Why Inequality Started Soaring in 1971

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.

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  • jadan

    Financialization means “money making money”. If Piketty hasn’t studied the interrelationship between the growth of the derivative market ( the money making money economy), the devaluation of the dollar, and inequality, he should get on it right away because that is the real story. The gold standard has little to do with it. The Fed praised derivatives as “innovation”. Idiot Greenspan.
    Another synonym for financialization is “usury”. This economy has been
    sunk by debt. It thrives on debt like cancer thrives on the host. The
    muscle and substance of the productive economy is destroyed. Growth is
    phenomenal in the short term. Every successful Wall Street bet on some
    useless fictional derivative or “hedge” means another tiny devaluation of the
    dollar, another theft from the producers of real wealth. This has
    nothing to do with the gold standard. If we are not smart enough to
    create a monetary system that can operate in the interest of all and
    not merely the predators at the top, then we are simply not smart enough
    to survive. A gold standard is a mirage, like Reagan’s Main Street and
    morning in America. Pure fiction. If we cannot maintain a nation of
    laws, but cling to fantasies like “the free market”, which is a synonym
    for “everything goes”, then we are not smart enough to survive.

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  • http://www.youtube.com/scotty321 Scott Rose

    This article is exactly why I support Bitcoin. Bitcoin brings income equality back to the world again.

  • DigitalBluster

    Until the 1970s, real wages in the US kept pace with rising productivity. A confluence of many factors may have helped put an end to this. Among the possibilities: increasing numbers of women in the workforce; increasing immigration from south of the border; increasing competition from the rebuilt economies of post-WWII Europe and Asia; the rise of computerization. None of these are bad things, they’re just factors. More competition for jobs; fewer jobs to be had. Perfect conditions for driving down wages. In response, American workers subsidized their stagnant wages by going into debt up to their eyeballs. And who can blame them? The American Dream means doing better than your parents. Consumption is still portrayed as the measure of success. Productivity kept rising; wages stopped. What’s a person watching TV commercials supposed to do, other than revolt?