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Two competing economic systems eye each other warily across the ideological divide. One is based on complete state control and surveillance of its citizens; the other celebrates personal and financial freedom. The world holds its breath and hopes their mutual hostility does not turn into outright conflict.
No, this isn’t the Cold War: it’s the battle for supremacy between fiat and bitcoin. And as we know from the last century, no one gains from a war between two superpowers, whether the weapons are nuclear or monetary. Instead, the two worldviews must learn to live together.
The world’s separation into two parallel, competing economic systems has already begun. So rather than “pick a winner,” we need to understand what these two ideologies want to achieve, why each will dominate its own sphere of influence, and how we can navigate this time of transition. And we must ask whether, and how, we can secure cooperation and collaboration between these two so very different worlds.
The rise of Central Bank Digital Currencies (CBDCs) promises to be no less transformative than bitcoin, though they serve a very different ideology: state control. From a fundamental perspective, CBDCs are as poor a store of value as banknotes, and even easier to “print.” But that’s only one reason why governments see a future in digital money. These CBDCs lay the foundation for a universal financial ecosystem where every transaction is monitored and everyone’s access to the economy is controlled.
If that sounds like dystopian fiction, it’s merely the logical progression of a process that’s already been well advanced today. Just look at Facebook Marketplace: a hyper-efficient online economy that counts its customers in the billions, with incredibly powerful analytics and, crucially, complete control over its users. Break the rules, and you’re out.
It’s easy to see why Fiat 2.0 is so attractive to governments, but less obvious is why these digital currencies will succeed when bitcoin is superior in so many ways.
To understand why CBDCs are unstoppable, remember that they are designed to work with, and support, legacy financial infrastructure. Centralized digital currencies require no revolution in the world’s financial ecosystem; they can simply piggyback on existing fiat payment rails. That’s one key reason why their success is assured, but it also sets up tensions with the parallel Bitcoin ecosystem.
When CBDCs are the de facto standard for transactions, it creates a paradigm of control. With digital fiat creeping into more areas of the economy, even without the public being fully aware of it, governments will be even less tolerant of any rival system. They will naturally seek — as many are trying now — to apply the same legacy regulation to the Bitcoin ecosystem, demanding the same types of anti-money laundering, KYC controls, and transaction monitoring.
While it’s easy to regulate what you can control, Bitcoin’s value lies in decentralisation: it cannot be censored — unless you censor internet access as a whole — and it cannot be “printed.” And while this makes it the perfect means to transfer wealth through space and time, the risk is that governments and legislators will try to strongarm consumers into adopting Fiat 2.0 by adding as much friction as possible into buying, holding and transferring bitcoin. Tensions between the two monetary superpowers are only set to grow.
Bitcoin might be unkillable, but we can expect a rocky road to inevitable regulatory acceptance. There are two ways you can prepare: first, become an expert in Bitcoin at the technical level to understand the workarounds to any obstacles placed in the path of consumer adoption. But this requires a huge expenditure of time and effort, and even then may be beyond most people.
More realistically, people can choose services that are truly aligned with Bitcoin’s vision. Steer clear of financial services firms that claim to “do bitcoin,” yet still have a significant stake in the legacy financial ecosystem. Companies like PayPal might have a strong brand and worldwide reach, but unwary users will quickly discover that they don’t give ownership of coins to the user and require rigid requirements for withdrawing bitcoin to personal wallets.
And what of the regulators? Well, we’d like to see them play a role in bitcoin’s development – or rather, in the services built on top of it. We’ve seen how cryptocurrencies can be used as the foundation for scams and illegitimate crowd-funding endeavors. Just look at what Joseph Lubin has to say in that regard. We’d like to see regulatory frameworks that can avoid the abuse of the Bitcoin ecosystem. For this to work, regulators need to roll their sleeves up, hire experts, and create bodies and discussion panels to examine the risks and propose workable solutions, rather than just slapping layers of legacy regulation on them.
We’re seeing the emergence of two monetary standards: one for everyday financial transactions, and the other for storing and transferring wealth. Though neither can “win” over the other, the legacy financial system can make life unnecessarily difficult for bitcoin and its adherents, yet with no hope of halting the revolution. Let’s not see history repeat itself as farce, and hope the two worlds can compete but, where possible, collaborate for the greater good of humanity.
This is a guest post by Nik Oraevskiy. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.
Spike Lee’s new ad dubbed “The Currency of Currency” launched online today, and the two-minute spot depicts crypto as new money for a diverse world.
The 64-year-old Oscar winning filmmaker directed and starred in the commercial for crypto ATM provider Coin Cloud, and in the ad, he explores themes such as racial and financial inequality, diversity, and inclusivity.
“Old money, as rich as it looks, is flat out broke,” Lee says, adding “they call it green, but it’s only white” as he cites the lack of diversity in people depicted on U.S. dollar bills and coins. While the ad spot had previously been touted as being a “Bitcoin” commercial, BTC isn’t mentioned by name at all in the ad. Instead the concept of crypto in general is referred to as “new money.”
The ad does have a loose reference to Bitcoin via a Coin Cloud ATM that contains the BTC logo, however the firm’s ATMs support more than 30 digital assets.
The commercial was created in collaboration with the Campbell Ewald marketing and advertising agency, and features appearances from actor and activist Kendrick Sampson, singer-songwriter Teyana Talyor, Ru Paul’s Drag Race contestant Shangela and Emmy-nominated Pose star MJ Rodriquez.
In the ad, Lee cites issues with fiat and traditional banks and notes there are “7 million unbanked” and “20 million underbanked Americans.”
NEW: First look at Spike Lee’s Bitcoin commercial
“Old money is not going to pick us up – it pushes us down, exploits, and systematically oppresses. The digital rebellion is here. Old money is OUT, new money is IN.” pic.twitter.com/eD1nCenXBX
— Yano (@JasonYanowitz) July 14, 2021
“Old money is not going to pick us up – it pushes us down, exploits, and systematically oppresses,” he says. The filmmaker describes “new money” as “positive, inclusive, fluid” and “strong culturally rich.”
Related: Bitcoin helped the unbanked. Now, this project helps them get justice, too
Lee is known for exploring social and racial issues in his films, and the identity politics theme of the spot has drawn a mixed reaction online.
In response to ‘Documenting Bitcoin’s’ post about the ad user ‘The LogicalShaman’ stated that “making this about race at the beginning is super fucking tacky,” while Watchdog Capital’s Bruce Fenton said “Spike Lee cares more about what color skin people have than he cares about #Bitcoin.”
However “Analytics4Bitcoin” responded that they like that “more people feel included in the Bitcoin ecosystem,” and added that:
“Lots of focus on the negatives of the community but look around and what you see is a truly diverse collection of millions of people worldwide looking for better money. Pretty neat!”
Coin Cloud noted in a July 14 press release that the firm wanted to “spark important dialogue” from this ad campaign, and chose Lee specifically for his expertise in exploring social issues.
“His deep connection with communities of color, plus his track record of contextualizing issues of equality, make him an ideal partner for our goal of making digital currency accessible to all,” said Amondo Redmond, Global Chief Marketing Officer at Coin Cloud
Coin Cloud’s ad campaign will run nationally across cable TV channels such as Comedy Central and Adult Swim, and will also appear on social media platforms such as Youtube and Reddit.
There’s been lots of talks about the U.S. dollar losing its status as the world’s reserve currency. While most people still wonder when this is going to happen, I’m here to bring you the shocking truth: It’s already happening right in front of us. But most people fail to realize this because they don’t understand the signs. So, let me break it down for you so you know exactly how this is unfolding and, most importantly, how to protect yourself.
Since the 1700s, we’ve seen 750 different currencies in the world and only 20% of those remain. All have been devalued. This means they buy less today than they did originally, and the U.S. dollar is no exception.
According to Ray Dalio, founder of the world’s largest hedge fund, Bridgewater Associates, currencies die when a country racks up too much debt. The country ends up with four different options:
Of all these options, governments always choose to print money because that’s the “easy” route. They don’t have to cut down on spending, piss off creditors or hurt the rich. But that’s how things start to go south for a currency. Let me clarify this for you with historical examples.
In 1914, when WWI broke out, many European countries abandoned the gold standard so that they could pay for military expenses with paper money instead of gold. The United States became the lender of choice for several countries and, as a result, the USD unofficially replaced the British pound as the world’s new leading currency by 1919.
During WWII, the United States found itself in a privileged position to profit from the war. Before joining the conflict, we sold ammo, weapons and other supplies to the Allies in exchange for gold. As a result, we ended up amassing two-thirds of all the world’s gold.
When countries came together at the Bretton Woods Agreement, they realized it was time to have a worldwide currency system that was linked to gold. Since the United States owned most of the world’s reserves, and the U.S. dollar was also backed by it, USD officially claimed its world’s reserve currency position.
While most people think that the transition from British pound to U.S. dollar happened when the agreement was signed, it was actually a 30-year transition that started way back in 1914 when countries started to borrow dollars from the United States.
So when people ask me when the next transition is going to happen, I say, “We’re in the middle of it.” The world is already de-dollarizing and the signs are clear; you just need to know which ones to look at.
According to the International Monetary Fund (IMF), USD dominance is already declining. In 2017, the dollar composed 64% of the world’s reserves. Today, it’s down to about 59%.
Another obvious sign is in the U.S. Dollar Index (DXY), which is down 10% this year alone.
Of course, the pandemic plays a role in all this and the mainstream media is taking notice.
But here’s the big problem: The metrics above only tell you part of the story because you’re comparing USD with a basket of other currencies. In other words, you’re only looking at fiat currencies.
Instead, we should be looking at what money is used for: purchasing goods and services. That means we need to look at the dollar’s purchasing power. Here’s what I mean: If you compare gold to the dollar over time, you can see it cost $20 to buy an ounce of gold in the early 1900s. It jumped to $35/oz in 1933, then it went haywire after 1971.
Today, an ounce of gold costs over $1,800. Does this sound like the USD is holding its purchasing power? I don’t think so.
What about real estate? How has the USD held its purchasing power when compared to real estate? You might think home prices are going up, hitting all-time highs. But is real estate really going up or is the dollar simply losing its value?
The index below highlights the loss of USD’s purchasing power compared to real estate. The truth is home prices aren’t just going up; it just takes more dollars to buy them.
We can also take a look at oil. It’s been going up similarly to gold, so is it increasing in value or is it just another sign of the dollar losing its purchasing power?
Of course, I couldn’t leave out one of the hottest assets today — bitcoin. This is the price of BTC compared to USD. Do you see any resemblance with the other assets I just showed you?
Now, let’s bring it all together and compare our current situation with a historic example. Before we proceed, let me warn you: This will give you a “zoomed out” perspective and most likely flip your mindset entirely.
This is the case of the Weimar Republic (Germany) in the early 1900s.
In 1922, Germany defaulted on debt to repay WWI reparations. In order to recoup their funds, France and Belgium invaded the Ruhr Valley — the German industrial epicenter.
As a response to the invasion, the German government ordered all workers to stay at home and not work — this is called “passive resistance.” Here’s where the Weimar Republic’s death spiral starts.
The country was already crippled by debt, but they still had to find a way to come up with cash to pay its workers. So what did they do? They started to print money (the fourth option we talked about earlier).
Now, take a look at what happened to their Consumer Price Index (CPI). The CPI measures the average change in prices that consumers pay for goods and services (aka inflation).
How did this affect the population? A good example is a loaf of bread, which cost $0.13 in 1914. That same loaf of bread cost $0.19 two years later in 1916. By 1919, the price had doubled to $0.26, then $1.20 in 1920 and $3.50 in 1922.
Once they started to print money in 1922, that same loaf of bread went from $3.50 to $100,000,000,000 ($100 billion!) by December 1923. That’s when the German mark collapsed.
During that period, you literally needed wheelbarrows to move your cash around. Eventually, the currency was worth less than wood, so they burned cash to heat their homes.
It’s important to note that, at the beginning, the loaf of bread went up very slowly. At that time, most people didn’t realize what was happening until it was too late. Like the boiling frog fable.
We can’t go back in time and change the past. But we can look at historical examples and compare them to our current reality, so we don’t repeat the same mistakes.
The first parallel between the United States and the Weimar Republic is money printing. Take a look at the United States’ M1 and M2, which are measurements of the amount of dollars in circulation: M2 is also a key economic indicator used to forecast inflation.
It goes without saying, the resemblance between these indicators and the German CPI is astonishing.
The third parallel we can draw from the Weimar Republic is our crippling debt. Defaulting on debt was the first “domino piece” that led to other events unfolding. In 2021, the United States grew to a record budget deficit of $1.7 trillion in the first half of the fiscal year. It means we’re spending more than we’re bringing in — exponentially more than in previous years.
The reason I bring you all these data is so you can zoom out and see things from a better perspective. In the book, “When Money Dies” by Adam Fergusson, he says most Germans couldn’t see what was really happening. A lot of them literally thought they were getting rich because they thought their assets were going up in value.
But now you know that was not the case, it was actually the German mark losing purchasing power. So they started banking their cash, selling their assets and trading them for currency. At the end of the day, they ended up with a literal pile of worthless paper.
Now, if you were in the Weimar Republic at that time, what would you have done?
The chart above shows the price of gold from 1915 to 1935. If you’d bought gold around 1920 and held on to it until 1935 that would’ve been the trade of the decade for you. But here’s the biggest takeaway: It’s easy to see the upward trend from this perspective, but it wasn’t a clear, straight line for people living at that time. It was a very volatile period.
So let me ask you: What are you doing with your money now? Some people are cashing out, trading their assets like real estate, gold, bitcoin or even stocks for dollars because they’re at all-time highs. The same way the Germans did.
If we continue to increase debt and print money, the USD will continue to lose its value and its position as the world’s reserve currency. The loaf of bread is going up and you don’t want to end up with a pile of worthless cash.
My advice to you is to find inflation hedges, assets that are going up with the rate of inflation. Most importantly, start now before it’s too late. Don’t wait for the “next Bretton Woods Agreement,” the transition is already happening — and it’s happening right in front of you.
This is a guest post by Mark Moss. Opinions expressed are entirely their own and do not necessarily reflect those of BTC, Inc. or Bitcoin Magazine.
The presence of bitcoin continues to accelerate in Argentina, a country that has been severely affected by government-sanctioned anti-free market policies. Citizens of Argentina have long utilized the U.S. dollar as a means to transact outside of the traditional system, yet bitcoin has been gaining traction in the country over the last few years. Recently, the Latin American director of digital exchange Binance told AFP News, “The number of user accounts for investing in ‘cryptos’ has multiplied by ten in Argentina since 2020,” detailing a staggering increase in the number of users.
Argentina entered the 20th century as one of the wealthiest countries throughout the entire world. Prior to World War I, Argentina was richer than the traditional European superpowers of France, Germany and their Spanish colonizers. The country continued to grow throughout the first half of the 20th century, albeit at a slower pace than the rest of the world but still maintaining a positive growth rate.
Yet, in 1975, the economic scenario in the country quickly changed; from 1975 to 1990, the country experienced economic stagnation and dramatic inflation. Starting in 1975, the government enacted the Rodrigazo, a series of centrally planned government policies that aimed to centralize economic decision-making. As a result, inflation averaged over 300% per year from 1975 to 1990, reaching severe hyperinflation rates of 2,600% in 1989 and 1990. These bouts of government-induced hyperinflation destroyed the savings of citizens preserving their wealth in the Argentintian peso and set the country into a devastating downward spiral.
Throughout the 1990s, Argentina had a law of convertibility that fixed the peso’s exchange rate at par with the U.S. dollar, meaning every peso had to be backed by a 1:1 U.S. dollar reserve ratio. This temporarily stalled inflation for about a decade, yet meant that politicians could not print exorbitant amounts of money. As a result of the government’s desire to increase spending, in 2001, they quickly enacted a series of government policies known as the Corralito. During this attack on economic freedoms in the country, the Argentinian government froze citizens’ dollar-denominated bank accounts within the banking system. Simultaneously, they altered the peso to USD exchange rate then proceeded to steal the dollars within the banking system as all were converted to Argentinian pesos under the new exchange rate, simply to finance government spending at the expense of the common citizen.
After the Corralito, the economy had a slight return to growth as government-imposed restrictions were slowly lifted from 2002 to 2012. In 2012, rising inflation and capital flight led to a massive decrease in the country’s dollar reserves pushing the government to enact new capital controls, specifically centered around limiting citizens’ access to U.S. Dollars. These capital controls led to a steady increase in the black market for dollars transacted outside of the traditional banking system, known as the blue dollar rate.
From 2012 to 2015, capital controls continued to be enacted under President Cristina Kirchner, leading to a steady increase in the blue dollar conversion rate. Under President Mauricio Macri from 2015 to 2018, some capital controls were lifted, decreasing the size of the black market for U.S. dollars, yet the loosening of restrictions did little to prevent a steady rise in the blue dollar rate.
In August 2019, President Macri lost the primary vote, marking an end to the free-market policies the administration had instituted. This led to a massive stock market sell-off and currency devaluation as the peso dropped 15% in a single day. In September 2019, new capital controls were instituted that prevented citizens from converting pesos to dollars at a rate that exceeded $10,000 per month. A month later, after Macri officially lost the election, citizens were limited to just $200 of dollar savings from the previous $10,000 allowed.
Under the current Alberto Fernandez administration, capital controls have been greatly increased. The administration announced after entering office in December 2019 that all purchases made in any foreign currency would be subject to a 30% tax, hampering official avenues for citizens to transact with relatively stable fiat currencies such as the U.S. dollar. As of April 2021, the government has confirmed that all capital controls will remain in place for the foreseeable future, doubling down on policies that have destroyed the free market in Argentina, devalued the peso, and forced citizens to transact on the black market to maintain any level of prosperity.
Coinciding with the new capital controls within the country, bitcoin adoption has been steadily increasing. The amount of peer-to-peer volume within the country has significantly increased since 2018 and is continuing to maintain a consistent volume.
As seen in the chart above, the clear upward peer-to-peer volume trend beginning in early 2020 coincides with new capital controls within the country. These volumes may continue to increase as the current administration recently confirmed that all capital controls will remain in place, a move that will induce capital flight and continue to force citizens to transact outside of the traditional financial system.
On the corporate side, South American e-commerce giant MercadoLibre, headquartered in Buenos Aires, Argentina, recently disclosed a $7.8 million bitcoin purchase, with plans to hold bitcoin on their balance sheet. The company has accepted bitcoin for payments since 2015, as a result of South American customers being relatively financially disadvantaged and effectively being forced to rely on bitcoin as a reliable payment method.
Argentinians have been consistently robbed of their ability to preserve capital within their own country. Dramatic domestic inflation as a result of government money printing and heinous economic policies have forced citizens to abandon the peso for the U.S. dollar. Yet, in an attempt to finance government spending, citizens have had the only reliable form of currency outright stolen from them time and time again.
On the surface, bitcoin is the best savings technology in the world, providing an avenue for the citizens of Argentina to preserve their wealth in a perfectly constructed deflationary piece of technology. This is not bitcoin’s only usage for the economically disadvantaged citizens of Argentina; bitcoin cannot be censored or confiscated regardless of government intervention. This facet alone will allow Argentinians to prosper outside of the arms of a corrupt government that has consistently shown a disregard for the well-being of its citizens.
Bitcoin does not align with the goals and incentive structure of the Argentine government, but fills the goals of the average citizen to perfection. Argentinians now have the ability to opt out of a system that has treated them unfairly for decades.
Bitcoin is freedom money.
Josef Tětek is a SatoshiLabs and Trezor Brand Ambassador.
It’s a tulip mania, a Ponzi scheme, a bubble about to burst. You’ve heard it all before. And not just from your nocoiner friends: This narrative has been pushed for years by many famous economists with a Nobel on their shelf. Why do renowned economists fail to see the value in bitcoin? It’s not a failure of understanding; it’s a difference of worldview.
The influence of mainstream economics cannot be underestimated. As John Maynard Keynes said, “Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back.” This fits current economic policy perfectly. So, let’s see how the madmen and scribblers view the current economy — and, therefore, society itself.
Mainstream economics is mostly a mixture of two dominant schools of economic thought.
Keynesianism in its various forms (i.e., post-Keynesianism, new Keynesianism) is heavily focused on the economic aggregates: GDP, unemployment rate, consumer spending, inflation measured through consumer price index (CPI) and such. Market forces are viewed as chronically inadequate due to various alleged market failures. Society is in constant need of public goods supplied by the government. Public spending is a panacea in the eyes of Keynesian economists and should be done even at the cost of heavy budget deficits, if need be. Interestingly, Keynes himself prescribed public deficits only in the downturns; but the U.S. budget has been in a deficit in 46 out of the past 50 years, even in the times of strong economic growth.
Monetarism also focuses on the economic aggregates, but its prescriptions are, well, monetarist in nature: Instead of fiscal measures, the economy should be aided by the central bank’s actions. Inflating the money supply, manipulating short-term interest rates, stepping in as a lender of last resort, buying up mortgages, bonds or even equities — all these measures steer the economy from the inevitable crash, deflation and unemployment, in the eyes of the monetarist.
Today’s economic pundits, advisors and government officials usually hold these two views of the economy combined. Thus, the economic policy should be liberal with the taxpayers’ money and with their purchasing power as well. It’s important to point out that monetarism started to play a role in mainstream economics in the 1970s, after the U.S. dollar was decoupled from gold and the whole world found itself under a pure fiat money standard, without any link to gold whatsoever. In a sense, monetarism came to Keynesianism’s rescue: With ever-rising debt levels, an argument for ever-lower interest rates needed to be found. Chronic deficits drive the need to inflate the debt away through easy money policy. And easy money policy is, in turn, a strong incentive to go into more debt — for the government and the economy as a whole.
While an economic policy based on mainstream economics seemed to work over the past decades, it is doomed in the long run. Snowballing debt, fueled by easy money policy, simply isn’t sustainable and something has to give: Either the debt will be defaulted upon, or the purchasing power of fiat money will evaporate. As Dylan LeClair succinctly puts it: “There is mathematically no way out of the current economic environment.”
Instead of money created by the click of a mouse, we have money that must be mined — created through resource-intensive computations. … In other words, cryptocurrency enthusiasts are effectively celebrating the use of cutting-edge technology to set the monetary system back 300 years. Why would you want to do that? What problem does it solve? — Paul Krugman
Now, let’s tackle the initial question: Why do mainstream economists hate on bitcoin?
The above quote from the renowned Nobelist helps us answer the question. It’s noteworthy that what a sound money advocate views as the main advantage of bitcoin, the mainstream economist understands as its downside. For Paul Krugman (an epitome of mainstream economics today), bitcoin is a monetary setback, because you can’t create sats at the click of a button.
That’s a fiat mindset: The worldview that the state and its experts should be able to create and inject money at will, because they supposedly know better. We can call this by its true name: monetary socialism. The state defines what money is via legal tender laws and sets the monetary policy (i.e., rate of money creation), the state decides whom the new money will reach first, the state sets the interest rates, the state nudges people away from savings and toward debt. Though the state pays lip service to the market via tools like “open market operations.” there really isn’t much room for true market forces in the era of fiat money.
One of the basic functions of money is (or should be) its role as a store of value. But there isn’t a place for that when establishment economists get to work. Since money can be created from thin air, there really isn’t a point to holding it over long term. Investments, you say? But why, we have credit with ever-lower interest rates for that! What about the safety net? Welfare programs! That’s why you’ll never see a mainstream economist conceding that bitcoin has the store of value quality going for it: It’s like asking a colorblind person to enjoy the rainbow. They just don’t have the capability to see it.
And it makes sense from the viewpoint of mainstream economics: The only way out of the Keynesian debt hole besides outright default is via inflation. The idea that money should act as a store of value is preposterous if you have the mainstream worldview. Money should serve as the medium of exchange. It’s enough if it doesn’t hyperinflate in the short term, but losing most of its value in the long run is desirable.
All rational action is in the first place individual action. Only the individual thinks. Only the individual reasons. Only the individual acts. — Ludwig von Mises
The key problem with the mainstream approach is its focus on the aggregate and little consideration is given for the individual actions and relative forces that play out in the economy. While it’s true the government or the central bank can stimulate the economy into a growth trajectory, the structure of the economy can end up being unstable as a result. Just consider the 2008 financial crisis: The U.S. economy has been seemingly growing strong for years, but this growth was later found to be pretty toxic and the whole financial system almost collapsed as a result. And the solution was more of the same, per the mainstream prescription: more deficit spending, lower interest rates, and unprecedented monetary policies such as quantitative easing.
The Austrian school of economics focuses precisely on what the mainstream ignores: relative price changes, capital heterogeneity, incentives in the private vs. public sector, the shifts in time preference via monetary policies. If you’re struggling to understand what that means, it can be simplified to one key idea: individual human action. Everything that happens in the economy stems from the fact that individuals act. The individual is motivated by subjective preferences and the incentives that people face. Economic policy can be viewed as an attempt to manipulate the incentive structure: Lower interest rates and people will be incentivized to go into debt and prefer consumption over investment.
Contrary to mainstream economics, the Austrian school isn’t technocratic in nature. The adherents of Austrian economics understand that the economy is fundamentally unmanageable. But the absence of conscious management doesn’t mean chaos ensues. As Hayek explains in one of the greatest economic articles of all time, individual actions are coordinated via the price mechanism. Economy is a complex system in constant flux and the relevant data points about supply, demand, resource scarcity and individual preferences (and never-ending changes of these factors) are dispersed among millions of minds. To communicate each data point in its full form is impossible — instead, the smallest viable information is communicated through price. Price is all the information that manufacturers, merchants, investors and consumers need to know to adjust their actions to better reflect reality.
But when money itself is subject to central planning, the price mechanism is polluted by a lot of noise. For the price mechanism to broadcast pure economic signals and the economy to work properly, money should be separated from the state.
It’s important to underscore what money is. Money, in the most fundamental sense, is a societal institution — a set of rules and habits that ease the cooperation among people. As Nick Szabo points out in Shelling Out, the institution of money emerges everywhere we look over the course of history, because it simply makes sense when the society reaches a sufficient division of labor. Money emerged from the need to store the value of one’s labor for later use and exchange the value with others. Both the store of value and means of exchange roles are crucial for money to fulfill its role in society. And it’s no coincidence that bitcoin emerged and took off at the peak of a worldwide financial crisis, when the store of value function in today’s money was sacrificed to keep the system together.
Everybody has a bias. The author of these lines is biased toward non-state solutions of society’s problems, and this bias is only partially based on value-free economic arguments. Political philosophy as well as self-interest is natural for humans and we shouldn’t be afraid to admit that. Fiat mindset is a bias held by those facing lifelong incentives to uphold the status quo.
The idea of stripping human discretion from monetary policy is completely opposite to the way money operates today. That’s a major problem for mainstream economics, which focuses on money as a short-term enabler, one which can’t be saved, only spent, inevitably in favor of those who print it.
That’s why mainstream economists will fight bitcoin until the bitter end of hyperbitcoinization. Bitcoin as an emergent money phenomenon is a slap in their face. It has the potential to completely shatter the illusion of technocratic management. When the state loses the ability to manage money, the formula that has worked in the past decades falls apart: no monetary inflation, no Cantillon effect, no chronic public deficits, no bailouts. The house of cards falls down. But don’t blame bitcoin for that; the fiat system would crumble even if bitcoin never emerged, because central planning always fails. Bitcoin can act as a lifeboat before the fiat collapse and as an instrument of recovery afterward.
This is a guest post by Josef Tětek. Opinions expressed are entirely their own and do not necessarily reflect those of BTC, Inc. or Bitcoin Magazine.
This post contains compilations of work previously written by the author and published separately.
The word “fiat” is growing more aggrandized in the modern lexicon, however, despite its increasing popularity it is often ill-defined or misused. I regularly observe people falsely call bitcoin a fiat currency. This is thanks, not least of all, to the layman’s poor grasp of history and money. Fiat is of Latin origin, meaning authoritative sanction; a decree, command or order. Fiat does not mean “backed by nothing” or “redeemable for nothing” or “pegged to nothing.”
The phrase “fiat lux” is a Latin reference to some of the most prolific words ever written; from the book of Genesis in the Bible, “Let there be light.” We can see here how the word is used authoritatively, there was no light, God commanded that there should be light, and there was light.
Unfortunately for us (or perhaps to our great fortune), man’s emulation of the spoken word of God carries with it far less divine authority, and thus decrees of sapien origin must be enforced by coercion, which today usually comes in the form of complex legal and judicial systems. As long as men have ruled over one another with force, there have been decrees in this manner. A decree can be as simple as making a particular day an observed holiday, likewise it can be as foolish and convoluted as saying the sky must be green on a Tuesday. Here is the insufferable nature of humanity laid bare, man can make a decree, but he cannot necessarily make it so. Mankind does not manifest ends through his words but rather via his action.
Certainly, a ruler could devote vast amounts of his kingdom’s resources toward advancing the ends of his decrees, but his means may make it no more achievable than if he had nothing at all. In fact, a very charismatic and narcissistic leader might succeed in assuaging resistance against absurd and impossible schemes of a great variety. History is full of egocentric, megalomaniacs proclaiming “fiat lux” into the darkness.
However, for our purposes, it is necessary to focus on a more particular topic, and that is the more recent, modern history of money, particularly in the United States. The word fiat is, perhaps, so widely misunderstood because the history of money is correspondingly misunderstood. In fact, by uncovering why the word “fiat” is so commonly ill-defined, we might just uncover truths of supreme importance.
Despite what you may believe, the first fiat currency of the United States, following the birth of the nation, was not in 1971, 1933 or 1913 but instead in 1792. The Coinage Act of 1792, proposed by Alexander Hamilton, established a pegged exchange rate of 15:1 silver to gold. When viewed through the modern lens, it is not at first obvious how this would be considered a fiat currency. After all, monies made from metal are not worthless paper! This simply must mean that it is impossible that a gold or silver money could be fiat! However, this is untrue; remember what the term “fiat” actually means—“by decree.”
It was by decree that the exchange rate between gold and silver coinage was decided by the United States government rather than by a free, open and voluntary marketplace. This act of price fixing places a face value premium on one coinage or the other, relative to the underlying cost of the bullion struck into coins. In this particular case, it was a premium placed on the face value of silver coins over the value of the silver bullion required to mint them. This is inherently inflationary. This premium had ultimately dilutive effects on the circulating face value of silver, as you will see.
To understand how layers of decree abstracted away our understanding of money, we must review just a sliver of the history underlying the process of transition from bimetallism to a gold standard to a pseudo-gold standard and, ultimately, to irredeemable paper notes. Our primary source for this history will be Rothbard’s “History of Money and Banking in the United States.”
At a cursory glance, it’s not a simple matter to parse how soft and expansionary commodity money policy achieved through bimetallic pegs can be severely detrimental. Nor is it necessarily a simple matter to grasp how coinage exchange rates set by decree were a rudimentary form of the fiat money in wide use today. To sort this matter out, it is helpful for us to look for an extreme historical example.
In 1860, the empire of Japan opened up its borders for the first time to free and unregulated global trade in the modern world. Traditionally, Japan had set its exchange rate on gold to silver coinage at 1:5, while international rates at the time were set to 1:15. Consider, for a moment, the implications of this decree when exposed to market forces.
The artificially cheap gold Koban coins could be exchanged for the artificially soft, silver Tenpō coins at a 200% profit. Effectively, one could take five parts silver and exchange it for gold carrying an arbitrage trade against the rest of the world’s 1:15 gold-to-silver peg. In fact, this is exactly what happened, in 1860, 4 million gold ryos (a Japanese unit of weight) left the country, equivalent to approximately 70 tons of gold.
In response, the Bakufu (the Japanese Shogunate ruling class) chose to debase the gold contents of the Koban by two-thirds, bringing it in line with the foreign (and more realistically market adjusted) gold and silver exchange rates. At this point, however, the damage had been done.
Final settlement occurred in the form of the harder money moving out of the country by the shipload. Keep this story in mind as we make our way through the various shifts in American monetary policies throughout the 19th and 20th century.
The First National Bank of the United States was signed into Charter by Washington (under the direction of Alexander Hamilton) which set in motion a massive inflationary speculative boom. Private investors were allowed to purchase stock in the national bank, however only a quarter of the cost had to be paid in specie (gold and silver), the other three-quarters of the cost was to be paid in government debt securities. Rampant speculation surrounding National Bank stock ensued, and it was unsustainable. The speculation would’ve liquidated itself had it been allowed to run its course.
Alexander Hamilton worked closely with a New York financier (William Seton) to authorize the purchase of $150,000 of public debt with government revenue. A first great step in the marriage of government and private enterprise. By 1792, the expansion of credit made available to speculators by the Bank of the United States (in excess of $2.17 million) nearly bankrupted the Bank of New York, and from December 29 to March 9, cash reserves for the Bank of the United States decreased by 34%, prompting the bank to not renew nearly 25% of its outstanding debt.
Speculators were then forced to sell off securities in order to satisfy outstanding debts and the deflationary contraction began. In March, Hamilton then authorized an additional $100,000 in open-market purchases of securities and heavily encouraged the bank of New York to continue offering loans, collateralized with US debt. Hamilton also promised the treasury would buy up to $500,000 of securities from the Bank of New York thus staving off the liquidation for a short time.
The following few years were characterized by even more rampant speculation and malinvestment in the bank’s stock, government debt securities and paper land claims (corresponding to the ongoing westward expansion). As is typical, new credit and capital dried up, as a war-torn Europe grew weary of American speculative instruments, and paper land claims began to depreciate in value rapidly.
In 1797, British Parliament suspended redemption of specie (which lasted until 1821) and the complete undoing of the speculative credit expansion and paper financial instrument bubble followed.
The panic of 1819 was caused by a massive monetary expansion created by banks during the Napoleonic Wars, particularly the United States’ involvement in the War of 1812.
The War of 1812 was essentially a trade war, the far less often discussed second war with Britain who was blockading French–American trade routes in the greater context of the Napoleonic Wars. In order to procure the necessary goods required for the war, huge quantities of new bank notes were created in order to purchase government bonds.
To quote Rothbard:
“[F]rom 1811 to 1815 the number of banks in the country increased from 117 to 212; in addition, there had sprung up 35 private unincorporated banks, which were illegal in most states but were allowed to function under war conditions. Specie in the 30 reporting banks, 26 percent of the total number of banks of 1811, amounted to $2.57 million in 1811; this figure had risen to $5.40 million in the 98 reporting banks in 1815, or 40 percent of the total. Notes and deposits, on the other hand, were $10.95 million in 1811 and had increased to $31.6 million in 1815 among the reporting banks.”
Essentially, the US government was financing its war operations with massive amounts of inflated bank notes which, when called due for final settlement in specie, sparked a near nationwide bank insolvency. In 1814, the US government gave the go ahead for all banks to temporarily suspend redemption of specie, but to remain open and continue their expansion of debt unabated.
“Reporting banks increased their pyramid ratios from 3.17-to-1 in 1814 to 5.85-to-1 the following year, a drop of reserve ratios from 0.32 to 0.17. Thus, if we measure bank expansion by pyramiding and reserve ratios, we see that a major inflationary impetus during the War of 1812 came during the year 1815 after specie payments had been suspended throughout the country by government action.”
Rothbard expounds that although, during this particular point in time, there was no central bank in the United States (the National bank charter had lapsed under Jefferson) and misinformed historians often point to this as the cause of unchecked credit expansion, this monetary policy was similar to other expansionary periods which happened under the First and Second National Bank and, later, under the Federal Reserve System.
Coercion by the federal government, to secure wartime funding, drove the massive expansion of bank notes and credit, despite the lack of a central bank overseeing the process in this particular instance.
The federal government also issued large amounts of treasury notes which were “quasi-legal tender” and redeemable in specie one year after issuance. These notes took on a monetary role and were widely circulated and drove specie out of circulation (see Gresham’s Law).
“Wholesale price increases from 1811 to 1815 averaged 35 percent, with different cities experiencing a price inflation ranging from 28 percent to 55 percent. Since foreign trade was cut off by the war, prices of imported commodities rose far more, averaging 70 percent. But more important than this inflation, and at least as important as the wreckage of the monetary system during and after the war, was the precedent that the two-and-a-half-year-long suspension of specie payment set for the banking system for the future. From then on, every time there was a banking crisis brought on by inflationary expansion and demands for redemption in specie, state and federal governments looked the other way and permitted general suspension of specie payments while bank operations continued to flourish.”
All of this new money and credit, in conjunction with rising commodity prices, set off an inflationary boom in 1817, which led to the deflationary bust in 1819 as the economy was snapped back to reality.
“Contraction of money and credit by the Bank of the United States was almost unbelievable, total notes and deposits falling from $21.9 million in June 1818 to $11.5 million only a year later. The money supply contributed by the Bank of the United States was thereby contracted by no less than 47.2 percent in one year. The number of incorporated banks at first remained the same, and then fell rapidly from 1819 to 1822, falling from 341 in mid-1819 to 267 three years later. Total notes and deposits of state banks fell from an estimated $72 million in mid-1818 to $62.7 million a year later, a drop of 14 percent in one year. If we add in the fact that the U.S. Treasury contracted total Treasury notes from $8.81 million to zero during this period, we get the following estimated total money supply: in 1818, $103.5 million; in 1819, $74.2 million, a contraction in one year of 28.3 percent.”
As is the inevitable case with all fiat currency schemes, monetary expansion was the natural outcome. Large outflows of gold and silver from Mexico, due to the favorable premium on coinage in America, led to an exchange rate debasement of 16:1 in 1834 and, by the Coinage Act of 1853, all silver denominations were diluted further again.
By the 1850s, nearly half of the states in the Union had transitioned to what was called “free banking.” An important distinction here is that “free banking,” in the context of its political rhetoric sources, was not what economists traditionally considered free banking at the time.
The system of free banking that existed during this time period allowed the government to afford banks the “general suspension of specie payments whenever the banks over expanded and got into trouble,” as pointed out by Rothbard.
This means that, during times of crisis, banks were no longer liable to redeem their outstanding paper money certificates for the underlying metals. Free banking brought “a myriad of regulations, including edicts by state banking commissioners and high minimum capital requirements that greatly restricted entry into the banking business,” explains Rothbard.
In this way, competition in banking was heavily stifled by government intervention and normally, where overextended banks would fail during a time of liquidation, this liquidation was halted. But even more concerning;
“The expansion of bank notes and deposits was directly tied to the amount of state government securities that the bank had invested in and posted as bond with the state. In effect, then, state government bonds became the reserve base upon which banks were allowed to pyramid a multiple expansion of bank notes and deposits. Not only did this system provide explicitly or implicitly fractional reserve banking, but the pyramid was tied rigidly to the amount of government bonds purchased by the banks.”
Effectively, a bank’s ability to expand its credit and monetary base was directly tied to public debt. The more debt it purchased from the government, the more new money it could create and, in tandem, the more banks made use of this financial trickery, the more governments could expand their debt as well. This ability to expand credit and essentially soft default on that debt when it came due, through the suspension of specie redemption, is very important for what came next.
Starting in 1848, the American Gold rush was in full swing. A huge supply of new gold was introduced to the market creating strong inflationary signals. Seemingly, economic conditions were good. Investors and speculators engaged in rampant overleveraging.
By the mid 1850s, the supply of new gold began to dry up and, additionally, a large shipment of gold aboard the SS Central America was lost in the midst of a heavy storm. She was carrying approximately 30,000 pounds of gold to the shores of Eastern America at the time!
In the midst of these two deflationary events, the railroad companies booming around the growing westward expansion experienced a speculative stock bubble. Thanks to the abundance of cheap credit (and latent malinvestment), many of these companies were worth considerable amounts of money on paper but had no physical assets with which to run their business. Railroad stock values peaked in July 1857 and a slow market sell off began.
The subsequent fall out from these events lasted up until the Civil War at which point virtually all specie redemption stopped. The National Bank Act of 1863 forbade the issuance of any new state bank notes, finally giving a full monopoly of monetary expansion to the federal government.
With the groundwork having already been laid for paper money experiments in the colonial area, the United States switched from bimetallism to a paper currency backed by silver specie in order to fund the Civil War effort. This was colloquially known as the “green back system.”
Following the end of the war, the United States resumed redemption of specie but ended what was known as “free silver.” By 1873, the silver value of coins had dropped so low relative to their fiat face value that the United States soft abandoned bimetallism by ceasing the free and unlimited minting of silver coins with the Coinage Act of 1873. This was largely politically unpopular and led to 20 years of political strife over the alleged prosperity caused by monetary expansion under free silver.
The Sherman Silver Act of 1890 ushered in a period of inflation by decreeing an increase in the amount of silver purchased by the US government—to the tune of 4.5 million ounces of bullion a month. This caused a sharp increase in the paper money supply of the United States and encouraged rampant speculation.
The US treasury purchased the silver bullion using a special issue treasury note which could then be redeemed for either gold or silver, and a run on the gold reserves of the United States began. Artificially overvalued silver drove gold out of circulation and into hoards.
In the metals markets, silver was now worth less than the fiat exchange rate of silver to gold. Investors would buy silver from the booming mining economy, exchange it for gold with the treasury, and then sell the gold claims for a profit. These profits were then reinvested in more silver and on the cycle went.
This continued until the treasury nearly ran out of gold. President Grover Cleveland repealed the Sherman Act to prevent further loss of federal gold reserves.
By the end of 1890, the price of silver had dropped from $1.16 an ounce to $0.69 per ounce. By early 1894, the price had dropped to $0.60. By November of 1895, US mints entirely halted all production of silver coins and outright discouraged the use of silver dollars.
Runs were made on the US treasury gold reserves—not just by silver speculators but by European financiers as well—in anticipation of a spreading global financial turmoil. Concern over the weakening financial state of the United States led to bank runs and a nationwide liquidity squeeze as the malinvestment wrought by monetary expansion began to purge.
In the midst of this man-made regulatory fiscal crisis, global commodities prices (particularly that of wheat) tanked due to a cascade of liquidations in emerging markets. In 1894, the rate for a bushel of wheat dropped from its 14.7¢ 1893 price to 12.88¢ per bushel, continuing to fall all the way to 9.92¢ in 1901. Overleveraged US farming operations dependent on high international commodity prices went belly up.
By 1900, the United States established for the first time, a gold standard.
The panic of 1907 was a period of monetary contraction leading to a financial/banking crisis which set the tone for the creation of a central bank in the United States (The Federal Reserve, with the previous National Bank having been abolished under the Jackson Presidency).
The panic coincided with the annual harvest season where money would flow out of the cities as harvests were purchased. To compensate for this, banks would raise interest rates. Taking advantage of these new interest rates, foreign investment became increasingly attracted to the New York markets. During this time and as well across the first half of the decade, the United States saw a massive run-up of the DOW Jones (seen below).
In April 1906, San Francisco had a 7.9 magnitude earthquake, prompting a large amount of money to make its way to the west coast. In late 1906, the Bank of England also raised its interest rates, slowing foreign investment in New York City.
That same year, the Interstate Commerce Commission passed the Hepburn Act which allowed for a ceiling to be placed on railroad rates. The result was a devastating blow to the railroad securities valuations and so began the market cascade. This was followed by a collapse in the price of copper, a failure in the New York City Bond offering (June 1906), and major antitrust fines against the Standard Oil Co.
At the time, the national banking system had no ability to inject artificial liquidity into the system and, naturally, the liquidation was painful. This was much to the chagrin of many of the bankers throughout the country.
“In each of the banking panics after the Civil War, 1873, 1884, 1893, and 1907, there was a general suspension of specie payments. The panic of 1907 proved to be the most financially acute of them all. The bankers, almost to a man, had long agitated for going further than the national banking system, to go forward frankly and openly, surmounting the inner contradictions of the quasi-centralized system, to a system of central banking.”
“The Bankers found that the helpful cartelization of the national banking system was not sufficient. A central bank, they believed, was needed to provide a lender of last resort, a federal governmental Santa Clause who would always stand ready to bail out banks in trouble. Furthermore, a central bank was needed to provide elasticity of the money supply. A common complaint by bankers and by economists in the latter parts of the national banking era was that the money supply was inelastic. In plain English, this meant that there was no governmental mechanism to assure a greater expansion of the money supply—especially during panics and depressions, when banks particularly wished to be bailed out and avoid contraction. The national banking system was particularly inelastic, since its issue of notes was dependent on the banks’ deposits of government bonds at the treasury. Furthermore, by the end of the nineteenth century, government bonds generally sold on the market at 40 percent over par. This meant that every $1,400 worth of gold reserves would have to be sold by the banks to purchase every $1,000 worth of bonds—preventing the banks from expanding their note issues during a recession.”
It was following this crisis that a man named Nelson Aldrich (father-in-law of John D. Rockefeller) formed a commission to investigate and propose solutions to fix this “problem” of liquidation and money expansion.
Nelson Aldrich proposed “The Aldrich Plan.” Congressman Vreeland (one of the bill’s coauthors) had the following to say on the proposal:
“The bank I propose…is an ideal method of fighting monopoly. It could not possibly itself become a monopoly and it would prevent other banks combining into monopolies. With earnings limited to four and one half percent, there could not be monopoly.”
It is important to remember that antitrust legislation was center stage around this time. Popularized, in particular, by the likes of the “Progressive Bull Moose’’ Theodore Roosevelt with his Sherman Antitrust Act of 1890. This framing of a central bank in the United States being necessary to prevent banking monopolies was crucial to its public acceptance. The reality of how central bank policy affected change could not be further from these claims.
Firstly, we know with absolute certainty that the measly “four and a half percent” Vreeland spoke about would fly out the window at the earliest opportunity, but the real wealth concentrating monopolization of the Federal Reserve would come in the form of monetary and credit expansion.
Secondly, artificial protections from the liquidations of malinvestment is, in effect, a legal monopoly for all beneficiaries, shielding banks from the consequences of market forces which, ordinarily, naturally direct capital allocation.
Cleverly, the Federal Reserve was set to be a private institution, and unelected bureaucrats would reside over its policy making. This was a convenient loophole to skirt the unconstitutionality of unchecked monetary expansion. Frankly, this relationship is the opposite of antitrust, as private government partnerships both create and sustain cartels via judicial and legislative capture.
The most important difference between the Federal Reserve and the national banks of the United States, which had existed in years prior, was the Fed’s ability to create the official money of the United States. Paper bank notes issued by the Fed became legal tender for both public and private debts. Notice the Constitution didn’t specifically prohibit a private institution from issuing bills of credit and the government then deeming it legal tender. For all intents and purposes, this was a deliberate obfuscation of US constitutional law.
One should note, there is very little presence of a “private institution” on these illegitimate bills of credit, they take on every role and appearance of being a government issue.
All of this was a carefully constructed facade to convince the public that the government was working to “break apart the money trust.” The public was thoroughly convinced that it was the centralization of financial power in Wall Street which caused the booms and busts actually created by government policy making. The Aldrich bill was the reform that promised to fix this problem for the American people.
As G. Edward Griffin put it in his brilliant expose, “The Creature from Jekyll Island: A Second Look at the Federal Reserve”:
“The public was, of course, outraged, and the pressure predictably mounted for Congress to do something. The monetary scientists were fully prepared to use this reaction to their own advantage. The strategy was simple: (1) set up a special congressional committee to investigate the money trust; (2) make sure the committee is staffed by friends of the trust itself; and (3) conceal the full scope of the trust’s operation while revealing just enough to intensify the public clamor for reform. Once the political climate was hot enough, the Aldrich bill could be put forward.”
The restrictions on new money creation were eased by the FDR administration with the Federal Reserve turning over all of its gold to the treasury, under the Gold Reserve Act of 1934. One should note that monetary expansion began to increase in velocity particularly after the creation of the Federal Reserve in 1913 and into WWI.
The booming economy of the roaring twenties was a result of Mellon’s push to lower federal reserve interest rates in 1921 and 1924. The availability of cheap credit and cheap capital encouraged once again, rampant speculation.
In 1928, responding to the fear of a dangerous bubble in the stock market, the Federal Reserve began to raise interest rates. In 1929, the Fed raised the interest rates to 6% and yet still failed to stop rampant speculative activity in the markets.
Less than three months after this rate hike, came Black Tuesday. Historically, one of the worst financial crashes in the history of the United States. Mellon was a strange man. On one hand, he publicly proclaimed his disdain for economic intervention and yet, by 1930, he was already again calling for interest rate cuts (2% by mid-1930). The four-year devastation caused by the burst of this speculative bubble led to drastic reforms by the FDR administration.
The Emergency Banking Act of 1933 (EBA) was a series of reforms made by the federal government (driven by the FDR administration) to stabilize the banking system.
The act came directly on the heels of a nationwide banking holiday declared by FDR. These holidays were intended to halt the widespread bank runs. FDR made a great number of reforms during just the first year of his presidency.
The EBA was an amendment to the Trading with the Enemy Act of 1917 (TWEA) which originally gave the president power to restrict trade between the United States and foreign nations during a time of war (in particular, WWI), however, the TWEA was changed to also be usable in times of peace via a congressional amendment.
The EBA amendment was passed in a single night of chaos on the Congress floor with such haste that only a single copy was available to the House and was voted on after being read aloud. The act had two significant goals:
1. To reaffirm the Federal Reserve’s commitment to supply “unlimited currency” to banks which reopened after the end of the banking holiday
2. To establish a 100% deposit insurance for banks
All of these were temporary measures until the much more cohesive 1933 Banking Act.
The 1933 Banking Act was wide in scope, and it had many significant goals:
Executive Order 6102 (EO 6102) was signed on April 5, 1933 (one month after the Emergency Banking Act), by President Franklin D. Roosevelt, “forbidding the hoarding of gold coin, gold bullion, and gold certificates within the continental United States.” This power was made possible by the Emergency Banking Act of 1933.
Many are aware of EO 6102 and its implications on the US markets at the time, but few realize that gold ownership actually remained illegal throughout the entirety of the Bretton Woods agreement which ran from 1944 to 1971.
“The private ownership of gold certificates was legalized in 1964, and they can be openly owned by collectors but are not redeemable in gold. The limitation on gold ownership in the U.S. was repealed after President Gerald Ford signed a bill to “permit United States citizens to purchase, hold, sell, or otherwise deal with gold in the United States or abroad” with an act of Congress…which went into effect December 31, 1974.”
Following this legislation to its logical conclusions, this means that it was actually illegal for US citizens to redeem their USD for gold held by the US Treasury under the Bretton Woods system!
EO 6102 was a direct and indefinite suspension of the redemption of specie, echoing over a century of similar policy making surrounding government-induced financial depressions. In other words, paper notes could no longer be redeemed for the gold by which it was supposedly backed. In fact, from 1933 to 1971, this settlement to the base layer of money was a right reserved only for sovereigns.
From 1961 to 1968, Western Banks corroborated in what was known as the London Gold Pool. The United States and a handful of European nations pooled their gold resources into the London gold exchange in an attempt to stabilize the price of gold around the fixed redemption rate of $35 per troy ounce.
This monetary experiment, just like every other attempt at market intervention and stabilization (attempt to subvert free market action), failed horribly and ultimately led to the closing of the gold window by Richard Nixon in 1971.
Perhaps its best to establish a timeline of events here. In 1933, EO 6102 not only made it illegal for US citizens to hold physical gold but also effectively prohibited them from redeeming treasury notes for gold. With the outbreak of war in Europe, the London Gold Pool closed its operations in 1939, effectively stinting international gold redemption under Bretton Woods (est. 1944) until the London Gold Pool reopened in 1954.
Notice here, that during this time period (roughly 1933–1954), US gold reserves were at their all-time high. Starting in 1961, central banks began cooperating in an attempt to stabilize gold prices via the London Gold Pool by providing excess gold if demand increased and providing buy pressure if demand started to drop.
In the first half of the 1960s, the pound sterling was under significant stress from various European geopolitical crises (seen below). As a result, increasing amounts of intervention were needed from central banks to maintain the desired gold exchange rates.
It was well known by sovereign financial ministries that the United States was benefiting disproportionately via the dollar peg by exporting inflation and running deficits to benefit from the seigniorage of dollar creation. In 1965, the De Gaulle administration of France (at direction of the finance minister, Jaques Rueff) announced intentions to begin exchanging dollars for gold in an attempt to close this deficit gap and force a return to an international gold standard.
These events had significant and expected impacts on the demand and price of the gold markets, starting around 1960, a dramatic decrease in US gold reserves occurred, all the way up until the collapse of the London Gold Pool in 1968. In effect, this financial loss can be viewed as the central banks’ (both the United States and The Bank of England) attempt to stabilize the London Gold Pool.
Here we see the United States fighting the same battle previously fought by the Japanese Shogunate, caused by their artificially soft and expansionary money policy under bimetallism. Despite the suspension of redemption of specie for all but the sovereign states, artificially soft gold notes were arbitraged for a profit which could be settled in finality on the base layer money (gold specie).
In 1969, the IMF passed legislation allowing the issuance of the SDR, technically the first fiat obligation not backed by a form of gold redemption under the Bretton Woods system, and the first step toward the establishment of floating global fiat reserve currencies.
As we know, Nixon ended the convertibility of the dollar for gold in 1971 (the backbone of the Bretton Woods system) and the adjustable peg disappeared entirely in 1973.
For a far more comprehensive look at these events, I would refer you to this research piece. Hopefully I have given you enough of an overview of these historical events to get a picture of how the incentives of the system disrupt its stability. This topic is complex, and despite the fact that the USD was the backbone of the Bretton Woods system, that isn’t to say they were the only nation to benefit from inflation and market intervention.
Bretton Woods was doomed to fail because of its misaligned incentives.
The events of 1971 were yet another form of soft default on obligations, except this time, rather than suspending redemption of specie to her constituency, the United States suspended redemption for every nation state under the Bretton Woods system.
And yet, despite this decree of irredeemability for paper to gold, the face value of dollars to gold was still fixed. Historically, this price was what gave the paper notes its value in the first place, specie was the base layer of money, but paper notes allowed gold to scale in an increasingly complex and global economy. In a case where paper notes can never be redeemed for the underlying specie, the exchange value is set by decree rather than by the market.
Hence the term “fiat.”
But what’s most interesting is how so many great abstractions on top of the monetary system disrupted the common man’s ability to reason that paper notes were originally a layer above specie. Rather, he began to think of paper notes as the base layer itself. This was to the great benefit of the nation state, who found it could create for itself a great deal of funding for a whole manner of twisted machinations at the expense of its currency holders (which could be diluted en masse).
Mounting global geopolitical and local socioeconomic pressures put a tremendous amount of stress on the system to continuously debase circulating currency supply to fund the next crisis.
To better understand the consequences of indefinite suspension of settlement to the base layer, I suggest looking through my website called WTF Happened in 1971. Liquidation, which was once softened by temporary base layer settlement, has been supplanted by an indefinitely suspended expansionary system. The ripple effects continually grow in magnitude and severity as economic calculations are distorted on a global scale. Look no further than the dot com bust, the 2008 financial crisis, and the 2020 financial crisis for a glimpse at how unlimited credit expansion and expansionary monetary policy go hand in hand.
These are the inevitable results, increasing amounts of risk and leverage build up in the system, with no way to purge itself, beyond one final and total collapse.
Now that we have taken the time to properly understand the history of money, it should be obvious to us that bitcoin is not a fiat currency. In fact, it is not so tongue-in-cheek to call many aspects of modern society “fiat.” They are often, in fact, by decree rather than of an emergent and voluntary order.
It is disruption of settlement to the base layer of money, which has been co-opted so effectively over the last two centuries, that has abstracted away our ability to understand the monetary system. If you look at the markets today, the Federal Reserve’s expansion of the money supply, and the government’s ability to borrow and spend unabated, it seems to simply make no sense—that’s because it does not.
Credit expansion and the generational postponement of the liquidation of malinvestment is only possible under a system mired in numerous layers of decree over a co-opted monetary base layer. According to Ludwig von Mises, “There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of the voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.”
The common argument against bitcoin proclaims it to be a fiat currency because it is “not backed by anything.” This abstraction assumes that all money must be redeemable for something, but this simply is not so. Gold bars are not redeemable for anything and yet they were once money. They were, in fact, the base layer of money.
Bitcoin has value because people are free and willing to exchange for it, at its spot price. It has no peg, no artificial face value, and the settlement stack cannot be given a mandatory holiday.
Bitcoin is a new base layer of money, one that, as Friedrich Hayek wrote, can “take the thing out of the hands of government.” he first global, self-clearing, real-time settled, bearer asset. One which solves the problems inherent in scaling precious metals for use at a global economic scale. Bitcoin is an economic social contract with distributed consensus surrounding the rules of play, noncompliant with co-option.
A money not prone to the pitfalls of centralized issuance and debasement. A money usable outside of the confines of centralized institutions which can rehypothecate and postpone the liquidation of notes to settlement on the base layer. A money which sidesteps the inevitable replay of events that would occur under a return to the gold standard.
Bitcoin is the first base layer money in which redemption of specie (or final settlement) cannot be suspended without consequence. The right to final settlement will not be afforded exclusively to the sovereign state, but rather, any individual may choose to become self-sovereign, by simply becoming a willing participant in the network.
Despite our storied history of shenanigans, humanity progressed forward in spite of the shaky foundations upon which our economic activity, or the means of making life worth living, was ensconced. Bitcoin is better than a return to the gold standard. Bitcoin is more than a silver squeeze..
Bitcoin is a new beginning. A new base layer. An opportunity to transition a new and better system, while the old one goes down in flames. A space for fair, open and voluntary cooperation outside the prescriptions of tyrants. A fresh start for what humanity could be instead of the unyielding fixations on what it should have been.
Bitcoin is not man commanding “Fiat Lux”, but rather a genius example of how he makes it so.
This post contains compilations of work previously written by the author and published separately.
This is a guest post by Heavily Armed Clown. Opinions expressed are entirely their own and do not necessarily reflect those of BTC, Inc. or Bitcoin Magazine.
As of late, it is a regular occurrence to hear suits from the mainstream media cry out for the “need for liquidity to save us.”
“But what is this liquidity that they speak of?” the average Joe may think. The ocean of monetary energy known as the U.S. dollar is often misunderstood but this “liquidity” can be the difference between hardly surviving or thriving with minimal effort. Often revolving around how close one is to freshly made supply. (Brrr).
This ocean of monetary energy may seem safe for the first world’s fish swimming inside, but there is a catch. It is not actually an ocean — there is a man-made dam keeping this value from escaping and thus keeping the fish alive. Unfortunately for everyone who enjoys safe, first-world waters with “2 percent inflation,” there are cracks showing up in the USD dam.
The faith-based concrete is starting to show the tests of time and bureaucratic ineptitude. To be fair, there has never been a fiat currency in history that has been able to stand the true test of time. The British pound is the longest-standing fiat currency, enduring a 325-year life. In the process, it has managed to leak out 99.99 percent of its purchasing power.
Unlike the British pound, the U.S. dollar is still seemingly in its glory days, often proclaimed by the financial elite as a reliable store of value due to its “low volatility” and long track history (see: wtfhappenedin1971.com). Sporting a total market cap of over $100 trillion, including various layers of money and debt instruments, it must be safe, right? At first glance, it seems safe, and if it ain’t broke don’t fix it, right? Wrong, that’s not how dam’s work.
If the structure becomes compromised, it can go from working perfectly fine to being completely broken in the blink of an eye. “Working perfectly fine” doesn’t imply being perfect, rather the black swan moment has not occurred yet to expose the cracks. Which begs the question: Is there a way to find the cracks before the dam self destructs? Maybe to try to fix it, or maybe even to find a bright orange Satoshi’s ark to survive the coming flood!
For the average Joe and Jane across the globe, there is no hope in fixing the USD dam. Luckily, we have some very skilled engineers across the world that can help us access the health of the monetary structure. A logical voice on this topic with an exceptionally high signal-to-noise ratio is none other than Preston Pysh. Well known within the Bitcoin space for his ability to diagnose financial markets, combined with knowledge from an engineering background, Pysh is a perfect first stop on this structural inspection. Back in the early days of March 2020, while the financial markets and the entire world was going crazy, Nathaniel Whittmore sat down with Pysh on his weekly podcast “The Breakdown” to record an episode titled “What Happens When Currencies Fail.” During this episode, Pysh laid out the three main factors that have historically signaled the pending failure of a currency.
“So few people understand — particularly people in academia and on Wall Street don’t understand — the fact that currencies fail, in my opinion, when three conditions are met,” Pysh said, in a slightly paraphrased way. “First: A currency that is not pegged. Second: When the government is spending at a rate that far exceeds the tax revenue. Third: The debt that’s denominated in that currency — so, for the U.S. it would be the treasury/bond market — has a yield of zero percent. When all three of these scenarios are met, you start seeing the currency underlying it all go into failure.”
As much as I believe in the Bitcoiner motto of “don’t trust, verify,” let’s take Pysh’s advice and point our magnifying glasses at these potential weak points in the USD dam in order.
First off, the U.S. dollar defaulted on its gold liabilities in 1971, forever to be known as the “Nixon shock.” From that day forward, the U.S. dollar was backed by nothing but the decree of the king, the definition of fiat money. It’s important to note that after the Bretton Woods Conference of July 1944 the entire global monetary system was backed by dollars, which was presumably backed by gold. This means the Nixon shock not only threw the U.S. on a fiat money standard, but did so to the entire globe. (Seriously, check out wtfhappenedin1971.com if you haven’t yet). Which means that, not only is the U.S. dollar pegged to nothing, but the entire global monetary system is pegged to nothing. This may be the reason that the entire globe is massively in debt, upwards of $250 trillion. (But to who? That’s a discussion for another day…)
To continue, the second point is going to need some current and past data to try and get an idea of if the U.S. is currently spending more than it takes in and if it’s getting better or worse. The data will be sourced from the U.S. debt clock website. While not perfect, it will give us a good idea:
As seen by the numbers above, the U.S. government is spending $6.65 trillion per year, $3.45 trillion of which needed to be freshly printed due to revenue shortfalls. FYI, that’s over half if you’re not good at math.
If this was a business, this would be defined as hemorrhaging capital. Luckily for governments, they don’t play free market games, just highly-manipulated and morally-bankrupt games. On this playing field, efficiently using capital is frowned upon and there is no limit to the debt with which it is allowed to burden our future kin.
To try and get an idea if this is a flash in the pan “from COVID-19” or a sustainable problem, it’s best to look at the long-term trend of U.S. debt-to-GDP ratio. Additionally, there are liabilities that the U.S. government has accepted but currently doesn’t have the money set aside to pay for, commonly referred to as “unfunded liabilities.”
The U.S. debt clock shows the debt-to-GDP ratio actually improving from 1960 to 1980. In the 40 years since then, it has absolutely exploded, with 2008 being the black swan that greatly accelerated the problem and the COVID-19 self-induced economic suffocation being the death knell for the debt-to-GDP ratio to ever recover. Secondly, take a look at the U.S. unfunded liabilities to see if we can find some hope in making this budget conundrum work out. Turns out, politicians have promised to pay for roughly $158.9 trillion of benefits to Americans they did not set aside the money for, because obviously you can always kick the can down the road in American politics. It’s pretty safe to say that the U.S. government will be spending more than it takes in for the foreseeable future.
Last but not least, it’s time to analyze how the USD and broad debt markets are looking for 2021.
It’s probably important to cover some context for anyone who is not a bond market expert. For that, I will use a simple example: Your government is offering a war bond to help fight off the invading tribe, it is offering 5 percent interest on a five-year bond. You decide to throw in your last 100 clams to help reinforce the village. For the following five years, you would go to your local town center once every three months to receive your 1.25 clams in interest. After five years of this, you go back to the town center and receive your last payment of 1.25 clams plus your initial 100. Which is when you might start asking, “Why is this interesting at all?” Bond math only starts getting interesting when you sign up for a long-term bond. This simple example will highlight why I say this.
A 30-year bond paying 1 percent interest sounds pretty crappy, right? You pay $100 and get $1 a year for 30 years. Unless, that is, the interest rates went negative. If, later that year, the market price for a 30-year bond was -1 percent, your lame investment just became a rock star.
Don’t believe me? Using a bond value calculator, it can be seen that your $100 investment is now selling for $170 on the open market. Thus making long-dated bonds by far one of the best trades and easiest money of the last 50 years. Which is when most rational people say “If bonds going negative is the only way to really make money and keep the game going, who in their right mind would buy a 30-year bond with a negative yield?!”
As much hype as the equity markets get with the Apples, Teslas and GameStops of the world, the debt market is where the biggest whales swim. The global bond market is somewhere in the neighborhood of $100 trillion (the U.S. being 40 percent of that) and the total debt markets being upwards of $250 trillion. Historically, interest rates have floated from low single digits to high teens or more based upon current financial conditions — with 0 percent interest rates having never been observed in recorded history, for obvious reasons. Never in recorded history has an investor lent out money only to get less in return, implying time has no value or, better yet, time has a negative value.
Regardless of how obvious and simple this may seem, we are at the peak of a 3,000-year bull run with negative yielding debt everywhere. Currently, the global debt with a negative yield has reached over $18 trillion. I was unable to find a single picture dating back far enough, so two were needed to show the dramatic increase over the last 10 years:
Now, it’s time to zero in on the USD. With yields across the entire curve being positive, USD is in a much better position than the majority of its monetary counterparts. With that said, 1 percent interest rates on a 10-year bond isn’t exactly wonderful considering these same bonds had a 6 percent yield just 20 years ago. So, the obvious trend is toward zero/negative.
Traditionally, the value of these bonds is calculated by taking the inflation rate (commonly measured by CPI) plus the duration risk, which goes up the longer the bond is dated for. With the price of commodities rocketing up for the first time in years due to economic difficulties and money printing, the CPI trend may just start reversing. Upon an increase in the interest rate, the entire banking and corporate establishment becomes insolvent.
So, what does the Federal Reserve do to solve this? It participates in something called “yield curve control.” This tactic would be simply described as printing money to buy any bond that trades over a certain interest rate, aka, the Fed will lock rates in at near-zero and print new money to ensure its corporate cronies and hedge fund friends are able to refinance at ever-lower rates, thus letting the purchasing power of the USD act as the relief valve to save the debt markets. Inversely, if rates keep falling without yield curve control due to economic deflation, Pysh’s 0 percent debt criteria will be hit, implying that low/negative rates are inevitable no matter what future we head into.
Upon finishing this structural inspection, it’s clear to see the USD dam has major cracks and the faith-based structure has little hope of salvation at this point. But to close things out on a brighter note, I’d like to highlight my favorite method to avoid the fallout caused by the poorly-engineered fiat monetary structures: Satoshi’s bright orange ark.
Bitcoin is a miracle of modern day engineering. Its monetary properties and foundational antifragility make it a fantastic option to help you ride out the coming instability. This decentralized network of nodes, miners and cyber hornet HODLers protect the network from all foes, 24/7/365. With even the attackers of the network adding to the strength of its encrypted hull, there is no better way to ride out the coming chaos of the USD dam breaking than stacking sats, staying humble and trying to protect your friends and family from the coming flood.
This is a guest post by Joe Dirtay. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.