22.12.20 - The Fiat Standard

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2		THE FIAT STANDARD: THE DEBT SLAVERY ALTERNATIVE TO HUMAN CIVILIZATION
3		By Saifedean Ammous
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5		Amazon: Link
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7		#	TC Highlight
8		1	In his 1929 book The Thing, G. K. Chesterton tells the story of a man who finds a fence that appears to serve no purpose and decides to remove it. Another man counters, “If you don’t see the use of it, I certainly won’t let you clear it away. Go away and think. Then, when you can come back and tell me that you do see the use of it, I may allow you to destroy it.”1 Fifty years after taking its final form, and more than a century after its genesis, with a new competitor threatening to potentially remove it, an assessment of the uses of the fiat system is now both possible and necessary.
9		2	At its most basic, bitcoin increases humanity’s capacity for long-distance international settlement by around 500,000 transactions a day and completes that settlement in a few hours. This is an enormous upgrade over gold’s capacity, making international settlement a far more open market and much harder to monopolize. This also helps us understand bitcoin’s value proposition as not just harder money than gold, but also money that is far easier to transport. Bitcoin effectively combines gold’s salability across time with fiat’s salability across space in one apolitical, immutable, open-source package.
10		3	On August 6, 1915, His Majesty’s Government issued this appeal: In view of the importance of strengthening the gold reserves of the country for exchange purposes, the Treasury have instructed the Post Office and all public departments charged with the duty of making cash payments to use notes instead of gold coins whenever possible. The public generally are earnestly requested, in the national interest, to co-operate with the Treasury in this policy by (1) paying in gold to the Post Office and to the Banks; (2) asking for payment of cheques in notes rather than in gold; (3) using notes rather than gold for payment of wages and cash disbursements generally.3 With this obscure and largely forgotten announcement, the Bank of England effectively began the global monetary system’s move away from a gold standard, in which all government and bank obligations were redeemable in physical gold.
11		4	Instead of the predictable and reliable stability naturally provided by gold, the new global monetary standard was built around government rules, hence its name. The Latin word fiat means “let it be done,” and in English, the term has been adopted to mean a formal decree, authorization, or rule. It is an apt term for the current monetary standard, as what distinguishes it most is that it substitutes government dictates for the judgment of the market. Value on fiat’s base layer is not based on a freely traded physical commodity but is instead dictated by authority, which can control its issuance, supply, clearance, and settlement, and even confiscate it at any time it sees fit.
12		5	Had the Bank of England maintained full cover for its notes and bank accounts in gold, as they would have had to under a strict gold standard, war would not have posed a liquidity problem. All depositors could have had their banknotes and bank accounts redeemed in full in physical gold, and there would have been no need to queue outside the bank. However, the Bank of England had become accustomed to not backing all its notes with gold. Depositors had good reason to hold money in the form of banknotes and bank accounts rather than in physical gold. Compared to gold, banknotes were easier to carry and convert into either smaller or larger denominations, and an account at an English bank allowed the depositor to make payments by checkbook anywhere in the world far faster than sending physical gold. Global capital sought the bank’s superior safety and clearance mechanisms, which provided the bank a solid cushion to diverge from a strict 100% gold standard.
13		6	By controlling banks and confiscating gold, central banks could create money by fiat. By making the pound as good as gold, the new paper alchemists succeeded where Newton and the old alchemists failed. Gold could be produced at will after all. The printing press and the checking account were the alchemists’ long-sought philosopher’s stone. In the immediate aftermath of the war, there seemed to be no downside to the world’s central bank and its currency diverging from the sound gold anchor. Over time, the costs of these monetary shenanigans became apparent, as governments would increasingly abuse these schemes, ultimately making them a permanent feature of the fiat century—surreptitiously trading long-term prosperity for the illusion of short-term stability. The economic consequences of the inflation would weigh on the British economy for decades.
14		7	As economist Murray Rothbard described it: In short, Britain insisted on returning to gold at a valuation that was 10–20 percent higher than the going exchange rate, which reflected the results of war and postwar inflation. This meant that British prices would have had to decline by about 10 to 20 percent in order to remain competitive with foreign countries, and to maintain her all-important export business. But no such decline occurred, primarily because unions did not permit wage rates to be lowered. Real-wage rates rose, and chronic large-scale unemployment struck Great Britain. Credit was not allowed to contract, as was needed to bring about deflation, as unemployment would have grown even more menacing—an unemployment caused partly by the postwar establishment of government unemployment insurance (which permitted trade unions to hold out against any wage cuts). As a result, Great Britain tended to lose gold. Instead of repealing unemployment insurance, contracting credit, and/or going back to gold at a more realistic parity, Great Britain inflated her money supply to offset the loss of gold and turned to the United States for help. For if the United States government were to inflate American money, Great Britain would no longer lose gold to the United States. In short, the American public was nominated to suffer the burdens of inflation and subsequent collapse in order to maintain the British government and the British trade union movement in the style to which they insisted on becoming accustomed.
15		8	As American inflation devalued the U.S. dollar, the U.S. provided loans to Britain, and international central banks acquired large amounts of sterling reserves, it became feasible for the Bank of England to restore some form of gold redemption in 1925. It was not a return to the gold standard, but the introduction of a variation of it: the gold bullion standard. Under this standard, the Bank of England only offered redemption of standard 400-ounce “good delivery” gold bars. Banknotes were no longer redeemable in gold, and the Royal Mint denied the public the ability to purchase its gold. The bank had effectively gone off the gold standard for the majority of the population, and the value of the pound was less tethered to its supposed gold backing than before the war.
16		9	That inflation set in motion the familiar business cycle. As inflation subsided in late 1928, the stock market crashed in late 1929, and the boom of the 1920s gave way to the bust of the 1930s. This pattern of bubbles and collapses, the endless cycles of boom and bust, became a regular feature of the fiat standard worldwide, to the point that modern economic textbooks began to treat this phenomenon as if it is an inherent part of a normal market economy, something as normal and inevitable as the seasons.
17		10	The depression and the inflation to counter it made the pressure on the pound unbearable. The last pretense of maintaining the prewar gold parity was finally dropped in 1931 as the Bank of England devalued the pound by 25%. One wonders just how different history would have been had it performed this devaluation in 1920, allowing the return to solid gold footing and full gold redemption with stricter limits on inflation.
18		11	During the crisis of the 1930s, the U.S. government engaged in fiscal and monetary expansionism to ward off the collapse of its banking system and economy. These policies would not have been sustainable had the dollar continued to be redeemable for gold at $20.67 per troy ounce. In 1934, President Franklin D. Roosevelt ordered the confiscation of Americans’ gold, buying it from the public at $35.00, effectively devaluing the dollar by 43%. Less than two decades after Britain had set the fiat standard by taking hard money from the hands of its citizens and giving them fiat tokens, the U.S. followed suit. Both events were sovereign defaults, though history books rarely call them that.
19		12	In summation, the Bank of England effectively went off the gold standard in 1914 and only returned in 1925 on a gold bullion standard, which it abandoned in 1931. The U.S. abandoned the gold standard in 1917 but restored it in 1922 and abandoned it again in 1934. Britain and the U.S. adopted a gold-exchange standard in 1922 and abandoned it in 1971 to go on a fiat dollar standard. Since 1914, both currencies have lost more than 95% of their value relative to gold. The fiat standard installation process has been a long one, but it has had these hallmarks: gold confiscation, price increases, price controls, central planning, inflationary credit expansion, booms and busts, and the aspiration to export inflation by trying to dump fractionally backed currency on foreign regimes. The fiat standard was not the design of an engineer. It was instead the central banks’ desperate solution to their looming insolvency, the inevitable geopolitical outcome of a sixty-year-long marriage of politics and money. The history of fiat is the history of government-run financial institutions managing defaults. It was not a technology consciously designed to provide sound money or payment transfers. Central banks the world over would closely follow the prototype set by Britain and the U.S., as they too would default on gold and force the use of their fiat.
20		13	Contrary to what the name suggests, modern fiat money is not conjured out of thin air through government fiat. Governments do not just print currencies and hand them out to societies that accept them as good money. Modern fiat money is far more sophisticated and convoluted in its operation. The fundamental engineering feature of the fiat system is that it treats future promises of payment of money as if they were as good as present money, so long as they are issued by the government, or an entity guaranteed a lending license by the government.
21		14	With fiat, government credit allows nonexistent tokens from the future to be brought to life to settle transactions in the present when a loan is made, allowing the borrower and lender to have a larger amount of fiat tokens between them than when they started, thus devaluing the rest of the network’s tokens. The fiat network creates more tokens every time a government-licensed entity makes a loan in the local fiat token.
22	X	15	Blurring the line between money and credit makes measuring the money supply practically impossible. In a payment system like gold or bitcoin, only mature money (or money of full maturity, meaning money that does not have a future period of maturity at which it acquires its full liquid value) can be used to settle payments and debts. Under a fiat system, money that has not matured, and will only do so in the future, can be accepted as payment, so long as it is guaranteed by a commercial entity with a lending license.
23	X	16	When a client takes out a $1 million loan to buy a house, the lending bank does not take a preexisting mature $1 million present in its cash reserves, or from a depositor’s balance at the bank. It will simply issue the loan and create the dollars that are used to pay the seller of the house. These dollars did not exist before the loan was issued. Their existence is predicated on the borrower fulfilling their end of the bargain and making regular payments in the future.
24		17	With the exception of a few primitive and isolated tribes yet to have fiat enforced upon them, every human on earth is assigned to a regional node where they must pay their taxes in their local “fiatcoin.” Failure to pay with the local fiatcoin can result in physical arrest, imprisonment, and even murder. These are powerful incentives for adoption that both bitcoin and gold lack.
25		18	“The Fed,” as it is known to fiat enthusiasts, is the focal and central point of the fiat network. It is the only entity that can invalidate any transaction and confiscate any balance from any other fiat node. The Fed rules unilaterally over the SWIFT payments network and can prevent entire nations from joining it and settling trades with other nations.
26		19	Financial institutions mine the network’s native token—fiatcoin—through the arcane, centralized, manual, risky, and haphazard process of lending. A complex web of government rules and regulations determines how an institution can obtain the lending license that allows it to issue loans. These rules and regulations are typically promulgated by central governments, central banks, the Bank for International Settlements, or the IMF. Unlike with bitcoin, there is no easily verifiable proof-of-work protocol and no algorithmic adjustment to ensure the fiatcoin supply remains within known and clearly auditable parameters.
27		20	As a centrally planned system, the fiat standard does not allow for the emergence of a free market in capital and money where supply and demand determine the interest rate, i.e., the price of capital. Lending ultimately determines the money supply, and lending levels are in turn shaped by the interest rate and Federal Reserve policy. The Federal Reserve’s full fiat node holds periodic meetings for its central planning committee to decide the optimal interest rate to charge other nodes. The rate these unelected bureaucrats set is known as the federal funds rate, and all other interest rates are derived from this and rise as they get further away from the central node. The closer the borrower is to the Federal Reserve System, the lower the interest rate they can secure and the more likely they are to benefit from inflation of the money supply.
28		21	To perform these functions, each central bank has a cash balance, commonly referred to as the international cash reserve account. This is the base-layer fiat token and has the highest spatial salability, as it can perform international settlement between central banks. In what is arguably the most catastrophic monetary engineering decision in all human history, this cash balance is used to perform four simultaneous functions. And the intermingling of these functions is the root of all financial and monetary crises of the past century. They comprise: Backing the local currency Settling international trade Backing all bank deposits Buying government bonds to finance government spending
29		22	All central banks back their currencies with international reserve currencies they cannot print. For most countries, this is the U.S. dollar, and for the U.S., it is gold. At the end of the third fiscal quarter of 2020, the dollar constituted around 51% of global reserves, the euro 18.3%, gold 13.7%, the Japanese yen 5.2%, the British pound 4.1%, and the Chinese yuan 1.9%. Other currencies had smaller shares. The dollar has the lion’s share of the foreign exchange market, taking part in 88.3% of all the foreign exchange market’s daily trades.16 The dollar is the base-layer token of the global fiat network, and national currencies are derivatives of it. There are 180 national currencies in the world today. Other than the dollar and euro, national currencies are mainly used domestically in the secondary national fiat banking layers.
30		23	All international payments to and from a country have to go through its central bank, allowing it a strong degree of control over all of its international trade and investment activities. Central bank reserves increase when foreign investment inflows or exports increase, but they fall when foreign investment outflows or imports increase. As individuals seek to transact with one another internationally, they must resort to a system of partial barter, as Hans-Hermann Hoppe termed it,17 wherein they need to buy a foreign currency before buying the foreign good. This has led to the enormous growth of the foreign exchange industry, which only exists to profit from the arbitrage opportunities generated by the ever-shifting values of national currencies. This also effectively makes governments and their central banks third parties in every international transaction their citizens have with foreigners.
31		24	When a central bank buys larger quantities of its government’s bonds, the value of its currency declines, since it funds these purchases by inflating the money supply. As monetary continence has continued to erode, central banks no longer just buy government bonds; they also engage in monetizing all kinds of assets from stocks to bonds to defaulted debt to housing, and much more.
32		25	At its essence, the fiat standard destroys savings and the ability to plan for the future in order to operate a payments network.
33	X	26	While a small percentage of a country’s currency exists in the form of physical cash, the majority exists in digital form, created whenever a financial institution backed by the central bank lends. New money is not created when currency bills are printed, but rather whenever new debt is issued. Bill printing just turns some of the already existing money supply from digital to physical form.
34		27	Since lending is effectively the mining of new fiat tokens, there is a strong economic incentive to issue debt. Financial institutions stand to profit from creating new money, and a lending license is highly sought after.
35		28	While these deflationary episodes are widely known for their terrible economic consequences, another of their oft-ignored implications is that they are a significant check on the growth and expansion of the money supply. Without these episodes purging large chunks of the money supply periodically, currency devaluation would proceed at a much faster pace.
36		29	The deflation phobia of modern economists and policymakers has extended beyond just worrying about banking collapses. It has progressed to a pathological level, where even a natural decline in prices caused by productivity increases is viewed as economically catastrophic. There is a huge difference between recession-induced deflation, which is only possible with an inflationary credit collapse, and productivity-driven benevolent deflation. The latter is a healthy, normal, and sustainable feature of a free-functioning market system, where the good with the highest stock-to-flow and the reliably lowest rate of growth is used as money.
37	X	30	Money thus tends to become more valuable in terms of real goods and services, and savers are able to enjoy more goods if they defer consumption. Declining prices are a natural market response to increases in the production of goods and services. Contrary to the argument presented by decades of fiat economists, the normal decline in prices caused by productivity-driven deflation does not have devastating consequences for society (although it does for their fiat jobs). The ability to buy more goods in the future does not stop people from consuming in the present. Time preference is always positive, and people always prefer having something in the present to having it in the future.
38		31	People are more likely to hold on to their money if they expect its value to rise, but they will still need to spend it in order to survive. Harder money will result in a reduction in present spending, all else equal, but it will lead to more future spending.
39		32	As our money becomes harder, our ability to save efficiently increases, allowing us to provide for our future more easily and encouraging us to become increasingly future-oriented.
40		33	Peculiarly, among all monetary systems known to the author, fiat is the only one where the sum of all balances at any point in time is negative. Because of the enormous incentive to accumulate debt, and the fact that the native token is not physical or scarce in any real sense, financial institutions constantly generate negative balances for their clients. The total sum of all debts far exceeds the quantity of money available. All other media of exchange are present goods, and any debt must be lent by someone who owns it first, so the balances always add up to a positive number.
41		34	By banning the use of gold as money, governments created and amplified demand for their own debt far beyond what their creditworthiness would merit.24 Increasing demand for government bonds has driven the ever-growing government debt bubbles of the past few decades. By the late 2000s, bond yields in Western economies could clearly no longer beat inflation, and their role as a savings mechanism became less appealing. The stock index emerged as the new savings account in the post-2009 world.
42	X	35	Ironically, it might actually be the case that there would be less demand for savings under a monetary system in which money was hard and held its value. If you knew with good certainty that you had ten years’ expenditures saved, and that you could reliably expect their value to be consistent over time, you would probably not feel compelled to add more savings and could then take more risks with the rest of your capital. However, when money is a bad store of value, and stocks and bonds involve higher risks, you are less certain about ten years’ expenditure stored in investable assets. This might well lead to risk aversion, insecurity, and requiring larger quantities of savings.
43	X	36	The correct and successful financial strategy under the fiat standard is to constantly take on as much debt as possible, be meticulous about making all payments on time, and use the debt to buy hard assets that generate future returns. Doing this successively improves your credit score and allows you to borrow at lower rates, while you store your wealth in goods that cannot be inflated as easily as fiat. The fiat system thus taxes savers and subsidizes borrowers. The fiat standard encourages everyone to live fragile lives and take substantial financial risks. The alternative is a slow, continuous bleeding of wealth.
44		37	In the fiat standard, those who choose to hold positive balances are robbed as the purchasing power of their fiat is eroded by all the debt others are creating. Those who are in debt, on the other hand, get to benefit from some of the seigniorage. Not taking on debt is reckless financial irresponsibility. Irish economist Richard Cantillon described the redistributive impact of inflation as benefiting the people who receive the newly created money first at the expense of those who receive it later. In the modern fiat standard, the beneficiaries of the Cantillon effect are the borrowers, and savers are the victims. Spending less than you earn and keeping savings on hand are simply no longer optimal financial strategies; they are expensive luxuries most cannot afford.
45		38	Carl Menger defines salability as the degree to which a good can be brought to market without a significant loss in market price.27 A highly salable good is one with significant market depth and liquidity, making it possible for the holder to obtain the prevailing market price whenever they want to sell it.
46		39	Gold’s high value per weight made moving value with it cheaper than using silver. In the nineteenth century, gold was fifteen times more expensive than silver, thus making silver more expensive to store and transport. Today that ratio is around seventy to one in favor of gold. Making a payment with gold would thus require transporting a far lighter load than silver, copper, or iron, meaning it would incur a lower cost. Gold’s chemical stability and indestructible nature meant that moving it around was relatively safe. More value concentrated in less weight obviously resulted in a currency that was cheaper to transport. As a result, a buyer would expect to lose less value when moving currency long distances for transactions. This spatial salability was key to gold’s superiority over other precious metals.
47		40	In order to move gold as fast as modern transportation was moving goods, it was increasingly stored in vaults, and financial institutions and individuals traded claims upon that bank-held gold. Over time, market participants moved away from the finality of taking physical custody of gold following a payment, and money increasingly became a liability of financial institutions, which allowed it to move when needed. The more efficient the system, the less gold movement it required, meaning hugely decreased transportation costs. However, the savings achieved through centralization came at the cost of a less secure—and less auditable—financial system.
48		41	The gold standard’s monetary medium was not just the gold underlying it but also the payment and settlement rails that allowed it sufficient spatial salability to move around the world. Gold in the bank effectively carried a spatial salability premium over gold in individual physical possession. Rather than charge individuals a premium for holding their gold with high salability, banks kept gold redeemable at face value but increased the liabilities they issued backed by it.
49		42	Although gold is highly salable across time, its salability across space is very low compared to fiat. This is as significant a flaw as having a low stock-to-flow ratio. Whereas a low stock-to-flow ratio leads to a loss in value when trading the good across time, a high cost of transportation results in a significant loss of value when transacting the good across space. Hard money advocates can deride fiat money for losing its value across time, but they dismiss the reality that an ounce of gold sent across the world will arrive having lost a significant portion of its value to pay for its movement.
50	X	43	In a sane world, a world in which monetary systems were designed by engineers, gold’s salability across time would lead to it developing the best salability across space through banking infrastructure. But in the real world of centralized governments, expecting political money to deliver hard money with high interspatial salability is wishful thinking. A hard money that requires brick-and-mortar banks in order to clear it is always liable to government seizure or being replaced with government fiat. Political and engineering realities mean that the low spatial salability of gold and physical monies needs to be considered a feature, not a bug.
51		44	When an individual wants to make an international wire transfer over the fiat network, the sender’s bank account issues a payment order to the SWIFT network, a cooperative society based in Belgium and owned by its member financial institutions around the world. SWIFT is a messaging platform, not a platform for transferring funds. It sends payment messages to recipient banks, but it does not send actual money.
52	X	45	The problem with this logic is the same as with all inflationist arguments: money and credit, by themselves, are not productive assets. They merely represent receipts that allow their holders to purchase productive assets. An increase in the supply of money or credit will no more increase the stock of productive assets in an economy than an increase in printed football stadium tickets will increase the capacity of the stadium itself.
53		46	If the amount of cash depositors demand exceeds the bank’s reserves on hand, the bank has a “liquidity problem.” This is viewed as distinct from a solvency problem because the bank does have enough assets to meet all its depositors’ withdrawal demands, but it does not have them on hand.
54		47	The shadow banking system comprises financial firms created to take financial risks with fewer regulations and restrictions, and without a formal lender of last resort like the FDIC. They include investment banks, mortgage companies, money market funds, repurchase agreement markets, asset-backed commercial paper, securitization vehicles, and more arcane financial tools. Nonetheless, time has shown that when push comes to shove, the Federal Reserve will act as a lender of last resort to the shadow financial system, in many different ways.
55		48	Second, the U.S. central government and the Federal Reserve have repeatedly illustrated that massive financial corporations can engage in wild risk-taking while avoiding any downside. Politicians and Federal Reserve officials have given life to the “too big to fail” idea by repeatedly bailing out financial institutions that engage in risky behavior. The bailout rationale is always the same: we are so big, so intertwined in the global economy, so systemically interconnected into every facet of financial life, that not forcing taxpayers to pay for our mistakes will result in economic calamity and pain for not just us, but also for all the responsible people who did not take risks and who never stood to gain a penny from our recklessness.
56		49	The financial sector’s rent-seeking behavior achieved many successes for the industry, one of the biggest wins being the wholesale repeal of the Glass-Steagall Act. With Glass-Steagall stricken from the U.S. legal code, retail banks could once again enter into investment banking.
57	X	50	The history of money is a natural progression from easier to harder media over time. Salt, cattle, glass beads, limestone, seashells, iron, copper, and silver have all been used as money in various times and places, but by the end of the nineteenth century, the entire globe was practically on a gold standard.
58	X	51	The move toward harder monies with better salability across space and time can be viewed as a contributor to the epochal decline in time preference by allowing humans better savings technology, making the future less uncertain for them, and thus making them discount it less.
59		52	Rather than expecting money to appreciate and thus having a reliable way to retain value into the future, fiat returned humans of the twentieth century to far more primitive times, when retaining value into the future was far less certain and the value of their wealth was expected to be reduced in the future, if it survived at all. The future is hazier with easy money, and the inability to provide for the future makes it less certain. This increased uncertainty leads to a higher discounting of the future and thus a higher time preference. Fiat money effectively taxes future provisions, leading to a higher discounting of the future and an increase in basic present-oriented behavior among individuals. Why delay consumption today when you are unsure what will happen to your property tomorrow?
60		53	Adam Ferguson’s When Money Dies provides a good overview of the effects of hyperinflation in interwar Germany, a society that was one of the world’s most advanced a few years earlier.
61		54	Humans have needs beyond just the financial. The need for connection, love, and familiarity is very strong, and long-term investment in family is the most reliable method known for obtaining this. Being relieved from having to provide for the long term by the fiat credit machine, individuals end up investing less in the families that would give them joy and satisfaction in their later years. Nothing in our psyche has changed over the past one hundred years to allow us to overcome this need and sacrifice family. What has changed is our ability to think long term and care for our future selves.
62		55	As prices of highly nutritious foods rise, people are inevitably forced to replace them with cheaper alternatives. As the cheaper foods become a more prevalent part of the basket of goods, the effect of inflation is understated. To illustrate this point, imagine you earn ten dollars a day and spend it all on eating a delicious ribeye steak that gives you all the nutrients you need for the day. In this simple (and many would argue, optimal)40 consumer basket of goods, the CPI is ten dollars. Now imagine one day hyperinflation strikes, and the price of your ribeye increases to one hundred dollars while your daily wage remains ten dollars. What happens to the price of your basket of goods? It cannot rise tenfold because you cannot afford the one-hundred-dollar ribeye. Instead, you make do with the chemical shitstorm that is a soy burger for ten dollars. The CPI, magically, shows zero inflation. No matter what happens to monetary inflation, the CPI is destined to lag behind as a measure because it is based on consumer spending, which is itself determined by prices. Price rises do not elicit equivalent increases in consumer spending; they bring about reductions in the quality of consumed goods. The change in the cost of living cannot, therefore, be reflected in the price of the average basket of goods, since the basket declines in quality with inflation. This gives us an understanding of how prices continue to rise while the CPI registers at the politically optimal level of 2–3% per year. If you are happy to substitute industrial waste sludge for ribeye, you will not experience much inflation!
63		56	In The Great Inflation and Its Aftermath, Robert Samuelson recounts the story of how desperately President Lyndon Johnson had attempted to fight the rising prices of many economic goods.42 Of the many harebrained and economically destructive ideas he had, what was most striking was that in the spring of 1966, he called on the U.S. surgeon general to issue a phony warning against the consumption of eggs when their prices spiked. In other words, Johnson asked a federal bureaucrat to concoct a fraudulent health scare around perfectly nutritious food for reasons that had nothing to do with science.
64		57	In Bright Line Eating, Susan Thompson explains how the process of refining sugar and flour is similar to the refining process that has made cocaine and heroin such highly addictive substances.51 Whereas chewing on coca leaves or eating poppy plants will give someone a high and an energy kick, it is nowhere near as addictive as consuming purified cocaine or heroin. Many cultures consumed these plants for thousands of years with adverse effects far less severe than the damage their refined and processed descendants do to their modern consumers. The industrial processing of these plants into their modern, highly potent drug form has made them extremely addictive. It allows those consuming them to ingest large quantities of the pure essence of the plant without any of the rest of the plant matter that comes with it. The high is intensified, as is the withdrawal that follows it and the craving for more.
65		58	Processed flour and sugar can be used as recreational drugs in tiny quantities, but none of these products have a place in the human diet and must be avoided for humans to thrive and be healthy.
66		59	Nina Teicholz estimates the average American ate around 175 pounds of meat per year in the nineteenth century, predominantly from highly nutritious red meat. Today, the average American eats around 100 pounds of meat per year, but half of that comes from poultry. A century of technological progress and ever-increasing economic growth has somehow not translated to an increase in the consumption of the most sought-after and nutritious food. Instead, Americans are increasingly having to make do with inferior and cheaper sources of food.
67	X	60	In reality, nutrition is about far more than caloric intake. It is about securing sufficient quantities of essential nutrients for the body, which come in four categories: proteins, fats, vitamins, and minerals.
68		61	Price is mainly known today as both a dentist and a pioneer in the discovery and analysis of several vitamins. His 1939 magnum opus Nutrition and Physical Degeneration is largely ignored by the mainstream of academia and nutrition science,52 as his conclusions fly against the politically correct dogma taught in the medical and nutrition schools of modern universities.
69		62	One purpose of Price’s trip was to find “native dietaries consisting entirely of plant foods which were competent for providing all the factors needed for complete and normal physical development without the use of any animal tissues or product.”53 But after scouring the globe, Price did not find a single culture that subsisted on plant foods exclusively. All healthy traditional populations relied heavily on animal products. The healthiest and strongest populations he found were the Inuit of the Arctic and African herders. Almost nothing about the environment and customs of those two populations is similar in any way except for their reliance almost exclusively on animal foods.
70		63	As individuals’ time preference rises and they start to discount the future more heavily, they are less likely to value the maintenance of a healthy future state for their natural environment and soil. Consider the effect this would have on farmers: the higher a farmer’s time preference, the more they will discount the future health of their soil, and the more likely they are to care about maximizing their short-term profits. Indeed, this is exactly what we find with soil depletion leading up to the 1930s, the time of Price’s writing.
71		64	Heavily plowed industrial agriculture is an object lesson in high time preference, as is well understood by farmers worldwide, and well-articulated on the website of the Natural Resource Conservation Service of the U.S. Department of Agriculture: The plow is a potent tool of agriculture for the same reason that it has degraded productivity. Plowing turns over soil, mixes it with air, and stimulates the decomposition of organic matter. The rapid decomposition of organic matter releases a flush of nutrients that stimulates crop growth. But over time, plowing diminishes the supply of soil organic matter and associated soil properties, including water holding capacity, nutrient holding capacity, mellow tilth, resistance to erosion, and a diverse biological community.
72		65	The work of Alan Savory on the topic of soil depletion is very important here. The Savory Institute has been working on reforestation and soil regeneration across the world with spectacular success. Their secret? Unleashing large numbers of grazing animals on depleted soil to graze on whatever shrubs they can find and fertilize it with their manure. The results, visible on their website,56 speak for themselves and clearly illustrate a strong case for keeping soil healthy by holistically managing the grazing of large mammals.
73		66	Industrial farming allows farmers to strip nutrients from their soil rapidly, maximizing output in the first few years, at the expense of the long-term health of the soil. Fertilizers allow this present orientation to appear relatively costless in the future, since depleted soil can still be made fertile with industrial fertilizers. After a century of industrial farming, it is clear that this trade-off was very costly, as the human toll of industrial farming grows larger and clearer. By contrast, maintaining healthy soil through rotating cattle grazing and crop farming will offer less reward in the short run, but it will maintain the health of the soil in the long run.
74		67	The most common misconception about modern universities is that they are private, when they are almost all reliant on government financing. Governments provide universities with a sizable portion of their income in the form of research funding. Perhaps more importantly, governments provide students with subsidized low-interest loans to attend university, heavily skewing young adults’ choice in favor of attending university and causing a large misdirection of resources in that direction. That tuition costs have risen in concert with larger subsidies for a college education is no coincidence.
75		68	it is a product of a central plan, decided by a committee. It suffers from the problems of economic production familiar to anyone unfortunate enough to have lived under socialist regimes or fortunate enough to have read Mises’s monumental works on socialism.
76		69	In Apocalypse Never: Why Environmental Alarmism Hurts Us All, lifelong environmental activist Michael Shellenberger takes a very sober look at similar topics and shows why the popular alarm and hysteria around climate change is very misplaced.78 Beyond just dispelling the fears of climate alarmists, Shellenberger provides a very thoughtful and eye-opening treatment of the social and psychological impacts of the growing number of people who have been conditioned by fiat scientists into a state of despair, panic, and constant fear over the weather. Moreover, he illustrates how the obsession with CO2 has overshadowed and displaced the interest in other pressing environmental phenomena.
77		70	In theory, if the U.S. and Great Britain had been on a strict gold standard, then the gold-exchange standard would have been no different from the gold standard. But because thirty-two foreign central banks needed to leave their gold with the two major central banks in order to give it salability across the planet, these two countries had significant leeway in inflating their currencies beyond their gold reserves, effectively exporting their inflation abroad.
78		71	England is thus completely or partially entrenched in Austria, Hungary, Belgium, Norway, and Italy. She is in the process of entrenching herself in Greece and Portugal.… The currencies [of Europe] will be divided into two classes. Those of the first class, the dollar and the pound sterling, based on gold, and those of the second class based on the pound and dollar—with a part of their gold reserves being held by the Bank of England and the Federal Reserve Bank of New York. The latter moneys will have lost their independence.86
79		72	After Genoa, the U.S. and the British governments’ prime imperative was to get as many central banks to hold as much of their currencies as possible. This was unprecedented money printing and inflationism on a global scale. As other governments, institutions, and private actors began settling trade in dollars and pounds, they needed larger quantities of these reserves. World politics has since been largely motivated by major governments’ desire to get their inflationary currencies adopted as international reserves to allow them to engage in more politically expedient inflation.
80		73	National central banks were the nodes of the fiat network. The more nodes that could be set up worldwide, the more gold would pour into the British and American central banks. The more liquidity that existed on the network, the more inflation America and Britain could get away with. The dynamic created by the gold-exchange standard might lead an observer to wonder whether British and American support for national liberation movements was not purely altruistic but rather a self-interested move to create more fiat nodes in nascent countries.
81		74	As things got perilous for the dollar, U.S. President Jimmy Carter, sagging in popularity thanks to a broad economic malaise, nominated economist Paul Volcker to serve as the twelfth chairman of the Board of Governors of the Federal Reserve System in July of 1979. Volcker immediately set to work saving the dollar from destruction by reining in monetary policy and raising interest rates, which had enormous repercussions globally. Suddenly, every government with an unsustainable but manageable debt burden under low interest rates was now unable to make their increasingly larger interest rate payments. The 1980s would be the decade of third-world debt crises.
82		75	The benefit fiat offers to humanity is that it allows for savings on moving gold for payments. The costs are incalculable. We can classify the costs of fiat into four broad categories: (1) the destruction of holders’ wealth through inflation, (2) the destruction of the role of money in economic calculation, (3) the increased power of government to shape economy and society, and (4) the increased likelihood and cost of conflict.
83		76	The benefits from fiat are primarily in the cost saving associated with moving physical gold around. The clearance, settlement, and verification of physical gold would cost somewhere in the range of 0.05–0.5% of face value, as discussed in Chapter 6.
84		77	The average US house price in 1915 was $3,500. In 2021 it was $269,039. That is compound annual growth in the price of the house at a rate of 4.18% over 107 years. Had the fiat standard adopted a fixed supply in 1914, and prices declined by 2% per year instead, the average American house would today cost $411. With a much smaller supply of the dollar, prices would be far lower than what they are today. Incomes would of course also be much lower, but the decreasing price of goods means that they become more affordable over time, and that saved money buys more goods every year. $411 in 1915 could have bought your great grandfather 12% of a house. But if he had saved it and passed it on to you, it would buy you an entire house today. Your great grandfather’s pocket change would be enough for you to live off today.
85		78	The overwhelming majority of economic value exists in the major currencies; a weighted average inflation rate should reflect this, and when calculated, we can estimate that the average fiat user has suffered a 13.72% inflation in their money supply per year.97 When compared to holding hard money with a fixed supply, the average fiat user is witnessing a devaluation of the wealth stored in their savings by around 14% per year.
86		79	Central governments are constantly devaluing and degrading what little hope the poorest among us have for achieving a better life. At the same time, this regressive inflation tax rewards the rich who can borrow large quantities of devaluing fiat, and who can protect themselves by holding hard assets. Predictably enough, the economists, academics, activists, and politicians obsessed with inequality tend to be highly concentrated in fiat institutions, supported by government fiat subsidies, and understandably unable to draw the obvious connection between the inflation that pays their salaries and the poor who foot the bill. Bitcoin is far more efficient than fiat because it does not impose this form of wealth confiscation through inflation. Holders of bitcoin can verify the supply for themselves, and the supply is devaluing at a current rate lower than 2% per year, which is halving every four years on its way to zero, eventually.
87		80	Fiat enthusiasts might argue that the cost of debasement discussed above is not entirely a cost. They claim devaluation has allowed the government and its Cantillon-favored partners to spend, which is not entirely wasted. I would argue the opposite. Government spending, unlike private spending, is by its nature distortionary and wasteful, causing a misallocation of resources. The spending is a cost by itself. It is independent of the devaluation of the currency because it enables the kind of catastrophes outlined in the second section of this book.
88		81	Final settlement in fiat between financial institutions takes days domestically and weeks internationally. The mechanics of this process involve largely opaque shifts between central banks’ nonpublic ledgers. Bitcoin, on the other hand, is currently proven to carry out half a million final settlement transactions every day in a way that is transparent, predictable, and public. Bitcoin offers a settlement whose finality increases every ten minutes and a system that has not reversed a single confirmed transaction once in its first twelve years of operation. This settlement can only be compared to the physical movement of gold, but the lack of material and physical form gives bitcoin a significant leap over gold in its salability across space.
89	X	82	The digital ownership of bitcoin on-chain is completely divorced from any physical location on earth. As the value of a gold transaction increases, the cost of moving it a certain distance increases. As the distance through which a gold payment needs to move increases, the cost of moving a certain amount of value also increases. Gold’s salability across space declines with transaction value and distance, but bitcoin’s salability is unaffected by these factors.
90		83	Money is a present good that can be exchanged for other present goods in a final transaction which leaves the seller not reliant on the purchaser performing any future obligations. Credit, on the other hand, is a promise to deliver money in the future. Credit can be exchanged for a present good, but the seller of the good requires the buyer to make future payments to complete the purchase. This means credit can only be exchanged for a present good at a discount, reflecting the probability the recipient assigns to getting paid back from the purchaser. An exchange of a present good for credit can only happen among people who have some familial or institutional bond, where they expect future repeated interaction between one another, which would strongly encourage the borrower not to renege on their future payments.
91		84	Throughout the twentieth century, trade became more globalized, and as this process unfolded, governments strengthened their grips on gold-backed payment rails and centralized all banking through monopolies they controlled. The best way to understand the gold standard, and its failure, is that the basic monetary asset on which it is built is not just the physical gold, but also the payment infrastructure used by the banks and central banks. As gold banks became indispensable for gold performing its monetary role, their gold was only as good as their credit, making their credit as good as gold. The limited spatial salability of gold meant the monetization of debt issued by custodians and payment rail operators.
92		85	A good economist or engineer would view a 100% gold-backed payment system as the desirable and rational way to organize a gold monetary system. But after everything we learned in the twentieth century, the economist or engineer of the twenty-first century is better off understanding the payment infrastructure as part of the monetary system. A party that has monopoly control of the payment system will inevitably end up using this control to further its interests. It does so by issuing more liabilities than the gold it holds.
93	X	86	A sizable part of the demand for debt creation in the fiat system comes from the large demand for holding debt assets, such as bonds or other credit instruments, as a store of value. As fiat money itself cannot meet this demand, and as lending also creates new money, there is a strong financial incentive to create debt. Bitcoin is the astonishingly neat technological solution to this problem. It monetizes a hard asset and offers everyone a chance to hold an asset as a store of value that does not have liabilities attached to it. You no longer need others to be indebted for you to have savings. You can hold a hard asset as your savings, and the work that went into it would already have been performed in bitcoin’s proof-of-work calculations. It does not require future production and repayment from the borrower to have market value.
94		87	The current bitcoin transaction capacity is achieved at a block size of around one megabyte. The naive and obvious approach to scaling simply suggests an increase in the size of blocks until they are large enough to accommodate the number of transactions needed for bitcoin to take over the world. This was the scaling approach favored by the doomed hard fork attempts Bitcoin XT, Bitcoin Classic, Bitcoin Unlimited, and SegWit2x. It was also the driver of the doomed Bcash hard fork (as well as its own even more doomed hard fork, BcashSV). The sorry history of all these poorly thought-out attempts is well worth studying for understanding bitcoin.100 The important conclusion from all these episodes is that increasing the block size is not a workable scaling solution because even relatively small increases would come at the expense of a significant increase in the cost of running a bitcoin full node, likely resulting in a reduction in the number of full nodes, which is ultimately the only guarantee of bitcoin’s continued decentralization and lasting immutability.
95		88	Ludwig von Mises discusses how uncertainty about the future is the key driver of demand for holding money.101 With no uncertainty of the future, humans could know all their incomes and expenditures ahead of time and plan them optimally to avoid ever having to hold cash. But as uncertainty is an inevitable part of life, people must continue to hold money for future spending.
96		89	Bitcoin offers superior salability across space and time to bonds, gold, and government cash. But its main drawback is still its relatively small liquidity. At the current market price of around $40,000, the total market value of all bitcoin in circulation is around $800 billion. This is a sizable number that positions bitcoin among the largest national currencies, but still a drop in the bucket of the total market value of bonds, which is around $140 trillion. Bond markets still offer significant depth and liquidity for the largest institutional investors. But bitcoin, as it grows, has the advantage of being a monetarily fungible good, so demand for bitcoin can be met by any bitcoin seller. In the bond market, on the other hand, while overall market liquidity is quite large, the liquidity available for individual bonds and maturities are fractions of the overall liquidity. The homogeneity of bitcoin and its lack of a yield give it a natural advantage over bonds in playing the role of money. Gold was chosen as a money on the market precisely because it has no yield. The role of money optimizes liquidity at the expense of risk and return, while equity optimizes for return at the expense of liquidity. In a world where there is little incentive to monetize debt, it is doubtful that any demand would exist for bonds.
97		90	Bitcoin effectively puts the truth of the ledger up for sale to the highest bidder but attaches a very high cost to the bid, and it provides the other members of the network with a very cheap mechanism to detect fraud and rule-breaking. As a result, the bidders have an overwhelming incentive to be honest, and many thousands of network members arrive at peaceful, noncontroversial consensus roughly every ten minutes. The key to making this system work is that the bidder has to expend resources to make their claim; the bitcoin network nodes do not consider blocks presented without the solution to the proof-of-work problem, and that has proven an effective mechanism for guaranteeing that bids are only made by people who have carried out activities with demonstrable “unforgeable costliness.”
98		91	If the U.S. had spent the entire twentieth century following an isolationist foreign policy, another government would likely have taken over the role of the world’s central banker. A world of fiat money requires a central global authority to impose rules on all transacting parties, and the reward for being that authority is enormously attractive.
99		92	The mining difficulty adjustment is the link between the bitcoin network and the world’s economy. The difficulty adjustment keeps bitcoin functioning as planned regardless of new microchip technology or geopolitical shifts that shutter major mining operations. It allows bitcoin to operate at whatever scale it is demanded without needing to alter its structure. Adjusting the difficulty to calibrate around ten-minute block times means that the network will continue to maintain its monetary policy, with coin production not deviating from its set schedule, and that the security model discussed above remains intact: the cost of presenting a block for the network is always close to the cost of the reward for doing so.
100		93	The difficulty adjustment simply takes everything in the economic reality of the world and presents it to the bitcoin network in one metric: the block time. The protocol adjusts the difficulty to calibrate the block time around the desired ten minutes, so the network continues to function as expected, irrespective of demand. This property makes bitcoin the only liquid commodity with a perfectly inelastic supply. In other words, the supply of bitcoin is strictly limited and cannot respond to increased demand. Regardless of how many more computers join the network to mine bitcoin, there is no increase in the supply of bitcoin, only an increase in the difficulty of mining it through proof of work. This automatic adjustment is how bitcoin is uniquely different from all other monetary assets.