WTF happened in 1971? This question has become a standard among bitcoiners. It suggests that inflation would have gotten out of control from 1971, when US President Nixon suspended the convertibility of the dollar into gold. But is it really true? And what lesson should we draw from this for bitcoin?
WTF happened in 1971?
Let’s start at the beginning. We are in 1944, in the United States, at the Mount Washington Hotel in Bretton Woods. Present are representatives of 44 governments that are being imposed an international monetary system centered around the US dollar.
The greenback becomes the only currency freely convertible into gold and de facto the international reserve currency. We are talking about Gold Exchange Standard. One ounce of gold corresponds to 35 dollars. The dollar replaced the pound sterling and rose from 15% of global foreign exchange reserves in 1945 to 70% shortly before 1970.
It is also decided that the exchange rates will be fixed. In other words, trade balances must remain balanced. Each country must make the necessary sacrifices so that its exchange rate does not fluctuate. The IMF is created to keep watch.
The United States will play the game for a long time with balanced current and trade balances. Nevertheless, trade deficits will become the rule from the 1970s. If you take a look at the twitter account “ WTH happened in 1971 you will see that this period is truly pivotal in many other respects.
A multitude of graphs show trends as improbable as an explosion in the number of divorces or murders. More crucially, wages are no longer rising as fast as productivity, the trade balance is going into deficit, unemployment is rising and, above all, inflation is soaring.
What could have happened? Many argue that the end of the convertibility of the dollar into gold would have opened the gates of hell. That the United States was able to print without counting overnight, hence the inflation. However, when we look at the growth of the money supply in the United States, we certainly observe an increase, but it is very far from being extraordinary.
The M2 money supply increased by 7% per year on average between 1960 and 1970. Then by 9.5% between 1970 and 1980. By 8% between 1980 and 1990. By 4% between 1990 and 2000. By 6% between 2000 and 2010 And 6% between 2010 and 2020.
These data show that the gap between the money supply increases of the 1960s, 1970s and 1980s is anything but immense. It is also difficult to justify the increase in unemployment, which rose from 4% in 1970 to 10% in 1982. Injecting money normally has the effect of preserving employment…
It is also impossible to explain the decoupling between productivity growth and wages that continues today. And even less the explosion in the number of murders and divorces.
These figures show that the gold standard absolutely did not restrict the loans of American banks (which are exactly equal to the money supply). The only thing that has changed is that gold bars have stopped plying between Fort Knox and European central bank vaults.
From peak oil to the petrodollar
A more plausible explanation for trying to elucidate the turning point of the 1970s is the energy scarcity caused by the oil shocks of 1973 and 1979. The price of a barrel, from 3 dollars in 1970, rose to 11$ in 1974, then 39 dollars in 1980. That is a multiplication by 13 in one decade!
The first oil shock stemmed from the 1973 Arab-Israeli war (Yom Kippur War). It opposed Israel to a military coalition led by Egypt and Syria then financially supported by Saudi Arabia, Iraq, Libya, etc. The latter will end up turning off the oil tap in an attempt to bend Washington, which supported the Jewish state.
The second oil shock of 1979 is a global crisis originating in the Iran-Iraq war. The consequences were even worse because it has now been 8 years since the United States produced less oil due to the peak of production they passed in 1971. This explains why the American trade balance becomes in deficit from this same year. since it is now necessary to buy oil abroad.
Let us recall now that in 1970, oil represented 40% of the total energy consumed by the United States (the same at the world level). Energy being the main driver of productivity, it makes sense to ask the heart of the problem would not be that we have gone from a world where energy is almost free to a world where energy has a cost.
The slowdown in oil production growth is very clear on this chart. We go from 7% increase per year to just over 1% from the first oil shock:
Productivity (production per person) will continue to increase in line with the overall increase in energy production, but the constraint on the queen of energies which is oil (high density energy) will put the kibosh on the salary increase. The money spent on more expensive energy is partly offset by wages that no longer follow. It’s the end of the thirty glorious years.
Of course, the world did not stop turning. The room for maneuver remained enormous. For example, we have built nuclear power plants in France, the United States, the USSR and Japan. We also went to look for oil in West Africa as well as in the North Sea.
The increase in the production of gas and coal has also made it possible to cushion the shock, not to mention globalization and the immense gains in productivity obtained by relocating production to Asia where labor costs nothing.
So much so that the price of a barrel fell to around 20 dollars from 1985 and remained around this threshold until the beginning of the 2000s. Everyone knows what happened next. The barrel will fly up to 150 dollars in 2007 because of the peak of world conventional oil, triggering in passing the subprime crisis…
This pivotal period of the 1970s was also marked by the fact that Henry Kissinger, then Secretary of State, managed to get Saudi Arabia to sell its oil exclusively in dollars. The famous petrodollar…
King Faisal of Saudi Arabia will resign himself to cooperating in the face of Henry Kissinger’s fine promises vis-à-vis Israel, the threats of invasion and the assassination on the same day (November 14, 1974) of the two Saudi protagonists negotiations with the United States regarding the sale of black gold in dollars.
Saudi Central Bank Governor Anwar Ali was found dead at the New York Waldorf Astoria hotel and Foreign Minister Omar Saqqaf in Washington. These two emissaries were tasked with resisting Kissinger’s demands.
King Faisal will eventually give in in exchange for unlimited arms sales and a return of Israel to its 1948 borders. This did not happen, but the promise was forgotten after the king himself was assassinated on 25 March 1975, the Prophet’s birthday.
This is how the petrodollar was born, artificially supporting the dollar’s exchange rate despite the depeg with gold and its trade balance which would become chronically in deficit due to US peak oil:
Even today, the dollar represents 69% of foreign exchange reserves. In other words, the Americans have a credit of 7000 billion dollars with the rest of the world. That’s a lot of money when you consider that the US GDP is 20 trillion dollars.
All countries are obliged to keep it in reserve because oil and many other raw materials are still sold in dollars. Those who tried to sell their oil in other currencies (Iran, Iraq, Venezuela) were invaded or placed under embargo.
And we have seen recently that this money is very likely not to be reimbursed since Russia has had its 300 billion dollar reserves and 300 billion euros confiscated…
And bitcoin in all this?
The thesis of this article is that monetary creation is not the main cause of inflation. Rather, it is the consequence. The chicken and not the egg.
Imagine a mason who spends x money to build a house. And that overnight, due to the energy crisis, its raw materials (steel, cement, copper, glass, tiles, tiles, etc.), all made using energy, cost 10% more.
Well the mason will be forced to sell the house for 10% more. The buyer will have to borrow 10% more. The bank will have to increase the duration of the loan or risk blocking the economy.
In short, the bulk of inflation comes from the growing difficulty of extracting oil on which the entire economy depends, from the extraction of raw materials to supplying stores with finished products. [Ne manquez pas cet article sur la relation énergie / économie].
The fact that US tankers have yet to earn a single dollar after 10 years of producing Shale oil is tangible proof that it is getting harder and harder (more expensive) to pump energy. To go further, learn about theEROI (Energy return on energy invested).
That said, it is also true that state budget deficits and the fact that they roll over their debts is an absolutely exponential money creation process. This exacerbates inflation.
On the other hand, fiat currency is entirely based on interest rates, which makes it a ponzi by definition. The fact that we have to repay much more than we have borrowed forces us to grow more and more, until the physical limits of the planet cause hyperinflation…
Bitcoin embodies a monetary system more suited to the limits of growth. The reason being that it is simply impossible to continue to take on more debt if production slows down. Without growth to put in front of monetary creation, hyperinflation is assured.
It is therefore necessary that bitcoin replace the central currencies within the banking system. In this way, the banks could no longer withdraw. They would be forced to think long and hard before lending money to such and such a project and to favor those which make it possible to circumvent natural constraints rather than doing anything and making the rest of the population pay for the broken pots via the ‘inflation.
Finally, whatever the powerful decide to do with currency, every human now has the opportunity to cut the umbilical cord and give themselves a chance to protect against hyperinflation by embracing bitcoin, the greatest store of value ever. . Hold!
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