the debt and currency crisis periods—typically happen quickly, lasting only months to up to three years, depending
on how long it takes the governments to exercise these moves. However, the ripple effects of them can be long-
lasting. For example, these circumstances can lead to reserve currencies stopping being reserve currencies. Within
each of these currency regimes there are typically two to four big debt crises—i.e., big enough to cause banking
crises and debt write-downs or devaluations of 30% or more—but not big enough to break the currency system.
Because I have invested in many countries for about 50 years I have experienced dozens of them. They all run the
same way, which is explained in greater depth in my book Principles for Navigating Big Debt Crises.
The Monetary System That We Are in, from Its Beginning until Now
The dollar became the world’s leading reserve currency when the United States became the world’s strongest
economic and military power at the end of World War II. Since then having the world’s leading reserve currency
has been critical to the United States sustaining and extending its power. That is because a great power comes from
being able to create money and credit in the currency that is widely accepted around the world as a medium of
exchange and a storehold of wealth. As a result of having the ability to print the world’s currency the United
States’ relative financial economic power is multiple times the size of its real economic power.
At the risk of boring you by repeating some of the things I already told you, I will now review the US case and the
circumstances that led to the US and the dollar putting the world in the position that we are now in.
In brief, the new world order began after the end of World War II in 1945, with the Bretton Woods
agreement having put the dollar in the position of being the world’s leading reserve currency in 1944. The
US and the dollar naturally fit into that role because at the end of the war, the US had around two-thirds of the
world’s gold held by governments (which was the world’s money at the time), accounted for 50% of the world’s
economic production, and was the dominant military power. The new monetary system was a Type 2 (i.e.,
claims on hard money) monetary system, in which “paper dollar” claims on gold could be exchanged by
other countries’ central banks for an ounce of gold at a price of $35/ounce. It was then illegal for individuals to
own gold because government leaders didn’t want gold to compete with money and credit as a storehold of wealth.
So, at the time, gold was the money in the bank and the paper dollars were like checks in a checkbook that could
be turned in for the real money. At the time of the establishment of this new monetary system there was $50 of
paper money in existence for each ounce of gold the US government owned, so there was nearly 100% gold
backing. Other major countries that were US allies (e.g., the UK, France, and the Commonwealth countries) or
under US control (Germany, Japan, and Italy) had US-controlled currencies that were linked to the dollar. In the
years that followed, to finance its activities, the US government spent more than it took in in tax revenue so it had
to borrow money, which created more dollar-denominated debt. The US Federal Reserve allowed the creation of
a lot more claims on gold (i.e., dollar-denominated money and credit) than could actually be converted into
gold at that $35 price. As the paper money was turned in for the hard money (gold), the quantity of gold in the US
bank went down at the same time as the claims on it continued to rise. As a result, the Bretton Woods monetary
system broke down on August 15, 1971 when President Nixon, like President Roosevelt on March 5, 1933,
defaulted on the US’s promise to allow holders of paper dollars to turn them in for gold. Thus the dollar
devalued against gold and other currencies. That is when the US and all countries went to a Type 3 fiat
monetary system. If you want to read a great description of this process of figuring out how to go from the old
monetary system to the new fiat one, I recommend Changing Fortunes by Paul Volcker, who was the leading
American negotiator of how the new monetary system would work.
This move to a fiat monetary system freed the Federal Reserve and other central banks to create a lot of
dollar-denominated money and credit, which led to the inflationary 1970s, which was characterized by a flight
from dollars and dollar-denominated debt to goods, services, and inflation-hedge assets such as gold. That panic
out of dollar debt also led interest rates to rise and drove the gold price from the $35 that it was fixed at in 1944
and officially stayed at until 1971 to a then-peak of $670 in 1980.
With the money and credit managed this way in the 1970s it was profitable to borrow dollars and convert them into
goods and services, so many entities in many countries borrowed dollars largely through US banks to do that. As a
result, dollar-denominated debt grew rapidly around the world, and US banks made a lot of money lending it to
these borrowers. This lending led to the classic debt bubble part of the debt cycle. The panic out of dollars and
dollar-debt assets and into inflation-hedge assets, as well as the rapid borrowing of dollars and the getting into