Chapter 12: Fiat Cost-Benefit Analysis

Table of Contents

The previous eleven chapters offered an overview of the mechanisms and consequences of the deployment of fiat money as a global monetary operating system. This chapter attempts to account for the benefits and costs of this technology. With bitcoin, the cost for securing the network is incurred up front by miners. But the cost of operating and securing fiat, like the cost of sniffing glue, lies not in the small direct cost paid up front, but in the expensive long-term consequences. The physical infrastructure and energy needed to run the fiat monetary system are insignificant compared to the economic, political, social, nutritional, and civilizational consequences of deploying fiat monetary technology. Most of these costs are invaluable and incalculable. But when some of them are approximated, they convey the extent of the damage caused by fiat.

The benefit fiat offers to humanity is that it allows for savings on moving gold for payments. The costs are incalculable. We can classify the costs of fiat into four broad categories: (1) the destruction of holders’ wealth through inflation, (2) the destruction of the role of money in economic calculation, (3) the increased power of government to shape economy and society, and (4) the increased likelihood and cost of conflict.

Fiat Benefits

The benefits from fiat are primarily in the cost saving associated with moving physical gold around. The clearance, settlement, and verification of physical gold would cost somewhere in the range of 0.05–0.5% of face value, as discussed in Chapter 6. It is difficult to estimate how many transactions and at what face value they would be conducted had we lived in a world based on a gold standard today. We have no idea how much final settlement would take place compared to “second-layer” transactions which involve no physical gold movement. An absolute higher bound estimate would be that the face value of the gold final settlement transactions is equal to 10% of total world wealth. By this estimate, the maximum cost of gold settlement would be 0.5% of that, which is 0.05% of world wealth. While it is very hard to estimate the true cost of a modern economy running on a gold standard, we can think of this as an absolute upper bound. Fiat does not entirely eliminate this cost, as gold trading continues, but it reduces it significantly. Fiat’s costs, however, are numerous and far more substantive.


The first and most obvious cost is the wealth destroyed by the devaluation of national currencies. Every national fiat currency has devalued in real terms almost every year since its creation. This has continuously eroded the wealth of their holders. As bitcoin amply proves, there are no good reasons for the increase in the size of economic activity or user base to require an increase in the supply of tokens used in a monetary system. But government credit money is constantly expanding in supply, and as a result, it is constantly declining in value.

Measuring consumer price inflation is inadequate for measuring the waste of fiat, for reasons discussed in Chapters 4 and 8. Reliance on government statistics has more than just the obvious and severe problems. Governments have an extraordinarily strong incentive to influence the numbers, and government bureaucrats have proved pathologically dishonest when it comes to generating statistics. Further, changes in consumer prices are a complex product of a decrease in the value of fiat money and the increase in productivity causing a decline in goods’ value. Without any monetary inflation, productivity increases would translate to price decreases. With monetary inflation, rising prices indicate an increase in money supply larger than the increase in productivity. This means consumer price inflation does not allow us to estimate the wastefulness caused by using fiat money. The increase in the supply of the monetary unit is a much better proxy for it since it is unnecessary and purely a dilution of the value held by the holders.

The average US house price in 1915 was $3,500. In 2021 it was $269,039. That is compound annual growth in the price of the house at a rate of 4.18% over 107 years. Had the fiat standard adopted a fixed supply in 1914, and prices declined by 2% per year instead, the average American house would today cost $411. With a much smaller supply of the dollar, prices would be far lower than what they are today. Incomes would of course also be much lower, but the decreasing price of goods means that they become more affordable over time, and that saved money buys more goods every year. $411 in 1915 could have bought your great grandfather 12% of a house. But if he had saved it and passed it on to you, it would buy you an entire house today. Your great grandfather’s pocket change would be enough for you to live off today. A world of decreasing prices would provide people with a strong reason to save for the future, and one can only imagine how much better living standards would be today had humanity not been afflicted by inflationary fiat.

Based on World Bank data, the average annual supply inflation for the major national currencies between 1965 and 2020 is 6.67% for Switzerland, 7.44% for the U.S., 9.76% for Japan, 10.87% for the United Kingdom, and 20.33% for China. The euro area data is not available from the World Bank data, but it is found at the OECD, and averages 7.79%. The simple average for all the remaining countries in the World Bank dataset is 30.10%. The overwhelming majority of economic value exists in the major currencies; a weighted average inflation rate should reflect this, and when calculated, we can estimate that the average fiat user has suffered a 13.72% inflation in their money supply per year.97 When compared to holding hard money with a fixed supply, the average fiat user is witnessing a devaluation of the wealth stored in their savings by around 14% per year.

In 2019, the total global broad money supply stood at around $95 trillion, while total global wealth was around $360 trillion. This means that fiat money made up around 26.3% of humanity’s wealth. As that money is being devalued at 13.72%, humanity is losing around 3.6% of its wealth on average, every year, to fiat inflation depleting the value of its money. If the average trend holds over the coming year, we could expect fiat inflation to destroy around $15 trillion of value in the next year.

It is important here to stress the supremely regressive impact of the fiat tax on humanity. The world’s poor are predominantly distributed in countries experiencing higher inflation than that of the world reserve currencies. Further, the world’s poor have most of their wealth in money, not in financial assets. The world’s rich are the ones who hold the vast majority of the 75% of the world’s wealth that is not in fiat but in hard assets like stocks and bonds. The rich will own more liquid wealth than the poor, but their liquid wealth is a small fraction of their wealth, a fraction that declines as wealth increases. By having much of their wealth concentrated in the little liquid fiat they can own, the poor are constantly paying a heavy price for inflation.

A lot of ink is spilled over the evils of inequality, but very few will point to this very obvious and devastatingly cruel form of economic punishment inflicted on the world’s poor. Central governments are constantly devaluing and degrading what little hope the poorest among us have for achieving a better life. At the same time, this regressive inflation tax rewards the rich who can borrow large quantities of devaluing fiat, and who can protect themselves by holding hard assets. Predictably enough, the economists, academics, activists, and politicians obsessed with inequality tend to be highly concentrated in fiat institutions, supported by government fiat subsidies, and understandably unable to draw the obvious connection between the inflation that pays their salaries and the poor who foot the bill. Bitcoin is far more efficient than fiat because it does not impose this form of wealth confiscation through inflation. Holders of bitcoin can verify the supply for themselves, and the supply is devaluing at a current rate lower than 2% per year, which is halving every four years on its way to zero, eventually.

Economic Distortions

The second cost of fiat money can be understood as the second-order economic effects of an inflationary global system of partial barter around government currencies, and the enormously costly distortions it causes for the world economy. Chapter 5 in The Bitcoin Standard and Chapter 7 of this book discuss the connection between money and time preference, and how devaluing currency disincentivizes long-term thinking and encourages short term focus in decision-making. The result is a reduction in saving and an increase in indebtedness. Quantifying the enormous impact on humanity of a century of government manipulation of time preference is nearly impossible. The same goes for the centrally planned distortion of the most important economic calculations each human performs: their trades with their future selves. We have no idea what the world would have looked like had everyone continued to have a safe store of value to provide for their future selves. We likely would have seen more long-term thinking and less short-termism and impulsiveness. The impact on technological advancement, capital accumulation, and many societal problems can only be imagined. Chapter 6 in The Bitcoin Standard discusses in depth how business cycles are the inevitable result of the manipulation of the money distorting the price of capital, causing malinvestments, liquidations, recessions, and enormous amounts of capital destruction. The financial crisis of 2008 is estimated to cost every American $70,000 in lost lifetime earnings, or roughly a total of $21 trillion for the nation overall.

Another second-order effect of inflationary money is that it causes losing investments to appear profitable to investors and thus attract their capital. A business expecting a nominal profit will appear like a good investment to an investor, but in real terms, with the devaluation of the currency between the period of investment and the period of revenue accrual, the investment could actually turn out to be a losing investment. With money expected to debase at X%, any business that offers a positive nominal return smaller than X%, will appear profitable while being a net drain of society’s capital. Inflation turns money into a melting ice cube, strongly encouraging individuals to spend or invest, even if they cannot find a worthwhile purchase or investment. Wasteful spending and wasteful investments are an inevitable outcome of a monetary system in which the money cannot be expected to hold its value. The cost of the capital wasted in this way is incalculable, as we will never know how much more capital we could have accumulated, and innovations we could have discovered, had capital owners not had to dispense with it like a hot potato.

Also discussed in chapter 6 in The Bitcoin Standard is the balkanization of the world’s money from one universal medium of exchange, gold, into hundreds of government tokens with limited salability across time and space. This was a huge step backward for humanity’s monetary technology. It resulted in what Hoppe called a global system of partial barter. The foreign exchange market is not only an excessive cost in terms of transaction fees incurred by people engaging in cross-border barter. It is a much bigger expense in terms of the problems of calculation it creates for entrepreneurs. They must become part-time macroeconomic and monetary policy analysts to simply figure out the prices of their inputs and outputs. That cost, too, is incalculable.

Fiat Governments

Fiat enthusiasts might argue that the cost of debasement discussed above is not entirely a cost. They claim devaluation has allowed the government and its Cantillon-favored partners to spend, which is not entirely wasted. I would argue the opposite. Government spending, unlike private spending, is by its nature distortionary and wasteful, causing a misallocation of resources. The spending is a cost by itself. It is independent of the devaluation of the currency because it enables the kind of catastrophes outlined in the second section of this book. It is difficult to imagine the degree of government intervention in food production and diet discussed in Chapter 8 under a hard monetary system. The scientific process could not have degenerated into the current corrupt cartel for the mass production of content-free papers. This has been made possible due to government spending distorting the entire structure of the market and its incentives, as discussed in Chapter 9. Without inflation and government intervention in the energy market, it is difficult to imagine a free market causing the recent rises in energy prices and the decreasing reliability of grids in places that had mastered reliable grids many decades earlier.


The biggest and most devastating cost of fiat lies in the mechanism it uses to achieve consensus on a global ledger: violence. Whereas gold’s monetary role was guaranteed by its physical and chemical properties, and verification of its authenticity is possible, fiat’s monetary role is entirely predicated on the authority of the issuing central bank and government. By establishing a monopoly on the issuance and clearance of monetary tokens, Fiat converts all underlying monetary assets into virtual tokens arbitrarily assigned or removed by the central fiat node. Any transaction can be reversed, and any balance can be confiscated. Enormous amounts of these tokens can be conjured out of thin air into any balance, by pure fiat. All value and truth in the banking system can be decided politically. Fiat makes all domestic and international politics an extremely high-stakes game because the prize is virtual control over all economic value, domestically or globally. Further, and as discussed in chapter 8 of The Bitcoin Standard, the ability of government to draw on the entire wealth of its population makes it more likely to engage in military conflict and more likely to prolong such conflict, as the costs can be easily placed on the population.

Under the gold standard, governments fought until they ran out of gold and could no longer tax the population. Governments can fight under the fiat standard until they have appropriated all the value held by their citizens’ money. As former U.S. Representative Ron Paul explained, it is no coincidence that the century of central banking was the century of total war. R. J. Rummel estimates government regimes murdered 169 million people during the twentieth century. All these governments were able to carry out these atrocities thanks to fiat money’s extreme killer app: unlimited government finance. The two world wars and dozens of other wars and genocides have brought about horrors the likes of which the world has never seen. The cost for the dead and their many loved ones cannot be estimated in tangible terms.

Fiat’s proof of work relies on violence and the use of physical power to subjugate opponents in the case of disagreement. Fiat is all about “might makes right.” It rewards might with the biggest prize of them all: the accounting system for all of society, increasingly rewarding the powerful, and incentivizing humans to engage in power contests rather than economic production. The benefit of running a payment system that allows you to mint money is extremely high. People will spend resources they value close to that benefit to capture it. Fiat makes violence and power the method for incurring the cost. It takes an enormous human toll, almost entirely borne by people who stand to gain nothing from any authority capturing the printing press.

Chapter 11
Chapter 13