In 1971, President Nixon permanently dislodged the USD from the gold standard, ending nearly forty years of global monetary policy in which the USD was equal to a fixed price for gold. In its place, Nixon decided to introduce a floating currency exchange system called Fiat which remains in place today.
There was a time when wealth meant the collective value of your material goods. Before the creation of the Federal Reserve System, the American economy operated on much simpler terms. There was no speculative investment in stocks and bonds, few debt financing schemes to fund one project after another, and less money being printed by the government.
Making money in America may have been physically exhausting work — but at least the payoff was in real material wealth and within everyone’s grasp.
Take the case of Cornelius Vanderbilt, for example. In today’s dollars, he would be roughly twice as rich as Jeff Bezos, the founder of Amazon. How is it that Vanderbilt, who died in 1877, could have amassed so much more material value than Bezos? Because back then the economy was not mired in debt financing schemes and a plurality of American dollars that inflates the price of everyday living. Curiously there were less than 20 million people in America. This means that Cornelius would have achieved trillionaire status in today’s dollars and today’s population.
Smaller Economy, Hard Working Population
By all estimates, life in 1830 was rough compared to 2018. Electricity was in its infancy, there was only coal heating in homes, and department stores were a new hot thing.
In the years in which Vanderbilt made his money, the economy was much smaller. This was partly due to demographics: there were simply fewer people in the country, so the potential for profit was lower than today. However, it was mainly due to the fact that the economy was cash poor. Legal tender only came in the form of gold, silver and copper coins, and credit lending was kept to a minimum.
These conditions meant three important things:
1. People Were Poorer. The average American needed far less money to get by. A loaf of bread cost a couple of cents, a bag of potatoes even less. The nature of industrialized labor was such that work was hard to come by, so a large majority of the population learned to live with less and make a living using their hands and whit to create value. They were forced to save up and had no option of buying things on credit like we can today. The reality is that people are just as poor today as they were back then — it’s just the credit system makes it seem like we are wealthy because of all the material goods we have now.
2. The Gold Standard Minimized. Borrowing and Work Paid for Livelihoods not Loans. The gold standard kept the banks in check because they were only able to lend out as much gold as they had on site. What the gold standard ensured was that everyone pretty much played by the same rules — including the government — and no one could borrow more than they were worth. That way, when someone like Vanderbilt actually found success, his material value was far more than the inflated value we see all around us today. Vanderbilt and everyone else did not work to pay off loans — they worked and kept their money. Think about the number of hours you work paying for your mortgage and paying taxes towards government debt. By the time the banks are paid, there is very little left.
3. Life Was Simpler, and Work Was Harder. Vanderbilt managed steamboat lines across the Hudson River. He began working at the age of 11 with only a third-grade education and through hard work and cunning built a massive transportation business off the manual labor of thousands of people. With automation in ascendance today, all we can say about Jeff Bezos is that he creates a lot of value for his shareholders but not much money.
Wealth Today is Mostly Asset Appreciation, Not Hard Money in the Bank
In some ways, Cornelius Vanderbilt was quite lucky. Born in a time when vast portions of the country had yet to be connected in a national economy, he was able to fund the creation of railroads that brought commerce across the country and remain fundamental assets in our economy to this day. What he earned was real, physical, material wealth that contributed greatly to the American project.
Can we say the same thing about Bezos? Not quite. Bezos owns plenty of stocks in the companies he helped to build, but these stocks do not translate directly into material wealth. They are tied up in debt repayment schemes set up to build the companies in the first place. Much like the American economy since the end of the gold standard, the wealth Bezos has is built off the back of debt financing on an inflated quantity of American dollars. On the other hand, Jeff. Bezos and Amazon deliver the product with service to almost everyone in America routinely — not to mention the rest of the world. It is a staggering accomplishment compared to Cornelius. Vanderbilt, and yet the Vanderbilt fortune will remain unmatchable as long as debt dominates our economy.
Even though it looks as though Bezos is one of the richest men in history, a lot of his wealth is virtual based on the debt-driven economy we live in today. We should strive to create an economic system more like the one in which Cornelius Vanderbilt earned his fortune. In those days, the scarcity of physical currency and tight fiscal responsibility of the banks and government alike meant an economic system that accurately reflected material conditions. However, we can make things better than ever by reducing debt financing with higher interest rates while creating demand through direct monetary supply from the federal reserve. The key to producing Vanderbilt-like wealth is to engineer the economy to deliver products and services that are not produced by debt bearing corporations. In other words, higher interest rates reduce borrowing and inflation risks. This can then be offset by demand side schemes issued by the federal reserve, and allows for true wealth creation as opposed to virtual asset appreciation.