I hear moaning. No, I’m not that guy who rails on about how all our problems will be magically fixed if we go back to the gold standard. It is important to know, though, that at this point in our history our money was no longer pegged to a commodity. Whether this is good or bad is up to you to judge, but either way it is important to note that, when this happened we switched from using money based upon a commodity to money based on fractional reserve banking.
Fractional reserve banking basically means that banks can lend out more money than they hold. The degree to which they can do this is regulated by the federal government. This change caused a massive explosion in the amount of money the United States had, because the currency was now based entirely on a system that allows for fractional lending. In essence we became a debt-based economy.
This situation is not unique to us, by the way. The rest of the world pretty much works on the same system now, though we are the only ones who can get away with printing so much money, since the dollar is the most-widely used reserve currency on the planet.
So we are at the mercy of fractional reserve lending, and the only entity that can limit the insanity of the banks is the federal government – a job at which they consistently fail. When they let the leash slip in the late 1970s and early 1908s on the Savings and Loan industry we got the S&L Crisis of the ‘80s. And when Clinton let the GSEs and secondary mortgage lenders slip in the 1990s and Bush 43 did nothing to reign in those excesses, we got the current housing crisis.
Here is where the illusion of the Clinton prosperity comes apart.
While the disappearance of our Cold War nemesis and the rise of Silicon Valley (both factors that Clinton had absolutely nothing to do with) definitely made the 90s into a time more conducent to financial prosperity, the lion’s share of the money generated under Clinton comes from his administration’s encouragement of incredibly destructive lending policies. If our money supply (and therefore the perception of our economic strength) is dictated by fractional reserve lending, and the government is actively encouraging banks to lend out more and more money via mortgages while holding less capital in reserve, then it APPEARS that the economy is doing well.