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> The world used gold/silver for its currency for most of human history until 1970 when we entered this period of worldwide fiat currencies. Our current situati
by hkt 6y ago
> The world used gold/silver for its currency for most of human history until 1970 when we entered this period of worldwide fiat currencies. Our current situation is pretty remarkable
Actually, in 1933 the US ended the use of the gold standard, following the UK (well, British Empire) which abandoned it in 1931.
What came to an end in 1970 was the Bretton-Woods system where global currencies were pegged against the dollar. There was political control over the tax rate between 1946 and 1971, but the US was always able to unilaterally end the system. It did so to print money to fund the Vietnam war (sort of).
The peg against the dollar meant america could have $100 of stuff from the UK or France by printing it, whereas we needed to pony up actual goods and services. It wasn't ideal.
The system was also put under pressure by petrodollars. Western purchases of oil were a leak of the currency outside of the Bretton Woods countries. Since Bretton Woods was ultimately about governments being able to regulate their currencies, petrodollars weakened their grasp and created markets which threatened confidence in the system.
The 1980s are where the real issues began, because most countries moved to fractional reserve banking rather than full reserve. The risks this produced in the system caused the 2008 crisis and led to the epic price inflation in housing etc we have seen in the last forty years. QE is an admission of defeat of the system introduced in the 80s, a hope that eventually we can go back to that time. No interest group has been strong enough to properly challenge this system, so it has yet to die.
TL;DR it ain't about gold, it is about banks
Edit: removed errant hyphens in "Bretton Woods".
- zabzonk 6y agoNit pickery: Bretton Woods is not hyphenated; it's not some guy or guys name, it's a place in New Hampshire.
- hkt 6y agoHah, reasonable. I'll edit the post.
- jedharris 6y agoYou say that in the 1980s "most countries moved to fractional reserve banking rather than full reserve". This is at best confusing: in most developed countries fractional reserve banking, regulated by central banks, goes back to the 1600s. The bank runs that have occurred throughout US history were only possible because essentially all our banks used fractional reserve banking. Also, the 2008 crisis was not due to or amplified by fractional reserve banking. The debt overhang was due to mortgage brokers and investment bankers (often without a retail bank license) selling securities -- effectively bonds secured by mortgages. As with any security, these had the explicit risk of becoming valueless, but this risk was hand-waved away by corrupt bond rating and other tricks. In fact, I'm pretty sure that no bank customers lost any deposits due to the 2008 crisis. Fractional reserve regulation worked exactly as intended.
- hkt 6y agoTrue, no bank customers lost deposits to my knowledge either. And yes, a major cause of the 2008 crisis was collateralized debt obligations (CDOs) built on residentially backed mortgage securities. Often CDOs would be built on other CDOs in a way which masked the risks involved and made investments of junk look great. The resultant loss of confidence was, in some ways, a result of investors not "getting" the almost recursive nature of those products. What I meant by the role of fractional reserve was related to capital ratios. I was incorrect to say full reserve was in effect until the 1980s, but the rate at which banks could create money was lower before then because their capital ratios were different. The rate of creation of money (usually for mortgage lending) increased from the lower capital requirements. This in turn increased the size of the market for mortgage backed securities (created to shift mortgages off the books of banks and to let them lend more) and led to 2008. It is a sufficiently epic size of subject to not really play nicely with brief explanation, so I aimed to make a tactical simplification. Fair enough for pointing that out!