Daily Archives: October 17, 2011

OWS Roots In The Monetary System

Bill Bonner is a very entertaining writer.  He is also about the only writer in the economics field that occasionally diagnoses the problem the same way I do, not that he has ever been dumb enough to suggest a solution – like I have.  But then he’s not a lawyer, either.

While Bonner can just affect amusement at the whole thing, we lawyers are compelled to make suggestions.  We just do things like that.  It’s our calling.

In any case, this is from his recent e-newsletter in its entirety, called “The Daily Reckoning”:

Favoritism in the Monetary System
Bill Bonner
Bill Bonner

Want to know how the rich got richer? Want to know how Wall Street made so much money?

We didn’t think so.

But we’ll tell you anyway. The post-1971 US dollar-based monetary system permitted an explosion of credit, which naturally favored the credit industry directly, and the entire financial asset-holding investoriat, indirectly. At the expense of the middle and lower classes. In other words, the expansion of credit, caused by a flexible, expandable money regime, set the whole economy ablaze. The middle and lower classes went deeply into debt to buy things. The “rich” — or at least those who owned stocks and bonds — got richer, as consumer spending lit up the business world, and particularly the financial industry itself. Profits from the financial industry were only about 10% of the total profits on Wall Street in 1970. By the time the credit bubble blew up in 2007 they had grown to 40%.

Wages for working stiffs were flat for 40 years. But earnings on Wall Street soared. In 1970, the typical salary in the financial industry was about the same as for equivalent positions in the rest of the economy. But, by the 21st century, Wall Street salaries were nearly twice as high.

People who complain about “greedy” executives and rich people miss the point. People — rich and poor — are always greedy. But they don’t always have a monetary system that encourages debt and favors investors over working people. This money system was created in 1971 by the Nixon Administration, which probably didn’t know what it was doing…and it was later perfected by subsequent Federal Reserve chairmen.

In addition to stretching the gap between rich and poor, the non- gold monetary system had one other notable consequence. It undermined the working classes’ ability to compete in the modern world. This it did by moving more and more production to the emerging markets. In pre-1971 days, nations had to settle up on their trade balances. That is, when one nation sold more to a neighboring nation than it spent with it, the nation in surplus ended up with an excess of the neighbor’s currency. This surplus currency was then presented to the deficit country. The accounts were settled by transferring gold — the monetary system’s reserve at the time — from the deficit country to the surplus country.
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