The Fiat Standard E-Book

Saifedean Ammous

• Herausgeber: The Saif House
• Kategorie: Fachliteratur
• Sprache: Englisch
• Veröffentlichungsjahr: 2021

Seitenzahl: 571

Beschreibung

In The Fiat Standard, world-renowned economist Saifedean Ammous applies his unique analytical lens to the fiat monetary system, explaining it as a feat of engineering and technology just as he did for bitcoin in his global bestseller The Bitcoin Standard.

This time, Ammous delves into the world’s earlier shift from the gold standard to today’s system of government-backed fiat money—outlining the fiat standard’s purposes and failures; deriving the wider economic, political, and social implications of its use; and examining how bitcoin will affect it over time.

With penetrating insight, Ammous analyzes global political currencies by analogy to bitcoin: how they’re “mined” whenever government-guaranteed entities create loans, their lack of inherent restraints on inflation, and the rampant government intervention that has resulted in heavy, devastating, and persistent distortions to global markets for food, fuel, science, and education.

Through these comparisons, Ammous demonstrates that bitcoin could be our next step forward—providing high salability across space, just like the fiat system, but without the unchecked fiat-denominated debt. Rather than a messy hyperinflationary collapse, the rise of bitcoin could look like a debt jubilee and an orderly upgrade to the world’s monetary operating system, revolutionizing global capital and energy markets.

Leseprobe

The Fiat Standard

The Debt Slavery Alternative to Human Civilization

Saifedean Ammous

copyright © 2021 saifedean ammous

All rights reserved.

the fiat standard

The Debt Slavery Alternative to Human Civilization

isbn 978-1-5445-2647-8 Hardocver

isbn 978-1-5445-2645-4 Paperback

isbn 978-1-5445-2646-1 Ebook

To my mother, sister, brother, and grandparents

Contents

About the Author

Supporters

Foreword by Ross Stevens

part i: Fiat Money

Chapter 1. Introduction

Chapter 2. The Never-Ending Bank Holiday

Chapter 3. Fiat Technology

Network Topography

The Underlying Technology

Chapter 4. Fiat Mining

Lending as Mining

Deflation Phobia

CPI and Unitless Measurement

Inflation as a Vector

Chapter 5. Fiat Balances: Universal Debt Slavery

Unquantifiable

Irreconcilable

Tentative and Revocable

Negative

Fiat Savings

Fiat Debt

Chapter 6. What Is Fiat Good For?

Salability Across Space

Gold Spatial Salability

Fiat Spatial Salability

Bank Profitability

part ii: Fiat Life

Chapter 7. Fiat Life

Fiat against Nature

Fiat Time Preference

Fiat Architecture

Fiat Capital Destruction

Fiat Family

Chapter 8. Fiat Food

Fiat Farms

Fiat Diets

Fiat Foods

The Harvest of Fiat

Sound Food

Fiat Soils

Chapter 9. Fiat Science

Fiat Schools

Fiat Universities

Fiat Academics

Fiat Science

The Science Industrial Complex

The Science Says

Fiat Nutrition Science

Fiat Hysteria

Chapter 10. Fiat Fuels

Fiat Apocalypse

Fiat Thermodynamics

The Cost of Fiat Fuels

Chapter 11. Fiat States

The Misery Industry

Freedom from Accountability

Development’s Ugly History

A Real Impact Assessment

Development Successes

Chapter 12. Fiat Cost-Benefit Analysis

Fiat Benefits

Fiat Governments

Conflict

part iii: The Fiat Liquidator

Chapter 13. Why Bitcoin Fixes This

Salability Across Space

Separation of Money and Debt

Antifiat Technology

Neutral Global Currency

Chapter 14. Bitcoin Scaling

Hard Money Cannot Stay Niche

Bitcoin Block Space Supply

Second-Layer Scaling

Lightning Network

Trade-Offs and Risks

Chapter 15. Bitcoin Banking

Savings Technology

High Cash Reserves

Demonetizing the World

Unbonding the World

Robustness

Full Reserve Banking

Equity Finance

Chapter 16. Bitcoin and Energy Markets

Bitcoin Mining: Antifiat Technology

Difficulty Adjustment: The Secret Sauce

Bitcoin Fuel

Chapter 17. Bitcoin Cost-Benefit Analysis

Bitcoin Costs

Bitcoin Benefits

Is Bitcoin Worth It?

Chapter 18. Can Bitcoin Fix This

Government Attacks

Software Bugs

The Gold Standard

Central Bank Adoption

Monetary Upgrade and Debt Jubilee

Speculative Attacks

Central Bank Digital Currencies

Acknowledgments

Bibliography

List of Figures

Notes

About the Author

Saifedean Ammous is a world-renowned economist and author of The Bitcoin Standard: The Decentralized Alternative to Central Banking, the definitive and best-selling book on bitcoin, translated to 25 languages. He is also the author of the forthcoming textbook Principles of Economics. Saifedean teaches courses on the economics of bitcoin, and economics in the Austrian school tradition, on his online learning platform Saifedean.com, and also hosts The Bitcoin Standard Podcast.

Supporters

The author dedicates this book to the following readers who supported the self-publication of this book by preordering signed copies. Your support and interest are the reason that I write!

60e75d5207d67cef0b16cea187be29f3c97b80cec30420427187892f4f004a4c, A. Milenkovic, A.W. Steinly, Aaron Dewey Olsen, Abdullah Moai, AceRich2020, Adam Miller, @Adelgary, Afsheen Bigdeli, Ágúst Ragnar Pétursson, Akihiko Murai, Alberto Toussaint, Alex Bowe, Alex Chizhik, Alex Gladstein, Alex Toussaint, Alexander Tarnok, Ali Meer, Alistair Milne, Amber D. Scott, Amelia Alvarez, Amine Rahmouni, Andrés M. Tomás, Andrew K Sloan, Andrew Masters, Andrew P Hickman, Andrew W. Cleveland III, M.D., Andrewstotle, Andy Goldstein, Andy Holmes, Angelina Franklin, Anonymous, Antoni Taczanowski, Antonio Caccese, Armand Tuzel, Arvin Sahakian, Arxnovum Investments, Askar Kazhygul, Avtarkaur Sachamahithinant, Chaivit Sachamahithinant, Sujitra Sachamahithinant, AZHODL.com, Baron Bloe, Bartosz Granowski, Basem Jassin, Ben Davenport, Benoit Fontaine, Bert de Groot, Bill Daniels, Bill Sousa, @BitcoinIsThePin, bitcoin-schweiz.ch GmbH, bitcoinsverige.org, BklynFrank, Braiins & Slush Pool, Brandon Nabors, Bret Leon Lusskin Jr., Brett Bondi, Brian Lockhart, Brian Bilnoski, Brian Fisher, Brian L. McMichael, Britt Kelly, Browning Hi-Power 9mm, Bryan Boot, Bryan Hennecken, Bryan S. Wilson D.O., C&H, C4R3Bear, Carlos Octavio Chida Suárez, Cedric Youngelman, Chad Welch, Chafic Chahine, Charles Ruizhongtai Qi, Chiefmonkey, Chris Rye, Chris Vallé, Christian Cora, Christof Mathys, Christophe Masiero, Christopher Chang, Christopher S. Widger, CJ Wilson, Central Valley Bitcoiners, Clancy and Joe Rodgers, Clayton Maguire, Colin Heyes, Conscious Money Creators, Craig McGarrah III, Craig S Smith, D. Akira Ulmer, Dan Carman, Dan J, Dan Skeen, Daniel Carson, Daniel G. Ostermayer, Daniel Marulanda, Daniel Oon, Darin Feinstein, Darin Wilmert, Dave Burns, David Adriani, David B. Heller, David Barry, David Bryson, David Carre, David and Shauna Jeffries, David Love, David McFadzean, David Strimaitis, Decrypted LLC, Dennis Eibel, Dennis Kohler, Derek Sheeler, Derek Waltchack, Dick Trickle, Dicka, Dmitriy Molla, Doug Devine, Doug Hemingway, Michael Milmeister & the Stormrake team @stormrake.com, Dr. And Mrs. Douglas M. Moeckel, Dr. Paul Essey, Dustin Dettmer, Dylan Hedges, Dylan Wettasinghe, Ed Becker, Edgar R Tapia Gonzalez, ElCapitan, Eliah van Dijk and Anaïs van Dijk, Elias Andalaft—co-founder Webempresario.com, Elio S. Fattorini, Emmanuel Azih Jr., Eric Dosal, Érick Zazueta Ávila, Eugen Zimbelmann, Evangeline and Jacob, Fabian, Fabian Bürger, Fadi Mantash, Felix L., Filip Karađorđević and Danica Karađorđević, Filipe Neves, Frank Acklin, Frank T. Young, Frederick D’Mello, G Charles Harrison, Gabe C., Gabriele “gurgamezcla” Gussoni, Gaël Giusti, Gareth Hayes, Gary Lau, @gauchoeddy, Gerard N, Gerd Lüdtke, Gert Kleemann, Gina Jaramillo, Giuseppe Bueti, Glenn T., Gordon S Greer, Greg and Joy Morin, Gregory Zajaczkowski, Hadi, Harvinder Singh Sawhney, Hashim Elmegreisi, Hendel Bouchelaghem, Henry Gonzalez, Herman Vissia, Housam Majid Jarrar, Hugh Fowler, Hunter Hastings, Imre Michalsky, Isabella V. Fernando, Isaias De Leon, Isandi, J Dixon, J Flow, J. Kevin Coffin, J. Woods, J.M.B., Jack Heitger, Jacob Boyer, Jacob Cherian, Jakob Kucharczyk, James DelGuercio, James Harris, James Ian Thompson, James Machado, James McCoy, James Sutherland, James Swinhoe, James Viggiano, Jan W.F. van Dort—Master in digital currencies, Janajri Family, Coinbits Team, Jarod M. Bona, Jasper de Trafford, Javier Gil, Jay Chin, Jeff and Beth Ross, Jeff Aurand, Jeff Bennett, Jeff Packard, Jeff Smith, Jeffrey S. Van Harte, Jeffrey Poppenhagen, Jeffrey Williams of ILA Local 1654., Jeremiah Albright, Jeremiah James, Jeremy Cooper and #TeamCooperOhana, Jeremy Showalter, Jerrold Randall, Jerry Aguirre, Jez San, Jimmy Weaver, @JMFM_89, Joachim B., Joe Rubio, Johan M. 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Alonso, Luis Rivera, Lynley Pillay, Maciej Kazimieruk, Manu Beuselinck, Marco Bühler, Marco Giangiulio, Marius Reeder, Mark Ioli, Mark Moss, Mark Mulvey, Mark Rodney Gardner, Mark Simonson, Mark W Roen, Markus Lindgren, Marquie Mosley, Marquita Robinson-Garcia and DVINITI Skin Care, Marshall Long, Martin Brochhaus, Martin Roberto Richmond CFA, Mathew O’Keefe, Matija Grlj, Matt “yabapmatt” Rosen, Matt Maiuri, Matt Moran, Matt Sellitto, Maurice and Jeanne Schutte, Max, Max Guimarães, Maxon LaForge, Mazhar Memon, Michael Atwood, Michael Baker, Michael Byrne, Michael Fink, Michael Goldstein, Michael Harris, Michael Jonsson, Michal Duska and Roman Filipoiu, Milan Radojicic, Mina Eklad, Mischa Zed, Mitchel Edwards, Mitchell Kennedy, Mohammad Nauman, Money Phlow pty ltd, Mr. W. B., Nader S Dahdaleh, Nadir Seha Islam, Sibel Karakurum, Nazir Cihangir Islam, Nathan Mahaffey, Nathan Olmstead, Neal Nagely, Nicholas Sheahan and Martina Marcinska, Nick Karadza, Nick Ligerakis, Nicolás Ahumada, Nicolas Cage, Noor Elhuda El Bawab, Olly Stedall @saltedlolly, Omar Ruiz Geronimo, Omar Sabek, Omran Kaskar, Paige Webley, Pan Dermatis, panaccoman, @panicbuyingbtc, Panties for Bitcoin, Pantiesforbitcoin.com, Paolo Illing, Pattaravut Maleehuan, Paul I. Sung, Paul John Gaston, Paul Rylands, Paul Trentham, Pedro Brannum, Pei-Hsun Kao, Per Treborg, Perry Hester, Pete Cochran, Peter & Carren Egyed, Peter Francis Fenwick, Petr Žalud, Philip Guncill, Phillip Byrne, Pierre Alessandro Gmeiner, Pieter N., Pieter Voogt, PtAd, pij, pijankengur, Piotr Krzak, Piriya Sambandaraksa, Raj Shreyas Padliya, Rajan Sohal, Rauderce O., Rami Korhonen, Raven de la Cruz, Ravi Sohal, Red Pill Songs, Reina Bitcoin, Richard and Gigi, Richard Wiig, Richard Yu, Rick Pauw, Rickie Chang, Rijk Plasman, Rits Plasman, Rob (SATJ) Clark, Robert Alan Koonce, Robert B. Ferraro, Robert Del Riego, Robert Mearns, Robert Schulman, Roberto Costa Ramalhete, Roberto De Leon, Robin Thirtle, Rodolfo Novak (NVK), Rodrigo Gualberto, Roman Engelbrecht, Roman Filipoiu, Rory Orr, Rosa Jara, Rosie Featherby, Ruben Waterman, Ruslan Kuvaev, Russ, Rustin Watt, Ryan Anthony Williams, Ryan Blair, Ryan C Wilhoit, Ryan Cole, Ryan Jordan, Ryan Niles, Ryan Rinaldo, Ryan W. Slot, Sachin & Manavi Sharma, Samuel Claussen, Samuel Rufinatscha, San Family, Sanjay Srivatsa, Satoshi’s Domains, Scott C. Morgan @BtcVires, Scott S. Manhart, DDS, MS, Scott Schneider, Seb Walker, Sebastian Liu, SensibleYapper, Sergio Ruocco, Shakti Chauhan, Shao-Hsuan Kao, Shaun Thomson, Sheldon Friesen, Shire HODL, Shone Anstey at LQwD Fintech, Shone Sadler, Siim Männart, Simon Ree, Simona Macellari, Stacy, Stefano D’Amiano, Stephan Livera, Stephen Cole, Stephen Saunders, Steve and Paige Crozier, Subhan Tariq Esq., Tammy Fuller, Tarek, Tariq Al Muhtassib, Tarun K Chattoraj, The Goodspeed Family, The Stormrake team @stormrake.com, The Yingling Family, Thomas Hartland Mackie, Thomas Jaeger, Thomas Jenichen, Thomas Shelton, Tim Y., Tinoosh Zand, M.D., Tipton Cole, Tom G., Tom Karadza, Torstein Habbestad, Tyler W. 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Foreword

by Ross Stevens

Founder and Executive Chairman, NYDIG

Immediately upon its publication, Saifedean Ammous’s The Bitcoin Standard became an instant classic—required reading for anyone seriously interested in understanding the importance and power of bitcoin. First taking the reader on a captivating journey through the history of money, The Bitcoin Standard then proceeds to comprehensively lay out the first principles of bitcoin’s comparative appeal. Indeed, amidst a selection of outstanding bitcoin literature, The Bitcoin Standard sits atop the “if you only read one book about bitcoin, read this book” mantle from the bitcoin community.

Almost four years later, The Bitcoin Standard has aged well. Bitcoin is relevant to the lives of over one hundred million people worldwide today, strongly confirming the validity of Saifedean’s central insights. Given that bitcoin, unlike fiat, is voluntarily adopted by its users in every instance, it’s appropriate to be astonished that, despite bitcoin’s short life, it has become a significant global monetary institution, providing a nonstate and nonbank means of wealth storage, as well as an apolitical and neutral transactional medium.

Overall bitcoin adoption figures are compelling, but per capita penetration rates tell an even more interesting story. Bitcoin’s greatest per capita penetration is in sub-Saharan Africa, Latin America, Eastern Europe, and Southeast Asia. That citizens of these neighborhoods are among the most fervent early adopters makes sense. Whether the symptoms are advanced inflationary episodes or suffocating capital controls, citizens in the highest per capita adoption countries are attracted to bitcoin due to the failure of their local institutions, spanning weaknesses in government integrity, property rights, and monetary freedom.

Perhaps as intuitively as explicitly, the attraction hinges on bitcoin’s free-market, predetermined issuance model, which ensures that the privileged elite cannot emerge with sole access to the monetary spigot. Bitcoin’s proof of work—whereby bitcoin miners surrender electricity and computational resources to acquire new tokens—establishes a real-world cost for the resource, requiring miners to “buy in” should they want to occupy the position of the mint.

This is where Saifedean brilliantly turns things upside down in The Fiat Standard. His penetrating insight is to explain the operation of fiat by analogy to the operation of bitcoin. In this context, we can think of fiat as a digital currency, like an altcoin, defining its qualities and characteristics and its strengths and weaknesses. Saifedean analogizes fiat mining as credit creation and fiat miners as any institutions with fractional reserve requirements. Like bitcoin miners, fiat miners are incentivized to maximize token issuance for themselves. However, unlike bitcoin miners, fiat miners are not constrained by the difficulty adjustment. Thus, fiat mining has no mechanism for controlling issuance, which powerfully explains the accelerating explosion in fiat tokens, country after country, decade after decade. Saifedean’s framework further demonstrates that observed fiat collapses, like poorly designed bridges, represent nothing more than the inevitable, and inexorable, result of poor engineering.

Far from a one-sided attack on fiat, The Fiat Standard clearly illustrates and explains the advantages that made fiat’s global adoption possible. Whereas The Bitcoin Standard’s analytical framework centered around assessing salability across time, and how it explains the monetary rise of gold and bitcoin, in The Fiat Standard, Saifedean uses the framework of salability across space to explain the rise of fiat and how it replaced gold. This framework further forms the basis for assessing bitcoin’s rise in a fiat world, its security model, and chances of continued success.

Leveraging Saifedean’s language of “fiat tokens,” we also gain clarity on why modern central and commercial banking—combined—cause, not cure, severe economic downdrafts. By giving in to the populist clamor for ever more abundant, freely issued fiat tokens, fiat mining cripples the role of the wisest regulator, the market, by removing the most important mechanism for efficient, economy-wide allocation of capital: relative prices of sound (i.e., strictly limited) monetary tokens. Lacking restraint in fiat token issuance, sovereign defaults in 2020 were the highest they’ve been in more than twenty years, and the ratio of sovereign credit downgrades to upgrades was at an all-time high of ten to one.

With the flaws in fiat’s engineering infrastructure firmly established, Saifedean then takes us on a wide and unexpected journey, a tour de force that demonstrates the implications of these flaws in various areas of our day-to-day life, spanning architecture, family, food, science, and energy, among others. This controversial section will leave certain readers angry, strongly disagreeing, or worse. However, many open-minded readers will emerge with a cannot-unsee collection of thought-provoking questions and insights regarding fiat’s perniciousness. Saifedean’s framing of fiat as a fundamental explanation represents an important and original contribution to the discussion of why a monetary system governed by rulers leads to vast inequities, imbalances, and unintended consequences.

I will spoil no surprises here. However, as a preview of what’s to come, recall that while bitcoin requires its appropriately expensive proof-of-work process to create new tokens, fiat mining’s process obliterates the concept of opportunity cost in creating its tokens. This contrast explains the mad dashes for, and desperate clinging to, power among fiat token creators—and therefore the utter lack of surprise that this crowd feels most threatened by bitcoin. Seeing no opportunity cost to minting fiat tokens with abandon, many fiat miners act like they are getting something for nothing. Consider the wide-ranging societal implications of that perceived, of course not actual, reality.

Saifedean ends on a note of optimism mixed with practicality, exploring how fiat and bitcoin can coexist, including bitcoin potentially driving a gradual reduction in fiat debt via voluntary fiat liquidation. Accelerating bitcoin adoption, coupled with fiat’s continued decline in real terms, can generate a glide path for humanity’s step-by-step, voluntary transformation to sound money. Thus, the rise of bitcoin need not cause a catastrophic collapse of fiat, and a strong case can be made for bitcoin as a form of fiat-denominated wealth insurance, strengthening the case for a corresponding nonzero bitcoin allocation for everyone.

However, bitcoin is also a form of life insurance, though not in the traditional sense of a big payout if you die. Rather, bitcoin provides a big payout while you live, in the form—pricelessly—of personal sovereignty, freedom, and dignity. In a world replete with monetary unfairness, injustice, the institutionalization of moral hazard, and the State’s increasing domestication of our individuality, bitcoin’s incorruptible fairness, justice, truth, and beauty represent a beacon for all optimists who seek personal improvement and peace.

Perhaps just in time, each global citizen now has a choice. You can stay on the fiat standard, in which some people get to produce unlimited new units of money for free, most likely not you. Or opt in to the bitcoin standard, in which no one gets to do that, including you. With the option, now, of a monetary system governed by rules, not rulers, we can each be grateful for the opportunity, and personal responsibility, of making that choice.

part i

Fiat Money

Chapter 1

Introduction

This year marks the fiftieth anniversary of the U.S. government closing the gold-exchange window and putting the world on a fiat monetary system. The vast majority of people alive today have never used anything but fiat money. 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. Fiat’s longevity makes it unreasonable to keep dismissing it as an irredeemable fraud on the brink of collapse, as many of its detractors have done for decades. 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.

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.

While fiat has not won acceptance on the free market, and though its failings and limitations are many, there is no denying that many fiat systems have worked for large parts of the last century and facilitated an unfathomably large number of 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.

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 has so far avoided the complete collapse its detractors predicted, that cannot vindicate its promoters’ advertising of it as a free-lunch-maker with no opportunity cost or consequence. More than sixty episodes of hyperinflation have taken place in countries using fiat monetary systems in the past century.2 Moreover, avoiding regular catastrophic collapse is hardly enough to make a case for it as a positive technological, economic, and social development.

Beyond 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. Adopting this approach to writing The Bitcoin Standard contributed to making it the bestselling book on bitcoin to date, helping hundreds of thousands of readers across more than twenty-five languages understand the significance and implications of bitcoin.

Perhaps counterintuitively, 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. My aim is to explain the operation and engineering structure of the fiat monetary system and how it operates in reality, away from the romanticism of governments and banks that 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 six 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 work. 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 around $800 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. 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, we can better understand fiat’s modes of operation and all-too-frequent modes of failure.

To begin, it is 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 in managing government default. 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 and 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. The focus of the first part of the book will be on the operation and function of the fiat monetary system, by making an 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 network topography and 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. Government coercion can maintain such a system for a very long time, even if it would not survive free-market competition.

Chapter 4 examines how the fiat network’s native tokens come into existence. As fiat money is credit, credit creation in a fiat currency results in the creation of new money, which means that lending is fiat’s antiquated and haphazard 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 precise or engineered mechanisms for controlling issuance. Credit money, instead, causes constant cycles of expansion and contraction in the money supply, with devastating consequences.

Chapter 5 then analyzes balances on the fiat network, exploring how many, if not most, users have negative account balances—a unique feature of the fiat network. The ability to mine fiat by issuing debt means individuals, corporations, and governments all face a strong incentive to get into debt. The monetization and universalization of debt is also a war on savings, and one which governments have persecuted stealthily and quite successfully against their citizens over the last century.

Based on this analysis, Chapter 6 concludes the first section of the book by discussing the uses of fiat and the problems it solves. The two obvious uses of fiat are that it allows for government to easily finance itself, and it allows banks to engage in maturity-mismatching and fractional reserve banking while largely protecting themselves from the inevitable downside. But the third use of fiat is the one that has been the most important to its survival: salability across space.

I must confess, attempting to think of the fiat monetary system in engineering terms and trying to understand the problem it solves has given me an appreciation of its usefulness and a gentler assessment of the motives and circumstances that led to its emergence. Understanding the problem this fiat system solves makes a move from the gold standard to the fiat standard appear less outlandish and insane than it had appeared to me while writing The Bitcoin Standard, as a hard money believer who could see nothing good or reasonable about the move to an easier money.

Seeing that the analytical framework of The Bitcoin Standard was built around the concept of salability across time, and the ability of money to hold its value into the future, and the implications of that to society, the fiat standard initially appears as a deliberate, nefarious conspiracy to destroy human civilization. But writing this book and thinking very hard about the operational reality of fiat has brought into sharper focus the property of salability across space, and, in the process, has made the rationale for the emergence of the fiat standard clearer and more comprehensible. For all its many failings, there is no escaping the conclusion that the fiat standard was indeed a solution to a real and debilitating problem with the gold standard, namely its low spatial salability.

Fiat’s low temporal salability remained a problem, but a tolerable one, because of its advantages in transferring value across space. More importantly, fiat allowed governments worldwide tremendous leeway to bribe their current citizens at the expense of their future citizens by creating the easy fiat tokens that operate their payment networks. Fiat was convenient for users, but it was more convenient for the government officials who controlled the only full nodes. As we take stock of a whole century of operation for this monetary system, a sober and nuanced assessment can appreciate the significance of this solution for facilitating global trade, while also understanding how it has allowed the inflation that has benefited governments at the expense of their citizens, present and future. Fiat may have been a huge step backward in terms of its salability across time, but it was a substantial leap forward in terms of salability across space.

Having laid out the mechanics for the operation of fiat in the first section, the book’s second section, Fiat Life, examines the economic, societal, and political implications of a society utilizing such a form of money with uncertain and usually poor intertemporal salability. Fiat increasingly divorces economic reward from economic productivity, and instead bases it on political allegiance. This attempted suspension of the concept of opportunity cost makes fiat a revolt against the natural order of the world, in which humans, and all other animals, have to struggle against scarcity every day of their lives. Nature provides humans with rewards only when their toil is successful, and similarly, markets only reward humans when they can produce something that others subjectively value. After a century of economic value being assigned at gunpoint, these indisputable realities of life are unknown to, or denied by, huge swaths of the world’s population who look to their governments for their salvation and sustenance.

The suspension of the normal workings of scarcity through government dictate has enormous implications on individual time preference and decision-making, with important consequences to many facets of life. In the second section of the book, we explore the impacts of fiat on family, food, education, science, health, fuels, and international governance and geopolitics. This section focuses on analyzing the implications of two causal economic mechanisms of fiat money: the utilization of debt as money and the ability of government to grant this debt at no cost. Part 2 concludes with a cost-benefit analysis of the fiat monetary system.

While the title of the book refers to fiat, this is still a book about bitcoin, and the first two sections build up the analytical foundation for the third part of the book, which examines the all-too-important question with which The Bitcoin Standard leaves the reader: what will the relationship between fiat and bitcoin be in the coming years? Chapter 13 examines the specific properties of bitcoin that make it a potential solution to the problems of fiat.

While The Bitcoin Standard focused on bitcoin’s intertemporal salability, The Fiat Standard examines how bitcoin’s salability across space is the mechanism that makes it a more serious threat to fiat than gold and other physical monies with low spatial salability. Bitcoin’s high salability across space allows us to monetize this hard asset itself, and not credit claims on it, as was the case with the gold standard. 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.

By being a hard asset, bitcoin is also debt free, and its creation does not incentivize debt issuance. By offering finality of settlement every ten minutes, bitcoin also makes the use of credit money very difficult. At each block interval, the ownership of all bitcoins is confirmed by tens of thousands of nodes all over the world. There can be no authority whose fiat can make good a broken promise to deliver a bitcoin by a certain block time. Financial institutions that engage in fractional reserve banking in a bitcoin economy will always be under the threat of a bank run as long as no institution exists that can conjure present bitcoin at significantly lower than the market rate, as governments can do with their fiat.

Chapter 14 discusses bitcoin scaling in detail and argues that it will likely happen through second-layer solutions, which will be optimized for speed, high volume, and low cost, and involve trade-offs in security and liquidity. Chapter 15 builds on this analysis to discuss what banking would look like under a bitcoin standard, while Chapter 16 studies bitcoin’s consumption of electric power, how it is related to bitcoin’s security, and how it can impact the market for energy worldwide. Chapter 17 then performs a cost-benefit analysis to upgrading from fiat to bitcoin.

The final chapter tackles the questions: How can bitcoin rise in the world of fiat, and what are the implications for these two monetary standards coexisting? Various threats to bitcoin are assessed from the economic perspective, and the economic incentive for bitcoin’s continued survival is presented. Will bitcoin’s rise necessitate a hyperinflationary collapse of fiat? Or will it be more like an orderly software upgrade? How will credit market dynamics and the rise of central bank digital currencies affect this relationship?

Chapter 2

The Never-Ending Bank Holiday

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. 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, 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.

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 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 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.4 However, 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 an appeal to authority and the 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 to ultimately bring about a fully operable implementation of the fiat standard in 1971.

The Bank of England’s troubles started at the dawn of the Great War. On July 31, 1914, large crowds stood outside the doors of its Threadneedle Street headquarters looking to convert their bank balances and banknotes into gold coins before the August bank holiday. The Austro-Hungarian Empire had just declared war against Serbia following the assassination of Archduke Franz Ferdinand and a month of escalating tensions across Europe. All over the continent, investors rushed to convert financial instruments into gold, as they worried governments would devalue currencies to finance war. That fateful July, English newspapers referred to the coming war as the August bank holiday war, expecting it to be a swift victory for the British military. Yet the lines of depositors outside the world’s most important financial institution foretold a different story: the bank holiday that would never end.

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.

At the time, the Bank of England was the center of the financial universe, and its pound sterling was recognized worldwide for being as good as gold. The creditworthiness of the British government, its powerful military, and its unrivaled global payments settlement network had given it the supreme position in the global financial order, with around half of global foreign exchange reserves held in sterling.

In the prewar period, the bank had also offered its own currency as a reserve for the central banks of its colonies, under what was known as the gold-exchange standard. Since the colonies used the bank to settle their international payments, they were expected to hold on to significant amounts of these reserves and not seek redemption in gold. This allowed the bank a certain inflationary margin, to the point that by 1913, the ratio of official reserves to liabilities to foreign monetary authorities was only 31%.5 The bank had exported its inflation to the colonies, financing its operations but placing itself in a precarious liquidity position. So long as most colonies, depositors, and paper holders did not ask to convert their bank accounts and notes to gold, liquidity would not be a problem.

For a generation of bankers reared on the peace and prosperity of the Victorian Era and the gold standard, there was little reason to worry about a liquidity crisis. There was also very little reason to worry about a world war, but both the war and the liquidity crisis materialized in the summer of 1914. While the Great War triggered the bank’s liquidity troubles, the deeper causes were self-inflicted, and typical of the fiat century, government monopoly over the payments network encouraged abuse of the currency.

As trouble brewed on the continent, many foreign depositors sought to withdraw their assets from Britain, and many Englishmen preferred to hold gold over the bank’s paper. In the last six working days of July, the bank paid out £12.3 million in gold coins from its £26.5 million total reserves.6 The previously unthinkable prospect of the bank of England defaulting on its promise to redeem its notes and accounts in gold suddenly appeared plausible. A devaluation of the pound at that stage would have allowed the bank sufficient reserves to back the currency but would have been unspeakably unpopular with the British public, permanently undermining their faith in the bank.

In November 1914, the British government issued the first war bond, aiming to raise £350 million from private investors at an interest rate of 4.1% and a maturity of ten years. Surprisingly, the bond issue was undersubscribed, and the British public purchased less than a third of the targeted sum. To avoid publicizing this failure, the Bank of England granted funds to its chief cashier and his deputy to purchase the bonds under their own names. The Financial Times, ever the bank’s faithful mouthpiece, published an article proclaiming the loan was oversubscribed. John Maynard Keynes worked at the Treasury at the time, and in a secret memo to the bank, he praised them for what he called their “masterly manipulation.” Keynes’s fondness for surreptitious monetary arrangements would go on to inspire thousands of economic textbooks published worldwide. The Bank of England had set the tone for a century of central bank and government collusion behind the public’s back. The Financial Times would only issue a correction 103 years later,7 when this matter was finally uncovered after some sleuthing in the bank’s archives by some enterprising staff members and published on the bank’s blog.8

The Bank of England decided to continue on the gold standard; however, its dwindling stockpiles meant it had to figure out some way to stem the tide of redemptions. Its solution was to declare an unofficial war on gold. The fascinating details of this war can be found in The Bank of England 1914–21 (Unpublished War History), an obscure but highly detailed study commissioned by Bank Governor Montagu Norman, authored by his personal secretary John Osborne, and completed in 1926. This study remained unpublished until the bank uploaded it to its website in September 2019.9

With the public not keen on lending for war, and the bank holding large amounts of government debt instead, the bank needed to shore up its liquidity with more gold. The Treasury issued the appeal quoted at the beginning of this chapter, asking the public to pay the post office and banks in gold, take payment in notes rather than in gold, and use notes for paying wages and cash disbursements. After this appeal, the Bank of England and the Treasury instructed banks to collect coins and hold them in reserve to be at the disposal of the Treasury throughout the war.

“In 1915, the sum of £20,823,000 was collected from the Bankers of the United Kingdom and, in order to furnish the Treasury with further credit, was exported to United States,” Osborne wrote. He added in a footnote, “The Bank kept £2,423,000 sovereigns because their stock was seriously depleted.” He continued, “In November 1915 it became necessary for the Government to appoint a Committee—London Exchange Committee—to advise on the subject of the Foreign Exchanges. In order to assist the Committee in their operations it was arranged that Bankers should cease to issue gold to their customers, whose requirements could of course be satisfied by Currency Notes.” The custom of committees determining monetary arrangements would become very common in the fiat century.

Osborne continues:

During the following year it became evident that as a result of the appeal referred to and the action of the Bankers the public were becoming more accustomed to the use of paper money and more reconciled to the absence of gold.

In order to meet an obligation of the London Exchange Committee in connection with the loan of $50,000,000 made to them by a group of United States Bankers in November 1915, the Clearing Bankers in June 1917 paid to the account of the Treasury the sum of £10,000,000 in gold coin, which was “set aside” on behalf of the Federal Reserve Bank of New York.

A further appeal to the Banks was made in a letter dated the 25th July 1917 from the Chancellor of the Exchequer. Bankers were asked to hold their stocks of gold coin at the disposal of the Government, in view of the existing state or the American exchange. The Chancellor urged the Banks, in the interests of general credit, to hand over their gold by private arrangement and so obviate the necessity for a compulsory order which could be issued under the Defence of the Realm Regulations. As a result of this appeal Bankers throughout the country agreed to hold 90% of their gold at the disposal of the Treasury.

On the 1st April 1919 the export of gold coin was prohibited by Order in Council end on the same date, at a meeting of Bankers, it was agreed that all gold coin and bullion then held and thereafter acquired by them (excepting only such gold as might be imported by the Banks themselves) should be held at the absolute disposal of the Treasury, and that delivery of it should be made to the Bank of England and when required. Furthermore, they agreed that all gold already earmarked for foreign account should, if released, be paid in to the Bank of England at once. Details of all holdings of gold were to be furnished to the Bank once a month and the Bankers agreed to discourage by every means in their power withdrawals of gold from the Bank of England.

It was realised that it was absolutely essential both to Bankers generally and to the whole country that the available supplies of gold should be ready at hand, if necessary, for use centrally to meet any threatening developments in foreign exchanges, and particularly in the American exchange. At the end of the year the Treasury requested the Bank to collect the entire stocks of gold coin held by Bankers throughout the Kingdom.10

The bank would periodically purchase gold coins from banks using banknotes. In December 1919, the Treasury requested the bank collect all the gold coins held by bankers in the United Kingdom. Private bankers surrendered £41,793,000 of gold coins by June of 1920, practically all of their gold holdings, in exchange for paper notes. The entire operation cost £5,516, at a rate of a little over £1 per £10,000 collected. The discipline of proof-of-work mining was conspicuously absent at fiat’s genesis and throughout its century. Most of the gold was shipped to the United States in exchange for credit to fight the war.

From the beginning of August 1914 to the end of August 1921, the bank’s net gain totaled £62,411,000 of gold. The British government confiscated 14,684,941 ounces of gold, or around 455.2 metric tons. Today, that gold would be worth around £20 billion, roughly 300 times what it was worth in 1914. At the time of writing in 2021, the Bank of England’s gold reserves stand at only 310.3 metric tons of gold.

The war, which caused this demand for gold, necessitated suspending most aviation, relieving the bank from shipping gold to its foreign depositors. In April 1919, as the war ended and aviation resumed, the export of gold coins was prohibited. Economic historian Lawrence Officer summarized this period:

With the outbreak of war, a run on sterling led Britain to impose extreme exchange control—a postponement of both domestic and international payments—that made the international gold standard non-operational. Convertibility was not legally suspended; but moral suasion, legalistic action, and regulation had the same effect. Gold exports were restricted by extralegal means (and by Trading with the Enemy legislation), with the Bank of England commandeering all gold imports and applying moral suasion to bankers and bullion brokers.11

With less gold in the hands of the people and more notes, the bank had succeeded in protecting the official gold-to-sterling exchange rate of £4.25 per troy ounce of gold, the same price set in 1717 by Master of the Royal Mint, Sir Isaac Newton. The Bank of England’s reliable record in redeeming its notes at this rate for two centuries, interrupted only by the Napoleonic Wars, was a matter of national pride and global renown. It not only gave sterling its legendary reputation of being as good as gold, but also turned the phrase “gold standard” into the proverbial benchmark and paradigm for excellence, predictability, and reliability—a phrase that was never threatened with replacement by a century of the fiat standard.

By using the war to suspend redeemability abroad and discourage it at home, the bank had successfully used its fiat, regulations, and monopoly control over the most important financial infrastructure in the world to finance the war effort without officially coming off the gold standard, announcing a suspension of gold redemption, or devaluing the pound. Thus was born a new science of government-sponsored financial alchemy. 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.

Figure 1. The impact of the war on sterling.

Source: Twigger, Robert. “Inflation: The Value of the Pound 1750–1998.” House of Commons Library Research Paper 99/20. U.K. Parliament (23 Feb. 1999), pp. 9–22. Web.

By maintaining the pound sterling at the prewar gold rate, the Bank of England sowed the seeds of several problems that became common in later implementations of the fiat standard. The bank maintained the nominal exchange rate between notes and gold, but in reality, the prices of normal goods and services increased sharply. According to recent research by the Economic Policy and Statistics Section of the House of Commons Library, the annual change in prices from 1915–1920 were 12.5%, 18.1%, 25.2%, 22%, and 10.1%, a cumulative five-year rise of 124%. Price increases made life difficult for the average Englishman, spurring the rise of organized labor and popular demands for price and wage controls. Inevitably, rationing and shortages followed, as well as mass unemployment. The war’s end brought millions of military servicemen home, but the price and wage controls made it very difficult for the British economy to accommodate their return to the workforce. Revaluing the pound to accommodate the inflation would have meant devaluing the population’s savings; however, prices of goods and labor would have readjusted on the market. By foregoing this revaluation, maintaining an overvalued exchange rate, and discouraging the redemption of paper into gold, the bank delayed the necessary economic adjustment and prolonged the dislocations brought about by inflation and price and wage controls. Pressure grew on the government to spend to support the unemployed and the poor. However, further spending and expansionary monetary policy caused even more price increases and put greater pressure on sterling in international markets. A populist clamor grew for the bank to bring gold coins back into circulation and return to the prewar gold standard.

Britain’s problems were not just domestic. While all European countries effectively went off the gold standard in 1914, the U.S. had only done so in 1917, attracting large quantities of gold fleeing Europe. With the credit it provided to the Bank of England, the U.S. Federal Reserve also secured a large part of the British supply of gold. As goes gold, so goes power. The Bank of England was learning to readjust to a new global economic reality in which the United States and its Federal Reserve played a supremely important role. The alchemy of the U.K.’s fiat standard continued to become more expensive as the U.S. took on its global leadership role and sterling continued to face troubles throughout the coming century, losing three-quarters of its value against the U.S. dollar, and more than 90% of its value against gold.

All major European economies engaged in large-scale inflation to finance the war, after which their currencies were devalued against gold and were no longer redeemable at the prewar rate. At this point, the prudent step would have been to acknowledge that the fiat standard had served its purpose as a temporary war-financing measure and return to the gold standard. Governments had repeatedly promised this, and Europe’s citizens had expected it. However, returning to the gold standard at the prewar parity would have meant an inevitable end to the inflationary boom started by the credit expansion that financed the war and, subsequently, a painful recession. The U.S. chose this path, resulting in a sharp but quick recession in 1920, after which the U.S. economy began one of its longest expansions in history. U.S. gold redemption resumed in 1922 after a five-year suspension. Britain, on the other hand, tried to square the impossible circle of maintaining the Treasury’s high spending, the union’s high wage requirements, the gold peg at its prewar rate, and sterling’s role as a global reserve currency. Having experienced the sweet taste of paper alchemy, the Bank of England thought it could manage its way out of overt default on its gold redemption obligations through financial and political engineering.

Rather than formalize the reality of inflation and devalue the pound to get back on the gold standard, the Bank of England and the Treasury chose to kick the can down the road and across the pond, where it would continue to be kicked into the next century. So began the habit of obtaining short-term relief at the expense of long-term solvency and stability.

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.12

As Benjamin Strong, chairman of the New York Fed, writes in a letter quoted by Rothbard:

The burden of this readjustment must fall more largely upon us than upon them [Great Britain]. It will be difficult politically and socially for the British Government and the Bank of England to face a price liquidation in England…in face of the fact that their trade is poor and they have over a million unemployed people receiving government aid.13

Britain sought to ease the pressure on its pound by convincing the U.S. to engage in expansionary monetary policy under the pretext of providing global liquidity. By devaluing the dollar next to gold, the U.S. stopped the drain of gold from Britain to the U.S. and thus reduced the pressure on the pound. To further protect the pound, the Bank of England dumped some of its pound reserves on other countries that needed to use its clearance and settlement mechanisms. Britain and the U.S. arranged the Genoa Conference in 1922 to try to reestablish a global monetary order around their currencies and gold. The conference recommendations included the line, “Gold is the only common standard which all European countries could at present agree to adopt.”14

However, returning to the gold standard was very difficult when the Bank of England, still the center of the financial universe, had yet to resume the redemption of its notes into gold. Instead, the U.S. and the U.K. attempted to introduce a gold-exchange standard, modeled on the monetary arrangements that had prevailed in some Asian countries before the war, the abuse of which caused the Bank of England to have a gold shortage at the eve of the war. In essence, global central banks would deposit gold at the Bank of England and U.S. Federal Reserve and use their international settlement network to add salability across space to their gold. This gave the Bank of England and the Federal Reserve significant leeway to go off the gold standard, because other countries’ reliance on these institutions’ financial infrastructure for international trade settlement meant they would rarely attempt to take physical custody of the gold.

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.

While people could no longer redeem their banknotes for gold, they could sell their gold abroad for more than they would have received from the Bank of England. Perversely, by devaluing gold, the bank had subsidized the precious metal’s exit from British shores, as gold always goes where it is valued most. More inflation in the U.S. was needed to prevent more gold from leaving Britain, as detailed in Rothbard’s America’s Great Depression.

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.

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.

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.

This was the fiat standard protocol installation, and the whole world copied it: run unsustainable deficits, default by confiscating and restricting the movement of gold, suspend redemption, increase the supply of paper notes, and if you can, try to get other countries to hold your currency as reserve. The U.S. did it best.