The foundations are laid for the Great Decline

The Great Prosperity following World War II was product of many forces but was based on the material wealth churned out by the amazing productivity of the American Industrial System.  As late as 1962, USA made more things than the rest of the planet combined.  As a result, we were a creditor nation and had a massive trade surplus.

But the 1960s saw an explosion of overseas expenses—most notably for wars of imperial aggression.  Yup, Vietnam.  (I have a friend who believes the decline of USA was the direct result of the "bad karma" we earned invading Vietnam.  He has a point.)  As the trade balance tipped into negative territory, something very important happened to the real economy.  In 1970, domestic oil production peaked.  After that, the oil bill would contribute ever larger amounts to the trade deficit.




The logical thing to do would have been to stop our spectacularly unpopular wars and go home to retool the economy to run on something other than oil.  But since that did not happen, the trade imbalance would soon trigger events in the financial markets.

By 1971, the agreement that USA gold would be the ultimate backer of the global monetary system was taking on water.  The French, who knew something about the costs of making war in Indochina, decided to convert their dollar holdings into gold—and they had enough of those holdings to drain Fort Knox—and then some.  So Nixon did the only thing he could do, he closed the Gold Window.  For the first time in history, gold had nothing to do with monetary policy.  And while this was good news for all of us who detest the Gold Standard and all the misery it brings, the idea of free-floating exchange rates was NOT an improvement.  After 1971, there were few barriers to open speculative attacks on a nation's currency—a fact that has led to once economic calamity after another.

Now it took awhile for either of these events to show their ugly consequences.  In the case oil production, the peak was only fully understood some years after the fact.  It could be argued that it wasn't until the Arab Oil Embargo of 1973 that the idea of Peak USA Oil was known outside a small circle of oil men—and most of them didn't really believe it.  As for the end of the gold experiment, that news was greeted by much wailing by the "sound money" boys but in fact, the real opportunities for plunder opened up by floating currencies weren't grasped until the 1980s.

But the Progressive revolution in economics was over.  An economy built on cheap oil was going to be very difficult to defend anyway and floating currencies meant there were just fewer defenses against the financial pirates who were waiting for their main chance.

Here is Richard Nixon announcing the end of the redemption of dollars for gold.  This is a remarkable YouTube—not the least because the comments show that most modern folks think the big sin was abandoning the gold standard. (sigh)