The Time the United States Ran Out of Money

Quick Overview

The United States effectively ran out of money in 1971 when President Nixon suspended the convertibility of the dollar to gold, which was the real money backing the paper currency, leading to a massive increase in paper money issuance relative to gold reserves, despite the immediate stock market reaction being a rise rather than a crash.

Key Points: The US effectively ran out of money when President Nixon suspended the convertibility of the dollar to gold on August 15, 1971. Before 1971, paper dollars were redeemable for gold at a rate of $19.67 per ounce, but government spending outpaced earnings, depleting gold reserves. Nixon announced the suspension via television, diplomatically stating the action was necessary to defend the dollar against speculators. The currency devaluation (breaking the link to gold) allowed the US to continue spending more than it earned by printing paper money checks. In 1933, President Franklin D. Roosevelt similarly broke the country's promise to exchange dollars for gold, instituting a bank holiday as the first step in financial reconstruction. Despite the expectation of a stock market plunge after Nixon's announcement, the market rose nearly 25% in the following 12 months. The value of the dollar fell from $19.67 per ounce of gold pre-1971 to $27.00 by 1973 and $33.00 shortly after, demonstrating a loss of purchasing power.

Context: The video explores two historical moments when the United States government essentially defaulted on its promise to back its currency with gold: first under President Franklin D. Roosevelt in 1933, and again under President Richard Nixon in 1971. The narrative contrasts the gold standard system, where paper money represented a claim on physical gold, with the subsequent fiat money system, explaining the economic implications of severing this backing.

Detailed Analysis

The video recounts the two major instances when the US government suspended the gold standard, which the narrator defines as the time the US 'ran out of money' by being unable to honor its promise to exchange paper dollars for gold. The first instance occurred in 1933 when President Franklin D. Roosevelt announced a national bank holiday via radio, breaking the promise to exchange dollars for gold, which was framed as the first step in financial reconstruction. The second, more recent event, happened on August 15, 1971, when President Nixon went on television to announce the temporary suspension of the dollar's convertibility to gold to defend the dollar against speculators. In both cases, the US was spending more paper money than it had gold reserves to exchange for it. The effect of Nixon's action was that the dollar's value against gold immediately dropped from $19.67 per ounce to $27.00, and later to $33.00, without a corresponding increase in the country's wealth. Counterintuitively, after Nixon's announcement, the stock market (indexed) rose nearly 25% over the next 12 months, defying the narrator's expectation of a plunge.