by WashingtonsBlog

Going Off the Gold Standard Encouraged a Financialized Economy … Which Caused Inequality to Soar

The New York Sun notes that inequality started soaring in 1971 … the same year that Nixon took the U.S. off of the gold standard.  The Sun shows the following chart from Thomas Piketty’s new book, Capital:

Zero Hedge emphasises the inflection point:


Why would going off the gold standard increase inequality?

Financialization of the economy is one of the main causes of inequality.  And going off the gold standard greatly increased financialization.

Forbes’ Brian Domitrovic explains:

The big switch to the foundation of the American financial structure at the advent of this period was the U.S. decision in 1971 to go off the gold standard. Before that time, it was basically clear that outside of wartime (when gold-standard conventions were often suspended), you could basically count on the dollar holding its value against major things like the consumer price level, foreign currencies, and commodities such as gold itself.

After 1971, in contrast, it became basically clear that you could count on no such thing. The CPI might go up 125% in one decade (as it did 1971-1981), the dollar could permanently lose 66% against major currencies (as it did against the yen in this period), and commodities could shoot up ten-to twenty-five fold (as was the case with oil and gold).

Therefore a new day in financial planning also arrived. Suddenly the importance of simply saving money diminished. Money that was saved also had to be hedged. If you simply saved money after 1971, you stood to get killed as the dollar lost value against things it was supposed to be able to procure in the future.

This is where the financial services industry began its long march upward in the share of U.S. economic output it gobbled up. People who had significant money—the rich—threw their money into the products offered by the financial sector, in that the worst thing to happen to a fortune diligently built up over the years would be to see it frittered away on account of currency depreciation.

But can the same be said for the working class and the poor? People of this station by definition have less experience, expertise, and access to financial services. Therefore, people of the lower classes are apt merely to save, as opposed to save and hedge, as has been necessary in the post-1971 world. The inevitable result is what we have seen: the stabilization and growth of the rich’s wealth stash, the diminution of that of the lower classes, and the aggrandizement of the financial sector. We can debate the statistics of the relative wealth of rich and poor—but the real zinger is the stubborn fact that finance’s share of GDP has gone up one and a half times since we went off gold.

This is not the only example of government policy causing inequality.  Unfortunately, there are many more.

Why Inequality Started Soaring in 1971 was originally published on Washington’s Blog

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