The Machine We Built

Issue 21

By David Thomas Graves

When the Dollar Lost Its Anchor

The Federal Reserve we live with today was not built overnight. It was reshaped in two decisive moves, first by Franklin Roosevelt in 1933 and then by Richard Nixon in 1971. Those two breaks changed what money was, how Americans could use it, and who ultimately controlled its value.

In 1933, deep in the Great Depression, FDR signed an executive order that made it illegal for Americans to hold most forms of gold. Citizens were forced to turn in their coins, bullion, and certificates to the government in exchange for paper dollars. The law allowed people to keep only a token amount of gold, mostly for jewelry or collectible coins, but the principle was gone. For the first time in American history, workers and families were stripped of the right to use gold as a personal store of value. Their wealth could no longer be anchored outside the reach of government. Gold ownership was no longer freedom. It was contraband.

That was the personal gold standard. Ordinary citizens could no longer use gold to check the power of the dollar. The system still maintained a connection to gold at the institutional level, but for workers, the anchor was already cut. Trust had replaced convertibility.

Nixon finished the job in 1971. Up until that point, while individuals could not redeem gold freely, foreign governments and central banks still could. If the dollar weakened, they had the right to demand gold from U.S. reserves in exchange for their paper. That tether, however strained, kept the dollar tied to something real. Nixon ended it in one televised announcement. From that moment forward, the dollar was no longer redeemable for gold,  not by citizens, not by foreign governments, not by anyone.

That move destroyed the institutional gold standard. What had once been a financial staple, a bedrock store of value, was transformed into something else entirely. Gold was no longer money. Gold became a commodity, a tradable asset like oil or wheat. The dollar, once tethered however loosely to scarcity, was now pure fiat. It had value only because the government declared it did.

This shift mattered. The dollar’s discipline had always come from its link to gold. Once that discipline vanished, the only guardrail left was the judgment of the Federal Reserve and the restraint of politicians. For workers, that meant their paychecks, their savings, and their retirements were no longer protected by a tangible anchor. They were protected only by trust in a system built on debt.

Yet gold did not disappear. Stripped of its role as the backbone of money, it became the hedge. It became the fallback for those who saw what was coming. While it could no longer force discipline on the dollar, it could still act as a shield against debasement and inflation. The old anchor became the new insurance policy.

This was the moment money manipulation became not the exception but the system itself. The gold standard had been dismantled. The fiat standard, controlled by the Federal Reserve, untethered from scarcity, fueled by politics,  had been born.

The Inflation Decade

Once Nixon cut the dollar loose from gold, the consequences came quickly. Without the tether, the only real limit on government spending and central bank expansion was discipline. And discipline is a scarce resource in Washington.

The 1970s became a decade of inflation. Oil shocks hammered the economy, wages and prices chased each other upward, and the cost of living spun out of control. For workers, the paycheck became a cruel joke. You could earn more every year and still fall behind, because the value of the dollar eroded faster than your wages rose. Families watched grocery bills double. Mortgages became unaffordable. Savings accounts, once seen as a bedrock of security, lost value in real time.

This was the world of “stagflation”, stagnant growth paired with runaway prices. The very scenario the Fed was created to prevent had arrived, only now it was fueled by the new freedom of fiat money. The government could spend, the Fed could print, and there was no gold left to restrain them.

By the end of the decade, confidence in the dollar was collapsing. Workers and retirees had no faith that their money would hold value. Foreign governments questioned whether America could keep its promises. The Fed had to act, and act hard.

Enter Paul Volcker. Appointed as Fed Chair in 1979, Volcker was willing to do what no politician would dare. He jacked up interest rates to levels unseen in modern America, pushing them above 20 percent. Credit froze. Businesses collapsed. Unemployment surged into double digits. For workers, the pain was immediate and brutal. Families lost homes. Factories shut down. A generation of middle-class Americans carried scars from the Volcker shock.

But the dollar survived. Inflation was beaten back. Confidence in American money was restored, at least for the time being. Volcker proved that the Fed could still impose discipline, but it did so by crushing workers in the process. The lesson was clear. Without gold, stability could still be enforced, but it would come through policy choices that balanced on the backs of ordinary people.

The 1970s taught us something that too many have forgotten. When the dollar lost its anchor, the cost of discipline shifted from the government to the worker. Stability was no longer automatic. It had to be manufactured, and the raw material was your paycheck, your job, and your savings.

Debt as Currency

After the Volcker shock of the early 1980s, America entered a new era. Inflation had been broken, but not by restoring discipline. It was broken by resetting the game. The dollar was no longer anchored to gold, so the Fed found a new anchor: debt.

This is the part of the story that almost no one tells. We think of debt as something personal, something shameful, something to be paid off as quickly as possible. But in the American system after 1971, debt is not just a personal burden. Debt is the fuel of the entire financial machine.

Here is how it works. Every time you borrow money, you are not just taking on a loan. You are creating money. When you sign the papers for a mortgage, the bank does not reach into a vault of savings to hand you cash. It creates a new deposit in your name. That deposit is money that did not exist before. The bank’s ability to do that comes from the Federal Reserve, which sets the rules for how much lending can occur and what counts as reserves.

Your mortgage is not just a loan. It is part of the money supply. Your credit card balance is not just revolving debt. It is liquidity flowing through the system. Your student loan is not just a financial burden you carry into adulthood. It is an asset on someone else’s balance sheet, the raw material that allows banks to expand, investors to speculate, and the Fed to measure “growth.”

The Fed’s policies are built on this reality. Lower interest rates make it cheaper for you to borrow, which creates more deposits, which expands the money supply. Higher interest rates make it harder for you to borrow, which contracts the money supply. The machine is not just manipulating government bonds. It is manipulating your willingness, and often your desperation, to take on debt.

This is why America shifted in the 1980s into a credit-driven economy. Wage growth slowed, but access to borrowing exploded. Want a home, a car, or a degree? Borrow. Want to start a business? Borrow. Want to keep up with rising costs when your paycheck stagnates? Borrow. The Fed does not just tolerate this. It encourages it. Because your debt is the system.

By the late 1990s and 2000s, this logic was fully entrenched. Credit cards replaced savings. Mortgages replaced wages as the measure of middle-class status. Student loans became the default path to education. Every dollar borrowed expanded the financial system, inflated asset prices, and made the machine look like it was growing.

But there is a cost. The system cannot survive without ever-expanding debt. Workers are trapped in a loop where their own liabilities become the collateral for the country’s growth. The Fed manages the economy not by building real value but by managing how much debt you can take on before you break.

This is not conspiracy. It is plumbing. The Federal Reserve regulates the flow of money, and in the fiat era, money and debt are the same pipe. The government borrows, institutions borrow, and you borrow. Every layer feeds the system. Without your signature on that line of credit, the machine slows. Without your willingness to carry debt, the money supply contracts. The American worker has become not just a producer of labor but a producer of money through debt.

That is the machine we got.

The Housing Mirage

By the early 2000s, the machine had found its fuel of choice: housing debt. For the Federal Reserve, banks, and Wall Street, nothing created more liquidity, more leverage, or more opportunity than the American dream of owning a home.

Here is how it worked. For decades, banks were expected to lend carefully. A mortgage required down payments, proof of income, and evidence that a borrower could reasonably repay. That discipline, however, was a bottleneck. Careful lending meant limited growth. And in a system where debt itself was the money supply, growth meant finding ways to hand out more loans.

So the rules changed. Regulations loosened. New products appeared. By the mid-2000s, banks were handing out loans to almost anyone who asked. No income verification. No proof of employment. Sometimes not even a credit history. They were called “NINJA loans”, no income, no job, no assets. It did not matter if a family could actually pay the mortgage. What mattered was that a loan had been created.

Why. Because a loan is not just a contract. It is money. When the bank issued a mortgage, it created new deposits. Those deposits rippled through the economy, inflating housing demand and sending home prices skyrocketing. For the Fed, this looked like growth. For Wall Street, it looked like opportunity.

Once the mortgage was issued, the bank did not have to hold the risk. Thanks to deregulation, it could package the loan together with thousands of others, slice the package into tranches, and sell the pieces as securities. These mortgage-backed securities could then be repackaged again into even more complex products, collateralized debt obligations, credit default swaps,  financial inventions designed to multiply profits from the same pool of debt.

The logic was perverse. The worse the loans, the bigger the pool of mortgages available to securitize. And the bigger the pool, the more derivatives could be created. Banks were incentivized to hand out loans to people who would never repay, because the loan itself was valuable not as a promise of repayment, but as raw material for Wall Street’s financial engineering.

This was not a system of lending. It was a system of manufacturing. Mortgages became assembly-line products, created as fast as possible to feed demand for securitization. Workers who just wanted a home were the input. Wall Street’s balance sheets were the output.

And through it all, the Fed kept the fuel cheap. Interest rates were low. Liquidity was abundant. The machine hummed with the illusion of prosperity. Rising home values made families feel wealthier, even as they were being shackled with debt they could not sustain. Wall Street booked record profits. The government celebrated record homeownership.

It was a mirage. But it was a mirage built on the very mechanics of the Federal Reserve’s debt-driven money creation.

By 2007, the illusion began to crack. The mountain of mortgages that had been handed out with no income checks, no job verification, and no hope of repayment finally came due. Borrowers started defaulting. At first, it looked like a small problem, a few bad loans at the margins. But those “few” bad loans were the foundation of the entire financial system.

Remember, the mortgages themselves were never the point. They were the raw material for Wall Street’s derivative machine. Once borrowers stopped paying, the complex securities built on top of those mortgages began to unravel. Tranches that had been stamped AAA by ratings agencies collapsed in value overnight. Collateralized debt obligations, which had been treated like gold-plated investments, turned out to be little more than toxic bundles of bad bets.

And because these products had been spread across the entire global financial system, the contagion was immediate. Banks stopped trusting one another. Interbank lending froze. Credit markets seized up. What had looked like an unstoppable engine of growth suddenly looked like a Ponzi scheme.

For ordinary Americans, the pain was swift and brutal. Millions lost their homes. Neighborhoods turned into ghost towns. Families who had been told that housing was the safest investment discovered they were underwater, owing more than their homes were worth. Retirement accounts evaporated as markets tanked. Jobs disappeared as businesses starved for credit.

Wall Street, meanwhile, went into survival mode. The same firms that had gorged themselves on mortgage-backed securities and derivatives suddenly declared they were “too big to fail.” And the Federal Reserve agreed.

The Fed flooded the system with liquidity, slashed interest rates to near zero, and launched emergency programs to buy toxic assets directly from the banks. Trillions of dollars in support poured into the financial sector. The institutions that had engineered the collapse were rescued. The workers who had been the raw material for the debt machine were left to fend for themselves.

This was the true revelation of 2008. The Federal Reserve was not just a neutral referee. It was a partner. It had enabled the debt explosion by keeping credit cheap. It had looked the other way as banks handed out predatory loans. It had benefited from the appearance of growth while workers sank deeper into debt. And when the system collapsed, the Fed made its priorities clear. Save the banks. Stabilize Wall Street. Workers could wait.

The bailout restored the machine, but it also rewrote the social contract. Debt had been exposed not as a personal failing but as a systemic tool, manufactured and weaponized by institutions. The worker’s home had been turned into a financial instrument. Their debt had been sliced, diced, and traded until the connection between borrower and lender was meaningless.

And the Federal Reserve had stood at the center of it all, pulling the levers of liquidity and watching the system devour itself.

The machine did not die in 2008. It was reborn.

The Age of Quantitative Easing

When the dust settled after the 2008 crash, the Federal Reserve had a choice. It could admit that the debt-driven machine had failed, reform the system, and rebuild an economy rooted in real wages and production. Or it could rescue the machine, double down on debt, and hope the illusion of growth could be sustained.

It chose the second path.

The tool was called Quantitative Easing, or QE. In theory it sounded technical, even dull. In practice it was revolutionary. Instead of just lowering interest rates, the Fed began creating money on a massive scale and using it to buy government bonds and mortgage-backed securities directly from the market. By doing so, it injected trillions of dollars into the financial system, inflating the price of assets across the board.

This was not a one-time emergency program. It became the new normal. Every time the markets wobbled, every time growth faltered, the Fed returned with another round of QE. The message was clear. Wall Street would always have a backstop.

For investors and institutions, it was a golden age. Stocks soared to record highs. Corporate debt exploded as companies borrowed cheaply to buy back their own shares. Housing prices rebounded, not because workers suddenly had more money, but because liquidity was flooding the system. Wealth became concentrated in financial assets, and financial assets became concentrated in the hands of the wealthy.

For workers, the story was different. Wage growth stagnated. The cost of living crept higher. Homeownership slipped further out of reach. The savings account, once a symbol of stability, became meaningless in a world where interest rates hovered near zero. Families were pushed deeper into credit card debt, auto loans, and student loans just to keep pace.

The Fed celebrated “recovery.” But what had been recovered was not the security of the worker. What had been recovered was the profitability of the system. QE did not rebuild the middle class. It rebuilt the balance sheets of banks and investors. It turned the stock market into a symbol of national health while ignoring the paycheck as a measure of real prosperity.

This was the quiet transformation. The Fed had gone from lender of last resort to permanent market-maker. It no longer existed just to stabilize in crisis. It existed to guarantee that asset prices would not be allowed to collapse. Capitalism had been refitted into a system where markets could never lose for long, but workers could.

The promise of stability, once anchored in protecting the public from financial panics, had been rewritten. Stability now meant protecting asset prices at all costs. Workers were not the beneficiaries. They were the collateral.

From Crisis Tool to Permanent Crutch

By the time the pandemic hit in 2020, the machine was already running on fumes. The Federal Reserve had spent more than a decade using cheap credit and quantitative easing to keep markets inflated. What had once been billed as extraordinary, temporary interventions had become permanent features of the economy. Every market shock, every downturn, every tremor in the financial system was met with the same response: pump more liquidity, buy more assets, and hope confidence would hold.

COVID made the dependence undeniable. Entire sectors of the economy shut down overnight. Tens of millions of workers were sent home. Businesses faced extinction. Instead of letting the correction run its course, the Fed went nuclear. Interest rates were slashed back to zero. Trillions of dollars in bonds and securities were bought outright. New emergency facilities were rolled out to support corporate debt, municipal bonds, even junk-rated securities. The balance sheet of the Federal Reserve exploded to historic levels.

Markets soared. Stocks hit record highs in the middle of a global crisis. Wealth for the top ten percent ballooned. And yet, for the average worker, the reality was chaos. Job insecurity, rising debt, collapsing savings, and an economy held together by temporary stimulus checks that barely covered rent. The Fed did not just blur the line between Wall Street and Main Street. It erased it. Policy became indistinguishable from rescue.

This is the Fed we got. A central bank that no longer acts as a referee but as a permanent crutch for a financial system addicted to debt. A machine that manages the economy not by anchoring money to value, but by anchoring money to liquidity. The consequences are everywhere. Housing markets distorted by speculation. Student loans treated as a profit center rather than an investment in education. Retirement savings gambled on inflated markets because safe assets yield nothing.

What started with FDR’s confiscation of personal gold, what accelerated with Nixon’s destruction of the institutional gold standard, has now reached its logical conclusion. The United States runs on a fiat system where debt is money, markets cannot fail, and the Fed is trapped in a cycle of rescue, inflate, and rescue again.

The worker is told this is stability. In truth, it is dependency. The Federal Reserve has become both doctor and drug dealer. Every injection of liquidity postpones collapse, but every injection deepens the addiction. There is no anchor, no discipline, no natural limit. Only debt, only intervention, only the illusion that the system is sustainable.

This is the machine we got.

And the next question is the only one that matters. How long can it last.

© David Thomas Graves 2025