October 29th, 1929.

>> [music]

>> Black Tuesday. The stock market dropped

by 12% in a single day.

Fortunes vanished in hours. Banks

collapsed in waves. Businesses shut

down. By 1933, 25% Americans had no job.

Bread lines stretched for blocks.

Families who once owned homes were now

living in cardboard shacks and

Hoovervilles.

"What am I supposed to tell the kids?"

"That's okay, Jeff. Tell them we'll

figure it out.

We always do." They didn't figure it

out, not for a long time. Their kids

grew up thinking full meant not hungry

enough to cry. So, Franklin Roosevelt

came in and threw everything at it.

Public works,

>> [music]

>> relief programs, new agencies, big

government on a scale America had never

really seen before. The New Deal put

millions [music] back to work building

bridges, dams, and highways. And to be

fair,

it helped. But it did not finish the

job. [music]

10 years after the crash, in 1939,

unemployment was still hanging around

15%. Yet, suddenly,

we interrupt this broadcast. The

Japanese have attacked Pearl Harbor. The

United States is at war.

And overnight, everything changed.

Factories that had been gathering

[music] dust roared back to life. But

now they were building tanks instead of

tractors. 17 million new jobs appeared.

Ford's assembly lines started rolling

out bombers instead of cars. Defense

[music] spending rocketed from 1.4% of

GDP to over 37%. Unemployment dropped

below 2%. Jeff got called to the

Cleveland tank plant. For the first time

in years, his family had a steady

paycheck. And just like that, on paper,

America looked incredible. So, later

Keynesian economists took one look at

this and said, [music]

"Uh of course. When people stop

spending, the government spends for

them.

>> [music]

>> World War II proved it. Case closed,

right?"

Wrong.

Let's test this so-called wartime

prosperity.

It's 1944. Jeff's family sits around

their kitchen table. We're out of sugar

[music] coupons until next month. Again?

And the meat allocation got cut. 2 lb

for the whole [music] family for the

week.

Well, at least according to the

newspaper, we've never been more

prosperous. Great.

I'll tell the children to eat the

newspaper.

This was the reality behind the numbers.

Yes, GDP was soaring.

But Americans were living under some of

the strictest rationing in US history.

Gasoline, meat, sugar, coffee, cheese,

even shoes rationed.

Car production had been banned since

1942.

By 1944, almost everything was

controlled except eggs and dairy.

Americans were saving over 25% of their

income.

Not because they'd all suddenly become

financially responsible. [music]

There was basically nothing to buy.

That's the trick.

>> [music]

>> The wartime boom was a statistical

illusion.

GDP goes up the same $10 million

whether a family builds a house or the

government builds a bomb and drops it

into the sea.

Same number.

Very different outcome for the family.

>> [music]

>> Jeff was earning more money than ever.

And his family was eating less than when

he was broke.

>> [music]

>> But the real test came after the war

ended.

1945, the guns go quiet, 10 million

soldiers are about to flood the job

market, government spending is about to

drop over 60%.

Holy crap.

>> [music]

>> Without government spending, we're

looking at the greatest period of

unemployment and industrial dislocation

any economy has ever faced. That's a

bold claim, Professor Samuelson. I will

literally [music] win the Nobel Prize.

Write it down.

I resonate with you, Professor. I'm

predicting an epidemic of violence.

And you are?

Also a future [music] Nobel laureate.

You're welcome.

Gentlemen, I am President Truman and I

also say [music] mass unemployment is

obvious. It's coming. So, everyone

agrees?

Without government [music] spending,

America collapses.

They were completely wrong.

Bomb factories became appliance

factories. Car plants switched from

tanks to Chevrolets. Shipyards pivoted

[music] from destroyers to fishing

vessels. Over 20 million people were

released from war-related work.

Unemployment peaked [music] at just

3.9%.

Truman himself later called it "The

swiftest and most gigantic changeover

that [music] any nation has made from

war to peace."

The economy didn't just survive the

spending cuts, it thrived because of

them.

Resources locked inside the war machine

flowed back into making things [music]

people actually wanted.

The Keynesian prediction was tested in

real time. It failed, but nobody updated

the textbooks. So, if the war didn't fix

the economy,

what did?

To answer that, we have to go back to

the moment the real damage started.

1914, World War I.

Countries are mobilizing millions of

soldiers, digging trenches across entire

continents,

building battleships, artillery,

uniforms, all of it, all at once, on a

scale the world has never seen.

All of it costs money, enormous,

staggering amounts of money.

Now, normally, a government funds a war

the same way it funds everything else,

taxes.

But, there's a limit to how much you can

squeeze out of your citizens, especially

when half of them are already in the

trenches.

Tax revenue runs out, the treasury runs

dry, and the war isn't over.

So, what do you do?

Well, just print it.

But, there was a problem. Back then,

>> [music]

>> most of the world was on the gold

standard, which meant governments

couldn't just print whatever they

needed. Every dollar, every pound, every

franc had to be backed by actual gold.

So, one by one, they ditched it. Gold

standard gone. Then the war ended, but

the printing did not.

Countries kept [music] printing money to

make their currency cheaper, which makes

their exports cheaper.

Other countries buy more of your stuff.

Sounds great. Until everyone figures out

the same trick.

France devalued. Britain devalued to

undercut France.

Germany printed so aggressively that a

loaf of bread cost 200 billion marks.

A housewife in Berlin needed a

wheelbarrow full of her life-saving cash

just to buy groceries.

A race to the bottom. Every country

destroying its own money to steal trade

from its neighbors. [music]

In the end, nobody gains an advantage.

All you're left with is money nobody

trusts.

World trade collapsed by 66% between

1929 and 1934.

Bad time for the economy. Good time for

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Back to the video. [music]

People were starving, humiliated, and

convinced the system is broken. So, they

became very interested in any man

standing on a podium promising to fix

everything.

Germany chose Hitler.

Italy chose Mussolini. Japan chose

military expansion.

The path from a printing press to a

battlefield was shorter than anyone

imagined.

So, by 1944,

delegates from 44 nations gather at a

giant hotel in New Hampshire and finally

figure out the way to fix the economy.

It is called the Bretton Woods system.

And their solution was almost

offensively boring.

>> [music]

>> Every currency gets pegged to the US

dollar. And the US dollar gets pegged to

gold.

$35 an ounce, fixed.

That was the anchor.

Now, if a government got a little too

excited with the printing press, there

was a limit. A hard stop.

No more turning your currency into

confetti just to [music] goose exports

for 6 months.

And for the first time in decades, money

meant something again.

Take Friedrich in post-war Germany.

His city is rubble. His father's machine

shop is half destroyed. But now, the

money in his pocket is tied to a money

[music] system he can actually trust.

So, he takes out a loan, rebuilds,

hires, expands. Multiply Friedrich by

millions.

That's the miracle.

Germany boomed. Japan boomed. France

boomed. Countries that had just been

flattened by war came roaring back.

Why? Because underneath all the

reconstruction and industry was one

boring, but essential foundation. Stable

money.

Money with an anchor.

Money politicians [music] couldn't

casually print. That was the real cure.

But, the system still has one fatal

flaw.

Bretton Woods told every country on

Earth, "Tie your currency to the dollar.

Trust the dollar.

But it never answered one question.

[music] Who watches America?

If France printed too many francs, the

peg would break.

If Japan got reckless with the yen,

[music]

markets would punish them overnight. But

the United States was the peg.

America could spend money it didn't have

>> [music]

>> and force the rest of the world to

accept the bill.

For a while, America behaved itself.

>> [music]

>> Then came the 1960s, Vietnam, Lyndon

Johnson's Great Society, [music] a war

overseas and a welfare state at home.

Sir, can we afford both?

Why should we?

We can just do it?

And so America flooded the world with

dollars.

>> [music]

>> Yet, the gold in Fort Knox stays the

same. So now there were way more dollars

floating around than gold to back them.

>> [music]

>> And one man looked at this arrangement

and said, "This is nonsense." Charles de

Gaulle, [music] president of France,

realized that if every country tried to

cash in its dollars for gold at once,

America would run out. So he decided

France would not be the idiot standing

at the back of the line.

>> [music]

>> He sent ships and planes to America in

1965 and said, "Bonjour.

>> [music]

>> We would like to withdraw our gold. You

print more dollars without more gold

behind them. The dollars the rest of us

hold become worth less. That is robbery

with better tailoring."

Other countries started getting the same

idea.

>> [music]

>> By 1966, the US had just 3.2 billion

dollars in gold to cover 14 billion

dollars [music] in foreign dollar

claims.

In 1971, West Germany left Bretton Woods

entirely.

Britain requested 3 billion dollars in

gold. A full-blown bank run. Except the

bank was the United States of America.

So on August 13th, 1971, Nixon [music]

gathered his top advisers at Camp David.

No press,

no Congress,

just a room full of men staring at

numbers and sweating.

Two days later, Nixon interrupted

millions of Americans watching

television and announced,

"My fellow Americans,

effective immediately,

>> [music]

>> the United States will suspend the

convertibility of dollars into gold.

This is a temporary measure

that will probably last [music] forever.

Thank you."

That was it. The gold anchor was gone.

Every currency in the world was now

backed by nothing but a government's

promise [music] not to print too much.

So, how did that go?

Gold, fixed at $35 under Bretton Woods,

hit over $5,000 by 2026.

Within 2 years of Nixon's move, the oil

crisis hit,

inflation surged, [music] growth

stalled.

Economists were so confused, they had to

invent a new word for it, stagflation.

Then came '74, '79, [music]

the savings and loan crisis, the dot-com

bust, 2008.

Every decade, [music]

another mess.

Every mess, the same solution.

Print more.

And every time somebody questioned

whether this was sustainable, someone

would drag out the same old line,

"Well, World War II proved government

spending fixes the economy."

No, it didn't.

But the myth survived because it was

useful.

If people believed war spending created

prosperity, then deficits sound smart,

printing sounds necessary, [music]

and every crisis becomes an excuse to do

more of the thing that caused the

instability in the first place.

As a wise man once said, "There is no

subtler, no surer means of overturning

the existing basis [music] of society

than to debauch the currency."