Why is 1971 Pivotal for Digital Currencies?

Maybe Satoshi Nakamoto and his friends didn’t like the way the economy was run after 1971. Bitcoin was meant to be a response to the problems with the new monetary system, such as the need to trust state institutions, constant crises, and the value of fiat money going down.

What Happened in 1971?

The Second World War did a lot of damage to the world economy. In 1944, representatives from 44 countries in the anti-Hitler coalition met at a conference and agreed on a new monetary system. This system was called Bretton Woods.

The new system was based on a fixed price for gold ($35 per troy ounce) and fixed exchange rates for the countries that took part, which were set in relation to the US dollar, which was the main currency. Even back then, the United States had the biggest economy and was the least affected by the war.

About half of the world’s gold reserves were also in the US. The Bretton Woods system replaced the gold standard, but in many ways it was the same as the gold standard. For example, the value of currencies was still backed by gold reserves.

The new system made sure that the dollar could be changed into other currencies and made it the reserve currency of the world. Because of this and other steps, the economy was able to fully recover by the beginning of the 1950s and keep growing quickly. This time period of about 25 years was called the “post-war economic miracle” in the West.

During this time, there was a lot of need around the world for dollars. To meet this demand, the US Federal Reserve (Fed) printed money faster than the amount of gold in reserves grew. Also, since the early 1960s, the U.S. has been getting more and more involved in the Vietnam War, which has caused the government to spend more money. Some of these costs were also covered by the “printing press.”

“Nixon’s Shock”

By the time Richard Nixon became president in 1969, there were 4 times as many dollars as there was gold to back them. Jeffrey Gartner, a professor at Yale University who wrote a book about what happened next, says that the country’s leaders were very worried about the economy getting worse. Also, the US exports were very expensive because of the “strong dollar.” The FRG and Switzerland both left the Bretton Woods system in May 1971. Other countries also slowly started to trade American money for gold.

At the beginning of August 1971, the US Congress said that the dollar should be worth less. This decision had been planned in secret for a long time by the Nixon administration. On August 15, the American president sent a taped message to the country in which he said that the dollar would no longer be tied to gold. The Nixon Shock is what people started calling this event.

The Effects of Nixon’s Shock and Reagan’s Economy

The end of the “gold standard” led to the creation of a global market for national currencies and free exchange rates for money. Central banks were given the chance to have a much more flexible monetary policy, which included printing a lot of money to help the government and economy.

In the early 1980s, after Reagan called for neo-liberalism in the economy and neo-conservatism in politics, the new monetary system began to take shape.

During the 1970s, the United States and other Western countries were hit by stagflation, which is when the currency keeps going down even though the economy doesn’t grow. The Reagan administration cut taxes a lot, especially on businesses, so that businesses would invest more and unemployment would go down. Reagan did a lot to cut government spending on social programs, but at the same time, he put a lot more money into the military and made it more expensive to run the government.

So, inflation and unemployment were beaten, but less tax money coming in and more money going to the military led to a sharp rise in the US budget deficit, which was covered by actively increasing the national debt. Because of this, its size tripled by 1988, and for the first time in many decades, the United States became the world’s biggest borrower instead of its biggest lender.

Reaganomics also had long-term effects on society and the economy. Real incomes kept going down, and social stratification got a lot worse. This trend hasn’t stopped: from 1964 to 2018, it got worse and worse. Taking inflation into account, Americans’ incomes only went up by 10%.

How the End of the “Gold Standard” is Linked to Cryptocurrencies

Bitcoin was the answer to the 2008 financial crisis and the ways that were chosen to handle it. Then, for the first time, the United States and other countries used a policy called “quantitative easing.” Central banks bought up troubled debt instruments by printing a lot of money and keeping interest rates low. There was a chance of hyperinflation, but it didn’t happen. Simply put, cryptocurrency is the solution to the problems with the new money system, which has had long-term negative effects.