I have seen a lot of questions on the internet asking what happened in the 1970s and how economic disparity increased so dramatically after that decade and my curiosity led me down a rabbit hole that starts on August 15, 1971, when President Richard Nixon gave a televised address announcing that the United States would no longer convert dollars into gold for foreign central banks. This was not a minor technical adjustment but the end of the Bretton Woods system that had governed global money since 1944 and the moment the dollar became pure fiat. The word fiat comes from the Latin third person singular present subjunctive of fieri meaning let it be done and it appears in the Vulgate Bible as fiat lux or let there be light where God speaks and reality is created by the act of declaring it. In Medieval Latin it was the opening of royal proclamations and sovereign commands and by the 1630s it entered English as authoritative sanction and by 1750 as a decree or order. Fiat money is money that exists because the state decrees it into existence and demands it for taxes and it is backed by nothing except the power of the authority that issues it.

Under Bretton Woods the dollar was pegged to gold at thirty-five dollars an ounce and every other major currency was pegged to the dollar and foreign central banks could redeem their dollar holdings for gold at that price which acted as a constraint on how much money the United States could create. By the 1960s this constraint was breaking because US inflation was rising due to spending on the Vietnam War and the Great Society programs and the balance of trade turned to a deficit for the first time since the nineteenth century and dollars were accumulating in foreign central banks far beyond what Fort Knox could cover at the official rate. In August 1971 France sent a ship to New York to retrieve its gold and Britain signaled it would do the same and Nixon convened his top economic advisors at Camp David including Treasury Secretary John Connally and Federal Reserve chairman Arthur Burns and Paul Volcker and they decided to close the gold window. Alongside this Nixon announced a ninety-day freeze on wages and prices and a ten percent surcharge on all imports which was a gun held to the head of every other country to revalue their currencies. The Smithsonian Agreement in December 1971 devalued the dollar to thirty-eight dollars an ounce and realigned exchange rates but it lasted barely a year and by February 1973 the dollar was devalued again to forty-two dollars and by March 1973 the entire system of fixed exchange rates was replaced by generalized floating.

The dollar was now backed by nothing except the power of the United States military and the fact that oil was priced in it which was cemented by a 1974 agreement with Saudi Arabia that created the petrodollar system. This meant the US could create dollars without limit because there was no gold peg to constrain monetary expansion. The consequences unfolded over the following decade. The 1973 oil shock sent energy prices soaring and the petrodollars flowed back to Western banks which then recycled them as loans to developing countries. By 1979 inflation was running at double digits and the new Federal Reserve chairman Paul Volcker raised interest rates to twenty percent which crushed inflation but also crushed wage growth and manufacturing and triggered a debt crisis across the global south. This is often called the Volcker shock and it marks the beginning of the neoliberal era.

What this did to the structure of the economy is visible in the data. Before the 1970s the financial sector captured roughly ten to fifteen percent of domestic corporate profits. By the 2000s it captured forty percent. Manufacturing employment which peaked in 1979 has declined steadily ever since. Wage growth for the bottom ninety percent of earners decoupled from productivity growth around 1973 and has never re-coupled while the top one percent saw their share of national income double from around ten percent in the 1970s to over twenty percent by the 2010s. The mechanism behind this is straightforward: when money can be created without constraint by those who control the financial system and when capital is free to move across borders while labor is not and when the state uses monetary policy to protect the value of financial assets rather than the value of work then the person who creates value with their hands or their mind gets a shrinking share while the person who moves money around gets an expanding share. The economist Michael Hudson calls this the shift from industrial capitalism to financial capitalism and Greta Krippner documents it as financialization where profits accumulate primarily through financial channels rather than through trade and commodity production.

Four hundred years ago a fiat was a royal decree that created reality by the act of declaring it. After August 1971 money became exactly that: a claim created by sovereign power with no backing except the authority behind it and the result has been a forty-year transfer of wealth from the people who make things to the people who move money and that is the answer to what happened in the 1970s.

If this made you think do find me on Twitter. I am @troysk704.