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The Fiat Standard: The Debt Slavery Alternative to Human Civilization



The Fiat Standard: The Debt Slavery Alternative to Human Civilization PDF

Author: Saifedean Ammous

Publisher: Saif House

Genres:

Publish Date: November 16, 2021

ISBN-10: 1544526474

Pages: 382

File Type: PDF

Language: English

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Book Preface

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. At the time, gold coins and bars were still widely used worldwide, but they were of limited use for international trade, which necessitated resorting to the clearance mechanisms of international banks. Chief among all banks at the time, the Bank of England’s network spanned the globe, and its pound sterling had, for centuries, acquired the reputation of being as good as gold.
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, 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.
With the move to fiat, peaceful exchange on the market no longer determined the value and choice of money. Instead, it was the victors of world wars and the gyrations of international geopolitics that would dictate the choice and value of the medium that constitutes one half of every market transaction. While the 1915 Bank of England announcement, and others like it at the time, were assumed to be temporary emergency measures necessary to fight the Great War, today, more than a century later, the Bank of England is yet to resume the promised redemption of its notes in gold. Temporary arrangements restricting note convertibility into gold have turned into the permanent financial infrastructure of the fiat system that took off over the next century. Never again would the world’s predominant monetary systems be based on a currencies fully redeemable in gold.
The above decree might be considered the equivalent of Satoshi Nakamoto’s email to the cryptography mailing list announcing Bitcoin, but unlike Nakamoto, His Majesty’s Government provided no software, white paper, nor any kind of technical specification as to how such a monetary system could be made practical and workable. Unlike the cold precision of Satoshi’s impersonal and dispassionate tone, His Majesty’s Government relied on appeal to authority, and emotional manipulation of its subjects’ sense of patriotism. Whereas Satoshi was able to launch the Bitcoin network in operational form a few months after its initial announcement, it took two world wars, dozens of monetary conferences, multiple financial crises, and three generations of governments, bankers, and economists struggling to ultimately bring about a fully operable implementation of the fiat standard in 1971.
Fifty years after taking its final form, and one century after its genesis, an assessment of the fiat system is now both possible and necessary. Its longevity makes it unreasonable to keep dismissing the fiat system as an irredeemable fraud on the brink of collapse, as many of its detractors have done for decades. Many people at the end of their life today have never used anything but fiat money, and neither did their long-deceased parents. This cannot be written off as an unexplained fluke, and economists should be able to explain how this system functions and survives, despite its many obvious flaws. There are, after all, plenty of markets around the world that are massively distorted by government interventions, but they nonetheless continue to survive. It is no endorsement of these interventions to attempt to explain how they persist.
It is also not appropriate to judge fiat systems based on the marketing material of their promoters and beneficiaries in government-financed academia and the popular press. While the global fiat system so far avoided the complete collapse its detractors would predict, that cannot vindicate its promoters’ advertising of it as a free-lunch-maker with no opportunity cost or consequence. More than fifty episodes of hyperinflation have taken place around the world using fiat monetary systems in the past century. Moreover, the global fiat system avoiding catastrophic collapse is hardly enough to make the case for it as a positive technological, economic, and social development.
Between the relentless propaganda of its enthusiasts and the rabid venom of its detractors, this book attempts to offer something new: an exploration of the fiat monetary system as a technology, from an engineering and functional perspective, outlining its purposes and common failure modes, and deriving the wider economic, political, and social implications of its use. I believe that adopting this approach to writing The Bitcoin Standard contributed to making it the best-selling book on bitcoin to date, helping hundreds of thousands of readers across more than 20 languages understand the significance and implications of bitcoin. Rather than focus on the details of how bitcoin operates, I chose to focus on why it operates the way it does, and what the implications are.
If you have read the Bitcoin Standard and enjoyed my exploration of bitcoin, I hope you will enjoy this exploration of the operation of fiat. Perhaps counter-intuitively, I believe that by first understanding the operation of bitcoin, you can then better understand the equivalent operations in fiat. It is easier to explain an abacus to a computer user than it is to explain a computer to an abacus user. A more advanced technology performs its functions more productively and efficiently, allowing a clear exposition of the mechanisms of the simpler technology, and exposing its weaknesses. For the reader who has become familiar with the operation of bitcoin, a good way to understand the operation of fiat is by drawing analogy to the operation of bitcoin using concepts like mining, nodes, balances, and proof of work. My aim is to explain the operation and engineering structure of the fiat monetary system and how it operates, in reality, away from the naive romanticism of governments and banks who have benefited from this system for a century.
The first seven chapters of The Bitcoin Standard explained the history and function of money, and its importance to the economic order. With that foundation laid, the final three chapters introduced bitcoin, explained its operation, and elaborated on how its operation relates to the economic questions discussed in the earlier chapters. My motivation as an author was to allow readers to understand how bitcoin operates and its monetary significance without requiring them to have a previous background in economics or digital currencies. Had Bitcoin not been invented, the first seven chapters of The Bitcoin Standard could have served as an introduction to explaining the operation of the fiat monetary system. This book picks up where Chapter 7 of The Bitcoin Standard left off. The first chapters of this book are modeled on the last three chapters of the Bitcoin Standard, except applied to fiat money.
How does the fiat system actually function, in an operational sense? The success of bitcoin in operating as a bare-bones and standalone free market monetary system helps elucidate the properties and functions necessary to make a monetary system function. Bitcoin was designed by a software engineer who boiled a monetary system down to its essentials. These choices were then validated by a free market of millions of people around the world who continue to use this system, and currently entrust it to hold more than $300 billion of their wealth. The fiat monetary system, by contrast, has never been put on a free market for its users to pass the only judgment that matters on it. The all-too-frequent systemic collapses of the fiat monetary system are arguably the true market judgment emerging after suppression by governments. With bitcoin showing us how an advanced monetary system can function entirely independently of government control, we can see clearly the properties required for a monetary system to operate on the free market, and in the process, better understand fiat’s modes of operation, and all-too-frequent modes of failure.
While fiat systems have not won acceptance on the free market, and though their failings and limitations are many, there is no denying the fact that many fiat systems have worked for large parts of the last century, and facilitated an unfathomably large number of transactions and trades all around the world. Its continued operation makes understanding it useful, particularly as we still live in a world that runs on fiat. Just because you may be done with fiat does not mean that fiat is done with you! Understanding how the fiat standard works, and how it frequently fails, is essential knowledge for being able to navigate it.
To begin, it’s important to understand that the fiat system was not a carefully, consciously, or deliberately designed financial operating system like bitcoin; rather, it evolved through a complex process of compromise between political constraints and expedience. The next chapter illustrates this by examining newly-released historical documents on just how the fiat standard was born, and how it replaced the gold standard, beginning in England in the early twentieth century, completing the transition in 1971 across the Atlantic. This is not a history book, however, and it will not attempt a full historical account of the development of the fiat standard over the past century, in the same way the Bitcoin Standard did not delve too deeply into the study of the historical development of the bitcoin software protocol. The focus of the first part of the book will be on the operation and function of the fiat monetary system, by making analogy to the operation of the bitcoin network, in what might be called a comparative study of the economics of different monetary engineering systems.
Chapter 3 examines the underlying technology behind the fiat standard. Contrary to what the name suggests, modern fiat money is not conjured out of thin air through government fiat. Government does not just print currency and hand it out to a society that accepts it as 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 money as if they were as good as present money because the government guarantees these promises. While such an arrangement would not survive in the free market, the coercion of government can maintain it for a very long time. Government can meet any present financial obligations by diverting them onto future taxpayers or onto current fiat holders through taxes or inflation; and, further, through legal tender laws, government can prevent any alternatives to its money from gaining traction. By leveraging their monopoly on the legal use of violence to meet present financial obligations from potential future income, government fiat makes debt into money, forces its acceptance across society, and prevents it from collapsing.
Chapter 4 examines how the fiat network’s native tokens come into existence, using fiat’s antiquated and haphazard version of mining. As fiat money is credit, credit creation in a fiat currency results in the creation of new money, which means that lending is the fiat version of mining. Fiat miners are the financial institutions capable of generating fiat-based debt with guarantees from the government and/or central banks. Unlike with bitcoin’s difficulty adjustment, fiat has no mechanisms for controlling issuance. Credit money, instead, causes constant cycles of expansion and contraction in the money supply with eventual devastating consequences, as this chapter examines.


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