should make “dollar cost average” purchases—i.e., buy consistently so that one would buy on the dips as well as
the highs. Because of that confident psychology, which was the opposite of the conservative psychology that
existed in the 1950s, the stock market hit its high in 1966, which marked the end of the good times for 16 years,
until the 1982 stock market bottom, though nobody knew it at the time because the mood was one of great
optimism and the decline from the market top looked like one of those dips that one should buy into.
It was during the 1960s that my own direct contact with events began. I started investing in 1961 at age 12. Of
course I didn’t know what I was doing at the time and had no appreciation for how lucky my contemporaries and I
were. I was born at the right time (just after the war at the beginning of a post-war Big Cycle upswing brought
about by the early upswing in the long-term debt cycle and a dominant world power that produced decades of
peace, prosperity, and bull markets) in the right place (in the United States, which was the most prosperous and
powerful country in the world). I was also very lucky to be raised by parents who loved and cared for me in an era
when the American Dream of equal opportunity allowed me to get a good public school education and come out
into a job market that gave me equal and excellent opportunity at an exciting time of idealism and dreaming big
that inspired me. I vividly remember John Kennedy, a charismatic leader who inspired the nation to journey to the
moon and to fight to eliminate poverty and assure civil rights.5 One could dream big, work hard, and make those
dreams happen, and successful people were role models then. In the 1960s it was great to be middle class. The
United States was the leading manufacturing country so labor was valuable. Most adults could get a good job, and
their kids could get a collage education and rise without limitation. Since the majority of people were middle class
the majority of people were happy.
Throughout the prosperous 1960s, the US did the classic things that helped the world to become more dollarized.
For example, US banks rapidly increased their operations and lending in foreign markets. In 1965, only 13 US
banks had foreign branches. By 1970, 79 banks had them, and by 1980 nearly every major US bank had at least
one foreign branch, and the total number of branches had grown to 787.6 Global lending of dollars by American
banks boomed. However, as is typical, a) those that prospered overdid things by operating financially imprudently
while b) global competition, especially from Germany and Japan, increased. As a result, the lending and the
finances of Americans began to deteriorate at the same time as its trade surpluses disappeared.
The Late-1960s Weakening Fundamentals That Led to the End of the
Bretton Woods Monetary System
As explained in Chapter 2, when claims on hard money (i.e., notes or paper money) are introduced, at first there is
the same number of claims on the “hard money” as there is hard money in the bank. However, the holders of the
paper claims and the banks soon discover the wonders of credit and debt. They can lend these paper claims to the
bank in exchange for an interest payment so they get interest. The banks that borrow it from them like it because
they lend the money to others, who pay a higher interest rate so the banks make a profit. Those who borrow the
money from the bank like it because it gives them buying power that they didn’t have. And the whole society likes
it because asset prices and production rise.
After 1945, foreign central banks had the option of holding interest-rate-paying debt or holding non-interest-rate-
earning gold. Because dollar-denominated debt was considered as good as gold, convertible into gold, and higher-
earning because it provided interest (which gold didn’t provide), central banks shrank their gold holdings relative
to their dollar-denominated debt holdings from 1945 until 1971. As explained in the Appendix to Chapter 2, “The
Changing Value of Money,” investors making such a move is a classic behavior and ends when a) the claims on the
real money (i.e., gold) substantially exceed the amount of real money in the bank and b) one can see that the
amount of real money in the bank (i.e., gold reserves) is going down. That is when no interest rate can be high
enough for it to make sense to hold the debt (i.e., claims on the real money) rather than to turn one’s paper money
in for gold. At that time a run on the bank occurs and a default and debt restructuring have to happen. That is what
led to the breakdown of the gold-linked Bretton Woods monetary system.
While the following summary repeats some of what was said in prior chapters, it is appropriate to recall it here.
As is typical of this peaceful and prosperous part of the cycle, in the 1950-70 period there was productive debt
growth and equity market developments that were essential for financing innovation and development early
on and became overdone later. In the 1960s Americans spent a lot on consumption and Germany and Japan,