Forty years of funny money

The Standard & Poor’s headquarters, inside one of the biggest skyscrapers in New York’s financial district, houses just about every kind of brainiac that Wall Street money can buy. Mathematicians, computer modellers, economists and market strategists pooled their collective wisdom before making last Friday’s decision to strip the United States of its triple-A credit rating.

It is a shame, however, that the ratings agency didn’t have a historian with a sense of irony on its team. If they had, S&P might have postponed the announcement, and the market turmoil it inevitably unleashed, for just a few days. The 15th of August would have been the perfect moment to unleash this particular bombshell.

Why? Because next Monday will mark the 40th anniversary of one of the most significant, if little recognised, turning points in post-war economic history. On 15 August 1971, President Richard Nixon ended the final link between the dollar and gold. And the moment he did so, the world began an experiment in what economists call ‘fiat’ money, and the rest of us know as ‘funny money’.

The scale of the change was immense. Throughout recorded history, money had been linked to something real: gold mostly, although sometimes silver, or even seashells. From that moment, it wasn’t any more. Money was just bits of paper, or more often bytes in a computer terminal.

Four decades on, we’re starting to have some idea of how that experiment is working out. And the answer is not very well. We’ve seen repeated booms and busts, and a succession of financial crises. Trade imbalances have exploded. The dollar has gone into rapid decline. The banking sector has risen to dominance. And, perhaps most importantly, we are literally drowning in debt.