Summary

In some ways this book has formalized thoughts and Ideas presented by the author that only a book can force through writing under the structure of chapters with clearly cited sources, but in many ways reading this book felt like a long twitter thread. The writing style of the author can be argued to be combative, with a healthy use of slang, and sometimes hilarious remarks with no mention of satire. There is a general aggression toward what the author perceives as a corrupted form of economic thinking which he labels “Keynesian Economics”, based on the late economist John Maynard Keynes. In general, I felt a strong passion is in the author which likely gave him the energy to write this book, but he clearly has a deep bias. I feel this book will not live a long life, there are some scattered pieces of timeless wisdom and knowledge, but much of it is directed at the present battle to support an argument for why Bitcoin is a superior form of currency for the modern world. The second half of the book is simply a defense of all criticisms that Bitcoin has faced. I enjoyed the first half of the book more, which explores the development of the modern Fiat currency standard and its advantages/disadvantages compared to other currency systems. The author states that his goal for writing this book 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 Latin word fiat means “let it be done”. The author argues that the modern use of fiat is akin to a dictation or command, essentially a law forced on the population, dictating what is to be used as money. One of the great advantages of having a fiat currency is that the issuing government never runs out of money, they are only bounded by the limits of currency devaluation, which one can argue is linked to physical constraints such as natural resource limitations and available workers in the labor force. Another aspect of a fiat system is that governments have significantly more control over the economy, and can have a significant impact on the health of the economic system based on decisions that are made. I would argue this is like a double edged sword, where good policy decisions can significantly help the economy, but poor policy decisions can do the opposite. This is the same dilemma with any centralization of power, similar to having a dictatorship, where a good king can be immensely beneficial, but a poor king can destroy the whole system. The author summarizes the evolution of the fiat system from earlier economic systems often based on a gold standard. I feel the author does not fully address the complications of an economic system based on a gold standard. He does address the issue of the immense cost in transporting gold and the general issues with security, but he does not seem to fully address the fact that major economic collapses have occurred during times of a gold standard. I am however sympathetic to the idea of a gold standard, as it does remove to some degree the power that the government has over the economy, and makes regulation or micro-managing of the economic activities of the population very difficult. I believe that one of the major reasons why Western Civilization developed is because the ruling classes of Europe often had to barter with aristocrats or other wealthy inhabitants of their realms in order to fund operations, including paying for an army. Kings of old Europe were limited in their monetary resources, and the lack of monetary centralization forced them to negotiate and develop a culture of compromise which appears to be lacking in much of the world.

The author writes that the elimination of the gold standard by President Franklin D Roosevelt in 1934, where all American citizens were commanded by law to sell their gold at a fixed price of $35 per troy ounce, essentially started the first modern fiat standard. This fiat standard is summarized as: “…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.” With the victory of World War II, and a huge increase in gold reserves for the United States, the signing of the Bretton Woods Agreement in 1946 returned the U.S. dollar to a standard that could be converted to gold, a system similar to what was used in Britain when it had the U.S. colonies. However, on August 15, 1971 President Nixon said in a nationally televised address: “I have directed Secretary Connally to suspend temporarily the convertibility of the dollar into gold or other reserve assets, except in amounts and conditions determined to be in the interest of monetary stability and in the best interests of the United States.” So once again, gold was decoupled with the U.S. dollar, which was followed by a time of high inflation. The author writes, “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 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.” “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.”

Chapter 3 focuses on the technological innovations of fiat money. “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.” This need to be licensed or approved by a government or regulating body creates a network effect for the fiat system. “The fiat network comprises around 190 central bank members of the International Monetary Fund (IMF), as well as tens of thousands of private banks, with many physical branches.” Ultimately fiat currency is forced under law to be used by members of the community, this maintains demand for the currency and ensures that pieces of paper or digits on a screen with no intrinsic value are maintained as value in the society. The author argues that “…the fiat standard destroys savings and the ability to plan for the future in order to operate a payments network.” By managing a fiat currency based on a policy of continual inflation, users of the currency are deprived of an easy way to store currency units for future use without it losing significant value. This forces strategies such as investing or capital allocation and all its associated risks as a necessity for the simple act of transferring purchasing power to a future time (i.e. saving). I think there is an interesting debate to be had, which of the two involves less risk to preserve purchasing power: storing a significant amount of gold in a vault, or managing a significant amount of capital in the world’s equity markets? Perhaps all fiat currency did was transfer risk away from protecting pieces of yellow metal to managing how much capital is stored in different companies? This question is not addressed by the author.

In Chapter 4 the author compares the act of debt and getting into debt akin to mining. “Getting others into debt is the fiat standards’ version of gold prospecting.” The author believes that much of modern monetary policy is dictated on the central conclusion of Milton Friedman’s A Monetary History of the United States, namely that “…the Great Depression was caused by the Federal Reserve not reflating the monetary system after the 1929 stock market crash.” There is a general phobia of deflation by many modern economists that cannot be denied. The author thinks deflation is a “…natural market response to increases in the production of goods and services”, suggesting that it is generally a good sign of human progress in increasing the capacity to produce goods and services. The author makes a case for the benefits of hard money with the following paragraph, “Human progress is intertwined with the hardening of our monetary media. The harder a monetary medium, the less its supply will be inflated, and the more its owner can expect it to maintain its value, or even have it appreciate over time. The more the money can be expected to hold its value over time, the more reliably an individual can use it to provide for their future self. The more reliably one can provide for their future self, the more they can reduce their uncertainty about the future. The less their uncertainty about the future, the less a person discounts the future, and the more they are likely to plan and provide for it. In other words, hard money is itself a driver of lowered time preference. As our money becomes harder, our ability to see efficiently increases, allowing us to provide for our future more easily and encouraging us to become increasingly future-orientated.” The author criticizes the use of the CPI index, or the “Consumer Price Inflation” Index. The CPI measured the price changes for a “basket of goods”. However, the goods that are in the basket can be changed, and have changed in the past, furthermore it does not address differential inflation such as property prices in more desirable areas vs less desirable. There is clearly very large dispersion in the inflation of goods, some things such as televisions have gotten cheaper, while tuition for top colleges continue to grow rapidly year after year.

Chapter 5 discusses the difficulties in knowing or measuring the quantity of fiat currency. Furthermore a philosophical concept is examined assuming one is to think of money as “ownership” in something. The author writes, “If ownership is understood as the ability to command and control something, then one never quite owns fiat in the sense of full sovereign control; one merely holds it tentatively, at the beneficence of the government, which effectively owns all the liquid wealth in its jurisdiction.” I find this to be quite a profound statement, I believe many think of money as a form of power or control, however it is possible that this is a left-over psychology from a previous non-fiat world where money was disconnected from the state. The author also makes the claim that in a fiat system wealth is not a product of having large amounts of fiat currency units (i.e. US dollars) but rather having large amounts of debt denominated in the ever-depreciated fiat currency. “Success consists of being able to secure ever-growing quantities of debt as you pass through the stages of life: a big college loan that allows you to get into the best paying job, whose salary will allow you a larger loan for a large house and another loan for a car.” Furthermore, “Financial security in the sense of having a stable amount of liquid wealth saved for the future is no longer available in the current system.” The author describes how the savings mechanism has broken down in recent times, “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.” The author continues, “The problem with fiat is that simply maintaining the wealth you already own requires significant active management and expert decision making….You effectively need to earn your money twice with fiat, once when you work for it, and once when you invest it to beat inflation.” “In the fiat standard, money becomes a liability rather than a future security.” So why do we have a devaluating currency to begin with, what good does it do? The author writes, “Fiat central banking is built on the fictional idea that devaluing currencies will cause people to invest more, thus inducing more economic production.” In a world where currency keeps its value into the future or potentially gains value I can see the appeal to not invest, as investing introduces future uncertainty and most people would like to have a predictable certain future. Although I find the idea of a hard currency appealing, I do think it would significantly reduce investment and economic growth, I first learned about investment simply because I did not like the idea of my purchasing power being destroyed via inflation, and now I invest most of my capital. Also I think it is important to recognize that the future is inherently uncertain, and we cannot make an economic system that makes the future certain, therefore I think an inflationary currency is actually more representative of reality rather than one which maintains its purchasing power through time. If the currency itself was to become safer and harder (like gold) then uncertainty would be introduced in other forms such as the higher risk of theft or societal conflicts.

In Chapter 6 the author argues against the stimulate effects of increasing money supply, “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…The demand for money is always higher than the supply, because people desire more things than they produce and because desiring is far easier than producing.” Although I agree with these statements I think the way in which money is usually created in our modern economy (via debt) it is usually linked to an effort of producing something. As long as new money is connected to new production, I do not see an imbalance of more money chasing fewer goods, however there could be issues of dispersion where some goods just have inherent scarcity that cannot be overcome by the production of other goods. However, I can see serious issues when debt is given for nonproductive means, such as a student loan for a student who only wants to go to a college to party and in no way gain beneficial training to bring to the workforce. One of the big advantages of fiat currency as explained in this chapter is the way in which it can restore systemic issues of fractional reserve lending. When banks lend while holding a fractional amount of their reserves, this essentially means that they would be unable to release all of their liabilities at once and therefore a bank run is possible. The ability to create unlimited fiat currency by a central authority such as the central bank removes the possibility of a bank run occurring and thus allows a fractional reserve lending system to exist without the possibility of a bank run scenario.

Chapter 7 delves into how a fiat currency system affects the psychology of people in it. The author writes, “As a monetary system whose constituent units are easy to produce for governments, fiat disrupts this natural order, as it severs the connection between work and reward.” “Instead of learning to be productive, fiat teaches you to play politics. Instead of work being rewarded based on its productivity, it is rewarded based on artificial status games.” In the author’s words, “Money can be thought of as the operating system for society, as it is involved in every economic transaction, and so it will have a pervasive influence on the nature of economic choices that individuals make and the values that motivate them.” Again I think there are some profound statements here by the author. A reflection that I had is that when money is connected to a naturally scarce resource such as gold there are real limits to the supply of money and therefore money itself becomes more valuable and harder to attain. In theory under a fiat system money is not free, but the gatekeepers of money becomes the holders of capital (banks, government, and wealthy individuals), rather than the depths of the earth (gold mines) or entities with large gold holdings. Ultimately government is the only significant (unlimited) gatekeeper, and there is a real question on how disciplined the government can be to ensure that money is only released in turn for productive means, I can imagine many scenarios where government is corrupted and releases money for unproductive uses. Ultimately a fiat standard makes the role of the government much more important to everyday life, but I can also imagine a bad scenario with a gold standard if a small minority were to control the majority of gold. I frankly do not see a perfect solution here. I was surprised to see the author’s views on interest rates. The author writes, “We can understand the process of human civilization as the process of lowering time preference.” In short the author is supporting an idea that interest rates are correlated to how advanced a civilization is, or in other words how much more valuable the present is to the future. In a highly advanced civilization, the future is relatively certain and therefore not discounted, a dollar today is similar to a dollar in ten years, but in less civilized conditions there is more future uncertainty and the future is discounted via high interest rates so the value of a dollar today is significantly more than a dollar in ten years. I can see the more dysfunctional countries of the current times operate under higher inflation rates, so I would have to say this argument does make sense to me. The author also writes, “The process of human civilization, as the lowering of time preference, is driven by, and in turn drives, more savings and lower interest rates. Austrian economist Eugen von Bohm-Bawerk said that the cultural level of a nation is mirrored by its rate of interest.” The author goes on to speculate, “I suspect that the end result of developing hard-to-confiscate, strictly scares hard money with an extremely high capacity for decentralized fast global settlement is that interest rates would naturally go to zero. Interest based lending would cease to exist.”

The remainder of the book delves into issues of food, science, fuel, and bitcoin. The author clearly has very aggressive opinions on how a fiat system is manipulating the perceptions of the public on these major topics. I don’t share all of the views of the author but I do sympathize to some degree on how he as arrived to them. I do feel that we currently live in a society where natural market forces would tend to increase the prices of major items necessary for a high quality of life such as food, health, and energy. As we currently live a somewhat free market economy, yet we are significantly overpopulated as a species and have the capacity to permanently reduce or destroy the remaining wild life on the planet, I would not be surprised if there are forces trying to impact “public perception” to push ideas that would reduce one’s consumption of animal products and carbon-based energy. There is a real debate to be had if a “free market” approach can deal with issues such as our addiction to carbon based fuels and a general desire to procreate and live forever, all while eating and potentially exterminating a large number of the living creatures on the planet. And no, I am not a vegetarian, I enjoy eating animals, particularly wild animals, but I think it is very important to be conscious of a healthy ecosystem and to adjust ones consumption relative to the health of the ecosystem (i.e. eat what is plentiful, not what is endangered or going extinct). I think it is important to realize that nature is not connected to our economic system, and often what we call “production” is simply stolen work performed by a healthy ecosystem made of living creatures just doing what they do to survive. I have yet to meet a beekeeper who is paying a share of the profit to the bees. I do not find the author’s arguments to ignore global warming and environmental harm convincing, I think he is simply trying to find a way to say all of the world’s problems come down to fiat currency.

Quotes

The vast majority of people alive today have never used anything but fiat money. Page 3

Nature offers humans a reality they must deal with to survive. Page 97

Every creature needs to spend its day searching food and trying to avoid becoming food. Page 97

Trade, social cooperation, and the ability of humans to live in close contact with one another in permanent settlements are dependent upon them learning to control their base, hostile, animal instincts and responses and substituting them with reason and a long term orientation. Page 107

Starting a family is a low time preference decision that requires the individual to highly value the future and sacrifice for it. Page 108

Historically, soy was not an edible crop; it was used to fix nitrogen in the soil. The Chinese first figured out how to make it more edible through its extensive fermentation in products like tempeh, natto, and soy sauce. Famines and poverty later forced Asian populations to eat more soybeans and soybean-based products. Page 122

When Europeans found West Africans were using beads for money, they took advantage of the fact that the beads are cheap to produce in Europe but expensive to produce in Africa. They brought in enormous quantities of beads to purchase everything valuable in West Africa. Page 244

The longer fiat monetary systems operate, the more they come to resemble a loyalty rewards scheme for the government. Page 276

The collapse of money destroys the division of labor and makes economic coordination impossible, unraveling modern life into a primitive disaster. Page 328