The Fiat Revolution

Los Angeles, 1971.

Dorothy Martinez is 67 years old. Today is her last day working as a seamstress. Forty years at the same shop. Forty years of waking at 5:30 AM. Forty years of careful, patient work.

Her coworkers throw a small party. Cake. Well wishes. Hugs. The owner hands her an envelope. Her final paycheck. Plus a small bonus. “You’ve been the best we’ve ever had,” he tells her.

That evening, she sits at her kitchen table. Opens her bank statement. The number is printed clearly: $42,000.

Forty years of saving. Two dollars at a time. Five dollars here. Ten dollars there. Every month, no matter what, she set something aside. She lived in the same small apartment. Drove the same old car. Cooked at home. Mended her own clothes. Saved while others spent.

$42,000. Not a fortune. But enough. Enough to live comfortably. Enough to help her grandchildren with school. Enough for the trip to Mexico she’d dreamed about: visiting family she hadn’t seen in decades.

She’s proud. Forty years of discipline have paid off. She did everything right. Everything society told her to do. Work hard. Save money. Plan for the future.

Dorothy Martinez will live until 2010. Thirty-nine years from this moment.

And by the time she dies, those $42,000 will be worth almost nothing.

What happens to Dorothy between 1971 and 2010 is not an accident. It’s the inevitable consequence of a decision made this same year, a decision that changed money forever.

To understand what happened to Dorothy’s savings, we need to understand what happened to money itself.

The Gold Standard

For most of modern history, money was backed by gold.

Not literally. You couldn’t always exchange paper money for physical gold at your local bank. But governments promised their currency was tied to gold reserves. One dollar equaled a specific amount of gold. One pound, one franc, one mark. All tied to gold.

This system acted as an anchor. It limited how much money governments could create. If you promised each dollar could be exchanged for gold, you couldn’t print unlimited dollars without gold reserves to back them.

The gold standard had flaws. It created rigidity. It made adjustment during crises difficult. But it had one overwhelming advantage: it prevented unlimited money creation.

Under the gold standard, if a government wanted to spend more, it had three options. Tax. Borrow. Or accumulate more gold. The government couldn’t simply create money from nothing. The gold anchor prevented that.

For citizens, this meant protection. Money saved today would still have value tomorrow because governments couldn’t inflate it away at will.

The system worked, more or less, for centuries. Britain operated on a gold standard throughout the 19th century. The United States adopted it formally in 1879. By 1900, most major economies had tied their currencies to gold.

Then came the 20th century.

The First Break

The First World War shattered the gold standard.

Wars are expensive. Britain, France, Germany needed to fund massive armies, endless ammunition, millions of soldiers. The costs were staggering. Taxation couldn’t cover it. Borrowing helped, but lenders grew nervous. Gold reserves were depleted buying supplies from neutral countries.

So countries did what desperate rulers have always done. They broke the rules.

They suspended the gold standard. They printed money to pay for the war. They created currency from nothing, promising to restore gold backing later: after victory, after peace, when things returned to normal.

By the war’s end in 1918, the old gold standard was in ruins.

After the war, countries tried to return to gold. Britain led the effort in 1925. Winston Churchill, then Chancellor of the Exchequer, made the decision to return to the pre-war exchange rate. He later called it the biggest mistake of his life.

The problem: Britain had inflated its currency during the war. Prices had risen. Wages had risen. The economy had adjusted to the new price level. Returning to the pre-war gold price meant deflation. Falling prices. Falling wages. Economic contraction.

British workers faced unemployment and pay cuts. The 1926 General Strike paralyzed the country. The economy stagnated while other nations grew.

The restored gold standard was fragile. Built on shaky foundations. Countries maintained gold backing not because they had sufficient reserves, but because they’d agreed to pretend they did.

When the Great Depression hit in 1929, that pretense collapsed.

Countries with gold-backed currencies couldn’t expand their money supply to fight the economic collapse. Britain left the gold standard in 1931. Within months, the economy began recovering. The United States effectively left in 1933 when Franklin Roosevelt made private gold ownership illegal and revalued gold from $20.67 to $35 per ounce, thereby stealing 40% of value from anyone who had held gold.

The precedent was set: when crisis came, governments would break their promises. The gold standard was no longer a hard constraint. It was a suggestion that could be ignored when convenient.

By the mid-1930s, the classical gold standard was dead.

Then came World War II, which buried what remained.

Bretton Woods: The Last Anchor

In July 1944, before World War II even ended, representatives from 44 countries gathered at Bretton Woods, New Hampshire. They needed a new monetary system. The world’s currencies were in chaos.

The solution they designed seemed elegant.

The U.S. dollar would be backed by gold at $35 per ounce. Foreign governments could exchange their dollars for gold at that rate anytime. Other currencies would be pegged to the dollar at fixed exchange rates.

This made the dollar the world’s reserve currency. Countries held dollars instead of gold because dollars were more convenient and could be converted to gold if needed.

The system had an important feature: it kept the United States constrained. They couldn’t print unlimited dollars because foreign governments could demand gold in exchange. The threat of gold redemption acted as a check on American monetary policy.

For about twenty years, it worked. International trade recovered. Economies grew. The dollar became the world’s currency.

But the system had a fatal flaw that became apparent in the 1960s.

The Spending Begins

The 1960s changed everything. Vietnam War costs exploded after 1965. Billions per year for troops, equipment, bombs. President Johnson also launched the Great Society: Medicare, Medicaid, expanded Social Security, federal education spending, the War on Poverty.

Johnson wanted both “guns and butter.” But paying for both required money the government didn’t have. They didn’t raise taxes enough. They didn’t cut spending elsewhere.

They created money. The Federal Reserve expanded the money supply to buy government bonds. The U.S. was inflating while promising the world that dollars were backed by gold at $35 per ounce.

Foreign governments noticed. The math was obvious. The U.S. was printing more dollars than it had gold to back. Either the dollar was overvalued relative to gold, or U.S. gold reserves would drain until the promise couldn’t be kept.

In 1965, French President Charles de Gaulle announced that France would begin converting its dollar reserves into gold. He saw that the United States was exploiting its reserve currency status. America could print dollars while other countries had to earn them through exports.

France began converting $150 million every month. French warships carried dollars to New York and returned loaded with gold bars.

Other countries followed. Germany, Britain, Japan. All held large dollar reserves. If those dollars were losing value through inflation, they wanted gold while they could still get it.

The gold drain accelerated. In 1950, the U.S. had held over 20,000 tons of gold. By 1970, it was down to 9,000 tons. Every month, more left.

The Federal Reserve faced a choice: stop inflating and risk recession, or keep inflating and watch the gold disappear.

They chose inflation. Which meant the gold kept disappearing. Which meant the Bretton Woods system was dying.

August 15, 1971

By 1971, the situation was unsustainable. U.S. gold reserves were draining fast. Foreign governments held over $60 billion in dollars but the U.S. had only about $10 billion worth of gold left at the official price. If even a fraction of those dollars were presented for redemption, the U.S. would run out of gold.

President Richard Nixon faced an impossible situation. He could honor the gold backing and watch reserves vanish entirely, which would force draconian spending cuts and economic contraction. Or he could break the promise.

On the evening of August 15, 1971, Nixon went on national television. In a fifteen-minute address, he announced that the United States was “temporarily” suspending the convertibility of dollars into gold.

“Temporary” was a lie. The suspension was never lifted.

Nixon framed it as defending the dollar against speculators and protecting American jobs. He blamed international currency speculators for attacking the dollar. He said the move would strengthen the dollar, stabilize the economy, and protect workers.

None of that was true. The dollar didn’t strengthen. It lost value. But Nixon solved his immediate problem: the gold drain stopped because there was nothing left to redeem dollars for.

The world reacted with confusion, then acceptance. Some countries tried to maintain their currencies’ gold backing independently. All failed. Within a few years, every major currency had abandoned gold entirely.

For the first time in human history, the entire global monetary system operated on pure fiat. Government decree. Nothing else.

The constraint was gone.

What Fiat Means

Fiat is a Latin word meaning “let it be done.”

Fiat money is money because the government says it is. Not because it’s scarce. Not because it’s backed by gold. Not because it has intrinsic value.

It’s money because the government declares it legal tender and forces acceptance through law.

The shift from gold-backed to fiat money was revolutionary. More revolutionary than most people understood at the time. More revolutionary than most understand today.

Under the gold standard, money creation was limited by physical reality. You needed gold. You couldn’t vote to create more gold. You couldn’t decree it into existence. You had to find it, mine it, refine it. Governments could cheat, debase, manipulate. But there were constraints. Hard constraints. Reality imposed limits.

Under fiat, those constraints disappeared.

A government could create as much money as it wanted. Not by mining gold. Not by conquering territory. Not by producing goods. Simply by decree. By expanding a central bank’s balance sheet. By adding zeros to a computer.

The Federal Reserve could create billions of dollars with keystrokes. The European Central Bank could do the same with euros. The Bank of Japan with yen. The Bank of England with pounds. Every central bank in the world gained the same power.

Money became pure abstraction. Numbers in computers. Entries in ledgers. Promises backed by nothing except the government’s ability to enforce legal tender laws.

This was sold as progress. As flexibility. As modern monetary sophistication. Central banks could now manage the economy, smooth business cycles, respond to crises. They weren’t constrained by “barbarous relics” like gold, as John Maynard Keynes had dismissively called the gold standard.

And in fairness, fiat money did provide flexibility. During the 2008 financial crisis, central banks created trillions of dollars to prevent economic collapse. Under a gold standard, that would have been impossible. The system might have collapsed entirely.

But flexibility is just another word for unlimited power.

The question, the one nobody asked in 1971, was simple: if governments can create unlimited money, what stops them from creating too much? What prevents them from inflating away the value of everyone’s savings? What protects people from having their life’s work quietly stolen?

The answer: nothing. Nothing stops them. There is no constraint except political will. And political will, as we’ve seen repeatedly throughout history, is weak.

Dorothy’s Fate

Dorothy Martinez didn’t understand any of this in 1971. She read about Nixon’s announcement in the newspaper. Something about the dollar and gold. It seemed complicated. Technical. She assumed people smarter than her had it figured out.

She trusted the system. She’d worked within it for forty years. She’d saved diligently. She’d done everything right.

The number in her bank account said $42,000.

That number didn’t change.

The number in her bank account didn’t change. But what $42,000 could buy began to change immediately.

In 1971, Dorothy’s $42,000 could buy a house outright in her Los Angeles neighborhood. A modest house, yes, but a complete house. Paid in full.

By 1980, housing prices had more than doubled. Her $42,000 could no longer buy a house. Maybe a down payment.

By 1990, the same houses sold for $150,000. Her $42,000 was less than a third of what she needed.

By 2000, those houses cost $250,000. Her $42,000 was barely enough for a down payment.

By 2010, the houses in her neighborhood sold for $350,000 to $400,000. Her $42,000 couldn’t even make a down payment.

The trip to Mexico she’d dreamed of? In 1971, it would have cost maybe $500 for a month. By 2010, a week would cost more than that.

Groceries. Utilities. Gas. Medicine. Everything rose. Not a little. Not gradually. Dramatically. Relentlessly.

In 1971, her weekly grocery bill was about $15. By 2010, the same groceries cost $75. Five times more.

In 1971, her electricity bill was $8 per month. By 2010, it was $65.

The government called this “inflation.” They said it was normal. Healthy, even. The Federal Reserve targeted 2% inflation per year. Just 2%. Doesn’t sound like much.

But 2% inflation for 39 years doesn’t mean prices go up 78%. It means they go up 115%. More than double. And actual inflation was often higher than the official 2% target.

In reality, from 1971 to 2010, the dollar lost approximately 87-88% of its purchasing power. The Bureau of Labor Statistics data shows the Consumer Price Index rose from 40.5 in 1971 to roughly 218 in 2010. What cost $100 in 1971 required about $540 in 2010 to buy the same goods - meaning Dorothy’s saved dollars had retained only 12-13% of their original purchasing power.

Dorothy didn’t understand the mathematics. She just knew that every year, her money bought less. Every year, things cost more. Every year, her careful savings eroded a little more.

The Hidden Tax

Inflation is often described as rising prices.

That’s not quite right.

When a government creates new money, it doesn’t create new wealth. It doesn’t make the economy larger. It doesn’t produce more goods or services. It doesn’t build factories or train workers or invent technologies.

It just dilutes the money already in existence.

Think of it this way. Imagine there are 100 gold coins in circulation. You own ten of them. You own 10% of all the money in the economy. You’ve worked hard for those ten coins. They represent your labor, your time, your effort.

Now imagine the government creates 100 more coins from nothing. Poof. They appear. Conjured into existence through monetary policy.

There are now 200 coins total. You still have ten. But you no longer own 10% of the money. You own 5%.

Your share was cut in half. Not because you spent anything. Not because you lost anything through theft or accident. But because the government diluted everyone’s holdings.

This is inflation. It’s a hidden tax. And it’s the most insidious tax ever invented because most people don’t understand it’s happening.

Direct taxes are visible. Income tax appears on your paycheck. You see the number. You know exactly what you lost. Sales tax appears on receipts. Property tax arrives in the mail. You can point to these taxes and say: “The government took this much from me.”

Inflation is invisible. Prices rise gradually. Your dollar buys a little less each year. The coffee that cost $2 last year costs $2.10 this year. The gallon of milk that was $3 is now $3.25. Your rent increases. Your insurance premiums climb. Everything costs more, but there’s no line item. No receipt. No bill from the government saying “Inflation Tax: 3%.”

The money in your savings account says $10,000. The number doesn’t change. But what $10,000 can buy shrinks year after year. The number stays the same. The value disappears.

This is theft. Quiet, gradual, relentless theft. And under fiat money, it’s permanent. Built into the system. Not a bug, but a feature. Because inflation serves a purpose for governments: it lets them spend without the political cost of raising taxes.

Every dollar created by the Federal Reserve is a dollar extracted from everyone holding dollars. Every euro created by the European Central Bank dilutes the euros in everyone’s bank accounts. Every yen printed by the Bank of Japan is a tax on every Japanese saver.

The tax is invisible, which makes it politically popular with governments and economically devastating for citizens.

Dorothy Martinez paid this tax for 39 years. She never saw the bill. She just watched her $42,000 buy less and less and less, until finally, it bought nothing.

The Theft of Time

Think about what money actually represents. It’s stored labor. Stored time. Stored life.

When you work, you’re trading hours of your life for money. Eight hours at the office equals a paycheck. That paycheck represents eight hours of your finite existence, converted into a form you can save and spend later.

Money is frozen time.

Dorothy didn’t lose $42,000. She lost the 40 years she spent earning it. The early mornings at the sewing machine. The late nights finishing orders. The weekends she worked instead of resting. The dresses she made for other people’s daughters while her own daughter wore hand-me-downs. The lunches she skipped to save a dollar. The movies she didn’t see. The dinners she didn’t enjoy.

All of it traded for money that was supposed to hold its value.

It didn’t.

You can’t get time back. It’s the one resource that’s absolutely finite. Fiat money breaks that promise.

Every human gets roughly 80 years if they’re lucky. Dorothy got 89. Every year, every month, every day is irreplaceable. When you trade your time for money, you’re trading life itself.

The trade only makes sense if the money holds value.

Fiat money breaks that promise. It makes time unstable. The hours you worked last year are worth less than the hours you work today. The hours you work today will be worth less next year.

Not just inflation. Not just rising prices. The theft of human time. The devaluation of human life.

Dorothy worked 40 years and saved diligently. In a world of sound money, those 40 years would have secured her future. In a world of fiat money, those 40 years were slowly stolen, one printed dollar at a time.

And she’s not alone. Every person who saved in dollars since 1971 has suffered the same theft. Some more, some less, but all in the same direction. Everyone holding currency while governments printed lost value. Everyone who worked and saved and planned saw their efforts diluted.

The theft is ongoing. Right now, as you read this, the Federal Reserve is creating new dollars. The European Central Bank is creating new euros. The Bank of Japan is creating new yen. Every central bank in the world is doing the same thing.

And everyone holding those currencies is being robbed of time they can never recover.

Who Benefits?

If fiat money harms savers, who benefits?

Governments benefit obviously. They can create money to fund spending without raising taxes. They can pay debts with devalued currency. Inflation is taxation without legislation.

Banks benefit because they’re closest to the money printer. When the Federal Reserve creates dollars, it doesn’t appear evenly across the economy. It enters through banks. The Fed creates dollars by buying bonds from banks. Those banks receive new money first, before prices rise. They lend it out at higher rates and collect the difference. By the time inflation reaches ordinary workers, banks have already profited.

Economists call this the Cantillon Effect, named after the 18th-century economist who first described it. Money doesn’t enter the economy evenly; it enters at specific points. Those closest to the source benefit. Those furthest away suffer.

Think of ripples in a pond. Someone throws a stone. The impact is strongest at the center. By the time ripples reach the edge, they’re weak and diluted.

Money works the same way. The Fed throws new money into the economy. Banks at the center receive it first while it still has full purchasing power. As the money ripples outward to Wall Street, to corporations, to wealthy investors, each group receives it before prices rise.

By the time money reaches ordinary workers, prices have already risen. Wages increase eventually, but they lag inflation.

If you’re near the money printer. government officials, bankers, Wall Street traders, wealthy asset holders, and you win. You receive new money before inflation hits. You can buy assets that then inflate in nominal terms, making you wealthier.

If you’re far from the printer. workers, savers, retirees on fixed incomes, and you lose. By the time new money reaches you, prices have already risen. Your wages increase slower than inflation. Your savings lose value. Your fixed income buys less each year.

Fiat money is a wealth transfer system. From the poor to the rich. From the powerless to the powerful. From those who work and save to those who control the money supply.

It’s not an accident. It’s not a side effect. It’s how the system works.

Dorothy Martinez worked as a seamstress. As far from the money printer as you could be. The Fed didn’t consult her before creating new dollars. Banks didn’t offer her cheap loans before inflation hit. She received no assets that appreciated as the money supply expanded.

She just worked, saved, and watched her purchasing power evaporate.

While she struggled, others prospered. Not because they worked harder. Not because they were smarter or more deserving. But because they were closer to the printer.

The banker who opened her account in 1971 probably did fine. His bank received cheap money from the Federal Reserve. He lent it out at higher rates. When inflation hit, his salary increased. His investments appreciated. He retired comfortably.

This is the Cantillon Effect in action. Distance from the money printer determines winners and losers. And that distance is not random. It’s determined by wealth, power, and access.

What Soft Money Creates

The experiment with unlimited fiat money has been running for over fifty years now. The results are becoming undeniable.

Dorothy Martinez was one of millions who trusted the system, saved carefully, and watched their life’s work evaporate. She died not understanding what had happened. Not knowing that the rules changed the year she retired. Not realizing that sound money had been replaced with something fundamentally different.

Since 1971, the consequences have compounded in ways that go beyond simple inflation.

Global debt has exploded to levels that would have been impossible under the gold standard. The United States federal debt was $400 billion in 1971. Today it exceeds $36 trillion. Corporate debt, household debt, consumer debt. All skyrocketed. This wasn’t coincidence. It was the predictable result of removing constraints on money creation.

Asset prices inflated dramatically. Houses, stocks, commodities. Everything rose in nominal terms. Not because they became more valuable, but because the measuring stick shrank. The median U.S. home cost $25,000 in 1971. Today it’s over $400,000. Same house. Different money.

The gap between wealthy and everyone else widened into a chasm. The wealthy owned assets that inflated with the money supply. Workers relied on wages that lagged inflation. Every round of money creation widened the gap.

And every year, the problem accelerates. More spending. More printing. More transfer of wealth from those who earn to those who control the printer.

But fiat money didn’t just change economics. It changed something deeper.

It changed how people think about time. About saving. About the future. About debt.

Dorothy saved for forty years because saving made sense under the system she understood. But the system changed beneath her feet. And the new system punished exactly the behavior it once rewarded.

That new system, the culture built on soft money, is what comes next.