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How Money Works

The Day Money Stopped Being Real: Nixon and 1971

Ages 10–14 25 min read Advanced

On August 15, 1971, US President Richard Nixon made a televised announcement that changed the world's money forever. He declared that the US dollar would no longer be convertible to gold.

In that moment, every currency on Earth became backed by nothing but trust.

Before 1971: The Bretton Woods System

After World War II, the world's currencies were pegged to the US dollar, and the US dollar was pegged to gold at $35 per ounce. Any country could exchange its dollars for gold at this fixed rate. This was called the Bretton Woods system (named after the town in New Hampshire where the agreement was signed in 1944).

This worked because the US held most of the world's gold and was the dominant economy. But by the late 1960s, the US was spending heavily on the Vietnam War and domestic programs. They were printing more dollars than their gold could back.

The "Nixon Shock"

France, under President Charles de Gaulle, started demanding gold for their dollars — essentially calling America's bluff. Other countries followed. The US was running out of gold.

Nixon's solution: simply stop converting dollars to gold. He said it was "temporary." It's been over 50 years.

What Changed After 1971

The website WTF Happened in 1971 (wtfhappenedin1971.com) collects charts showing dramatic changes that began around this date:

  • Wages stopped keeping up with productivity. Before 1971, as workers produced more, they earned more. After 1971, productivity kept rising but wages flattened.
  • Inequality exploded. The gap between the wealthy and everyone else widened dramatically.
  • Debt skyrocketed. Government and private debt soared — because without the gold constraint, there was no limit to money creation.
  • House prices disconnected from wages. In 1971, a median Australian house cost ~3x the median annual income. By 2024, it was ~13x (CoreLogic/ABS).
  • The US dollar lost over 85% of its purchasing power since 1971.

Fiat Money

Money that isn't backed by a physical commodity is called "fiat money" (from Latin fiat — "let it be done"). Its value comes entirely from government decree and public trust.

Every currency in the world today is fiat money. Its value rests on faith that others will accept it. When that faith is lost — as in Zimbabwe, Venezuela, or Weimar Germany — the currency can become worthless overnight.

Tonight's Question

"Our money isn't backed by gold or anything physical. It's backed by trust. What would need to happen for people to lose trust in the Australian dollar?"

This isn't hypothetical — it has happened to many currencies. What makes Australia different (or not)?

The 1971 Investigation

  1. Visit wtfhappenedin1971.com together.
  2. Look at the charts. Pick 3 that surprise you most.
  3. For each, discuss: is 1971 really the cause? Or is it coincidence?
  4. Research: what happened to Australian house prices, wages, and debt from 1971 to today?
  5. Ask a grandparent: what could they buy with their first week's wages? What can you buy with an equivalent week's wages today?

Go Further

  • Website: wtfhappenedin1971.com — the charts speak for themselves.
  • Documentary: "The Money Masters" (1996) — detailed history of money and banking.
  • Book: The Lords of Easy Money by Christopher Leonard (2022) — how the Fed changed America after 1971.
  • Debate: Should we return to the gold standard? What are the arguments for and against?

What We Simplified

  • 1971 wasn't the only cause. Globalisation, technology, deregulation, and many other factors contributed to wage stagnation and rising inequality.
  • The gold standard had major flaws. It contributed to deflationary spirals and limited governments' ability to respond to crises.
  • Fiat money enables modern economies. Without it, economic growth would be constrained by gold supply. Most economists consider fiat money an improvement — the issue is how it's managed.
  • Correlation isn't causation. The WTF Happened in 1971 charts are provocative but the causal links are debated among economists.

Sources

  • Eichengreen, B. (2011). Exorbitant Privilege: The Rise and Fall of the Dollar. Oxford University Press.
  • Leonard, C. (2022). The Lords of Easy Money. Simon & Schuster.
  • Irwin, N. (2013). The Alchemists: Three Central Bankers and a World on Fire. Penguin.
  • CoreLogic/ABS. "Dwelling Price to Income Ratios." Various years.
  • WTF Happened in 1971. wtfhappenedin1971.com

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