods that we shouldn’t“says Collin.”And maybe, in a way, sometimes because, to be completely honest, the website is a meme. We accept that. We love. That was what made it so popular, and every time we come across a chart that has an unusual turning point in 1971, you’d better believe it happened there, “he says.

Prentice adds: “We just put a lot of data on a website and asked a question, right? So we tried not to explain all of these graphics on the website. We just want it to exist and for people to answer their own questions and discuss it with one another“.

And of course, other things happened in 1971: Disney World opened, the Monkees split up. Could these things explain why everything has changed this year?

“What we see most is someone who says, ‘I was born this year.’ It was all my fault, ‘says Collin.

A more serious attempt to explain the major economic changes shown in the graphs is to attribute them to the wave of deregulation that swept the advanced economies of the 1970s and 1980s. Prentice said he fought this because of his libertarian worldview and anarcho-capitalist, everything should have improved a lot.

“”Why did things get worse after deregulation?“, he asks himself.

This is a great question. (It’s) because the monetary system is so broken – it’s not capitalism. This is not what we are defending. They picked up money socialism and then took out the reins.

“”So yeah, everything got a lot worse and the inequality got a lot worse. From that point of view, I think it’s much clearer to see why deregulation has really tightened everything.“”

And while we’re trying to poke holes in theory, many things have improved since 1971 as well. Life expectancy in the US has increased 10%, child survival has increased 71%, and food supply per person has increased 21%. Globally, things have improved out of sight: in the early 1970s, half of the world’s population lived in extreme poverty; today it is only 10%. The number of illiterate people has decreased by more than 50%, while the number of people living in a democracy worldwide has increased from 32% to almost 56%.

Prentice believes that advancement in technology is why these things have improved.

“”We can afford more cool gadgets to increase our productivity, even something as simple as the washing machine.“He says.” We used to spend hours a day washing our clothes and hanging and drying them. Now I don’t even think about it. Technology improves things like plants, right? Look at all of the farming implements we use now, these giant harvesters and all of these things that allow us to get our food cheaper. In general, I believe that all of the things you have just listed are due to deflationary pressures within an inflationary system“.

So you are essentially saying that all of the things that got better would have worked even better if they hadn’t been hampered by the end of the Bretton Woods system.

The background of the economy

According to Prentice, the two are aware that their ideas are outside of common economic thought, but he says it’s because they’ve tried to do things from scratch and “expose the mistakes other economists are making”.

“We have seen their arguments and are constantly questioning each other,” he says. “”It’s like at the end of Marty Bent podcasts, he keeps saying, ‘Are we crazy?“We ask ourselves that all the time. I don’t have the arrogance to be a smarter economist than anyone else. But I know that I work according to logic and first principles and that I want to benefit everyone in the world. “

Since June they have also been putting their ideas together in a newsletter, which is now number 68 and arrives in the inbox every other day.

“We started the newsletter to explain these little economic details and to explain small parts of the history of money because we believe bitcoin is inevitable and is the best money that has ever existed,” says Prentice.

Collin says it might one day turn out to be the first draft of a book on the subject.

“If our audience continues to grow and we continue to be well received, we’ll build a library of content that can one day be turned into a book,” he says. “An e-book with a more coherent analysis of money history and the emergence of a new paradigm, Bitcoin, that will change the world because it is here and cannot be stopped.”

This is a translation of an original article from Cointelegraph Magazine.

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