I have been trying to understand when and how the shift happened from making things to making money from money because if you look at the post-war decades the American economy was built on manufacturing and a white male high school graduate could have a car and a house and three kids in college and a wife who did not need to work and that was the Pax Americana where prosperity was tied to producing things. But starting in the 1960s the cracks began to show because Germany and Japan rebuilt their manufacturing and started competing with American goods and by 1971 the United States ran its first trade deficit since the nineteenth century while inflation from Vietnam War spending was eating away at the dollar. In August 1971 Nixon closed the gold window which meant foreign central banks could no longer exchange their dollars for gold at thirty-five dollars an ounce and this ended the Bretton Woods system and turned the dollar into a pure fiat currency backed by the authority of the state rather than by a commodity.

The dollar needed something to anchor its value after gold was gone and the answer came in 1974 when the United States struck a deal with Saudi Arabia where oil would continue to be priced in dollars and Saudi petrodollars would be recycled back into US Treasury bonds and this created the petrodollar system which meant anyone in the world who needed oil also needed dollars first. Around the same time Nixon made his historic visit to China in 1972 but the primary motivation was not economic because it was about playing the China card against the Soviet Union and getting help to end the Vietnam War and China at that point was a poor country with little to trade and the real economic integration happened later under Deng Xiaoping’s reforms starting in 1978 when American companies began moving manufacturing to China for the labor arbitrage.

In 1979 Paul Volcker became Federal Reserve chairman and raised interest rates to twenty percent to kill the inflation that had been brewing since the 1960s and it worked for prices but it also crushed wage growth and manufacturing and triggered a debt crisis across the developing world and this is the moment when the balance tipped. After Volcker the financial sector began capturing a much larger share of profits and by the 2000s finance was taking forty percent of domestic corporate profits compared to ten percent in the postwar era while manufacturing employment peaked in 1979 and has declined ever since. Wage growth for the bottom ninety percent of earners decoupled from productivity growth around 1973 and has never re-coupled because productivity kept rising but the gains went to capital not labor and 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 was straightforward which is that after the dollar was freed from gold there was no constraint on monetary expansion and after capital controls were removed money could move across borders freely while labor could not and after the financial sector was deregulated the people who moved money around could capture value without producing anything tangible. Michael Hudson calls this the shift from industrial capitalism to financial capitalism and what it means is that the person who builds a thing or grows food or writes code gets a shrinking share while the person who structures a deal or trades a derivative or collects rent gets an expanding share and this is how value creation changed from labour to money.

The practical consequence is that working hard will never make you rich in today’s world because the returns to labor have been deliberately compressed while the returns to capital have been inflated by decades of easy money and low interest rates and asset price appreciation. The people getting rich are not the ones who build things or grow food or write code because they are the ones who own assets and structure deals and sit on boards and collect rent and the system is designed to reward the movement of money over the creation of value because the rules were rewritten after 1971 to favor capital over labor. This is why crony capitalists keep growing because they understand that the game is not about producing more than the next person but about positioning yourself closer to the spigot of cheap money and once you see that the forty-year transfer of wealth from labor to capital was not a bug but a feature of the post-Bretton Woods system then the only honest response is to stop believing that hard work alone will save you.

If this resonates do give me a shout. I am @troysk704.