Table of Contents
Fiat Against Nature
Nature offers man a reality he must learn to deal with if he is to survive. You must sow to reap, you must work to be rewarded, and you will suffer from want by not working. This is the nature of life for all living beings. Every creature needs to spend its day searching for food and trying to avoid becoming food. This is the natural survival instinct without which we would not have survived to be here today.
As a monetary system whose constituent units are easy to produce for governments, fiat disrupts this natural order, as it severs the connection between work and reward. Rather than the market offering individuals the reward for their work as valued by the others they serve, fiat money makes monetary reward highly dependent on political obedience and connections. When jobs are unproductive, then reward cannot be based on productivity, it is rather based on obedience and politics. Instead of learning to be productive, fiat teaches you to play politics. Instead of work being rewarded based on its productivity, it is instead rewarded based on artificial status games.
When you start to think deeply about the distortionary effects of a centrally planned monetary system, you start to see them everywhere. Money, after all, is one half of every economic transaction. Money is the main vehicle with which we can trade with our future selves through the act of saving. The development of money allows humans to think of the future and make plans to provide for it. The harder the money, the more reliably we can provide for the future; the less uncertain the future is, the easier it is to think and plan for it, and the less it is discounted.
Money is the medium for the communication of information in a market economy. Profit and loss are the signals that ensure the most productive continues to profit and have more resources so as to produce more, while the unproductive loses their resources and has to stop wasting them. The only way for a business to survive is to produce something of value to others. At any point in time, all the businesses that are operational must be productive, and the only exceptions would be the businesses on their way to shutting down.
When money is controlled by government, this market process is perverted. The profit and loss mechanism is severely restricted. The requirement for survival is no longer productivity, but political acceptability. Unproductive but politically favored firms can survive for decades, continuing to waste resources, while productive and politically unfavored firms can go out of business. At any point in time, the businesses that are operational will likely contain a large number of zombie parasites, draining resources away from productive members of society.
By devaluing the monopoly currency, government essentially forces everyone to raise their time preference. The flip side of this is that the devaluation allows government to meddle with all aspects of life. This chapter focuses on the impact of fiat money on time preference, architecture, capital, the environment, and the family. The next chapters will explore the impact of raised time preference combined with limitless government spending and intervention on a few very important aspects of modern fiat life: food, education, science, energy, and security. Other important consequences of fiat money were discussed in The Bitcoin Standard: government finance, war, tyranny, and business cycles.
After a century of the fiat standard, wherein government fiat mandated citizenry use debt as money, it is now possible to discern some clear societal and economic consequences of the widespread use of this technology. Money can be thought of as the operating system for society, as it is involved in every economic transaction, and so it will have a pervasive influence on the nature of economic choices that individuals make and the values that motivate them.
Fiat Time Preference
Money as a technology is heavily intertwined with our time preference, i.e., the degree to which we discount the future. As humans develop the capacity to store economic goods for future use, their ability to provide for their future increases. An economically primitive man can provide for his future self by saving consumption goods for future use. As their degree of economic sophistication increases, humans can develop durable consumption goods that they maintain and use over time. As money develops as a mechanism for conducting trade, it can be saved to transfer economic value in the future, allowing for a more compact and reliable transfer of value across time. The better we are at providing for the future, the more we become aware of it and plan accordingly.
The process of lowering time preference is inextricably linked to money. Having money allows humans to delay consumption in exchange for something that can hold value well and can be exchanged easily. Without money, delaying consumption and saving would be more difficult, because the goods could lose their value over time. You could store grains to grow, but the chance of them ruining before the next season is higher than the chance of a gold coin ruining. If you can sell the grain for gold, you are able to exchange it back to grain whenever you need to, and you can use it to purchase something else meanwhile. Money naturally increases the expected future value of deferring consumption, compared to a world with no money. This incentivizes future provision. The better the money is at holding on to its value into the future, the more reliably individuals can use this money to provide for their future selves, and the less uncertainty they will have about their future lives.
The history of money is a natural progression from easier to harder media over time. Salt, cattle, glass beads, limestone, seashells, iron, copper, and silver have all been used as money in various times and places, but by the end of the nineteenth century, the entire globe was practically on a gold standard. The use of an easier monetary medium would lead to its overproduction, and thus a decline in its value and the dissipation of its monetary premium. Throughout history, and through global trade, money would always tend to be the hardest good to produce. As money progresses from easier to harder media of exchange, individuals’ time preference will naturally decline, as their discounting of the future declines. We can understand the process of human civilization as the process of lowering time preference, as Hans-Hermann Hoppe explains. As people value the future more, they begin to invest in improving it. Their actions are carried out with regard to their consequences over a longer and longer time frame. As more and more people cooperate and trade within a market order, creating more economic value, and planning for the future, capital is accumulated and the productivity of work increases. Material living conditions improve over time, and successive generations have a better standard of living than their forebears. With time, humans are able to direct their attention and labor away from the drudgery of basic survival to more elevated and elevating concerns.
According to Austrian economists, and as discussed in more detail in my Principles of Economics textbook, time preference is the driver and determinant of interest rates. In The History of Interest Rates, Homer and Sylla show a 5,000-year process of decline in interest rates, intertwined with significant increases during periods of war, diseases, and hardship. The move toward harder monies with better salability across space and time can be viewed as a contributor to the epochal decline in time preference by allowing humans better savings technology, making the future less uncertain for them, and thus making them discount it less. With the gold standard of the late nineteenth century, the majority of the world had access to a form of money that could hold its value well into the future, while also being increasingly easy to transfer across space. Saving for the future became increasingly reliable for more and more of the world’s population. With the ability to save in hard money, everyone is constantly enticed to save, lower their time preference, and reap future rewards. They see the benefits around them every day in falling prices and in the increased wealth of savers. Economic reality is constantly teaching everyone the high opportunity cost of present spending in terms of future happiness.
The twentieth century’s shift to an easier monetary medium has reversed this millennia-old process of progressively lowering time preference. Rather than a world in which almost everyone had access to a store of value whose supply could only be increased by around 2% a year, the twentieth century gave us a hodgepodge of government-provided abominations of currencies growing at 6–7% in only the best examples, usually achieving double-digit percentage growth and, occasionally, triple-digit.
Rather than expecting money to appreciate and thus having a reliable way to retain value into the future, fiat returned humans of the twentieth century to far more primitive times, when retaining value into the future was far less certain and the value of their wealth was expected to be reduced in the future, if it survived at all. The future is hazier with easy money, and the inability to provide for the future makes it less certain. This increased uncertainty leads to a higher discounting of the future and thus a higher time preference. Fiat money effectively taxes future provisions, leading to a higher discounting of the future and an increase in basic present-oriented behavior among individuals. Why delay consumption today when you are unsure what will happen to your property tomorrow?
The extreme of this process can be seen when observing the effects of hyperinflation, i.e., the move to a very easy and rapidly devaluing currency. A look at the modern economies of Lebanon, Zimbabwe, or Venezuela through their recent hyperinflationary episodes provides a good case study, as do the dozens of examples of hyperinflation in the twentieth century. Adam Ferguson’s When Money Dies provides a good overview of the effects of hyperinflation in interwar Germany, a society that was one of the world’s most advanced a few years earlier. In each of these hyperinflationary scenarios, as the value of money was destroyed, along with it went any concern for the future. Attention turns instead to the short-term quest for survival. Saving becomes unthinkable, and people seek to spend whatever money they have as soon as they secure it. People begin to discount all things which have value for the long run, and capital is used for immediate consumption. In hyperinflationary economies, fruit-bearing trees are chopped down for firewood in winter, businesses are liquidated to finance expenditure, and the proverbial seed corn is eaten. Human and physical capital leave the country to go where savers can afford to maintain and operate them productively. With the future so heavily discounted, there is less incentive to be civil, prudent, or law-abiding, and more incentive to be reckless, criminal, or dangerous. Crime and violence become exceedingly common as everyone feels robbed and seeks to take it out on whoever has anything. Families break down under financial strain. While more extreme in the cases of hyperinflation, these trends are nonetheless ever-present, in milder forms, under the yoke of the slow fiat inflationary bleed.
The most immediate effect of the decline in the ability of money to maintain its value over time is an increase in consumption and a reduction in saving. Deferring consumption and delaying gratification requires one to give up immediate pleasure in exchange for future reward. The less reliable the medium of exchange is for transforming value into future reward, the lower the expected value of the future reward, the more expensive the initial sacrifice becomes, and the less likely people are to defer consumption. The extreme of this phenomenon can be observed at the beginning of the month in supermarkets of countries witnessing very fast inflation. People who get their paycheck will rush to the supermarket to immediately convert it into groceries and essentials, knowing that the quantities they can acquire by the end of the month will be far smaller due to the destruction of the value of the currency. Fiat’s low and steady inflation does something similar, but it is more subtle.
The culture of conspicuous mass consumption that pervades our planet today cannot be understood except through the distorted incentives fiat creates around consumption. With the money constantly losing its value, deferring consumption and saving will likely have a negative expected value. Finding the right investments is difficult, requires active management and supervision, and entails risk. The path of least resistance, the path permeating the entire culture of fiat society, is to consume all your income, living paycheck to paycheck.
When money is hard and can appreciate, individuals are likely to be very discerning about what they spend it on, as the opportunity cost appreciates over time. Why buy a shoddy table, shirt, or home when you can wait a little while and watch your savings appreciate to allow you to buy a better one. But with cash burning a hole in their pockets, consumers are less picky about the quality of what they buy. The shoddy table, home, or shirt becomes a reasonable proposition when the alternative is to hold money that depreciates over time, allowing you to acquire an even lower quality product. Even shoddy tables will hold their value better than a depreciating fiat currency. The uncertainty of fiat extends to all property. With government emboldened by its ability to create money from thin air, it grows increasingly omnipotent over all citizens’ property, able to decree how they can use it, or to confiscate it altogether. In The Great Fiction, Hoppe likens fiat property to a sword of Damocles hanging over the head of all property owners, who can have their property confiscated at any point in time, increasing their future uncertainty and reducing their provision for the future.
Fiat’s high time preference is perhaps most apparent by examining the longest lived consumption good humans have: buildings. It is astoundingly curious that as industrial technology made construction cheaper and easier than ever before, the quality of buildings worldwide has declined, along with their life expectancy. Changes in future discounting will likely have the most significant effects on goods that survive longer, as they offer the most scope for trading-off future for present day utility. As time preference rises, the discounting of the future increases, and the value of a house surviving for many decades declines markedly. As this happens, architecture has moved from optimizing for quality and longevity to optimizing for present-day cost reduction.
Under the gold standard, homes were built to last. The owner would have saved since their childhood to build their home, and they usually built it with the intention of living in it for the rest of their life. But in the twentieth century, homes are built to reduce cost, with very little regard for the building’s long-term prospects. It is simply not true that twentieth century architecture is uglier and less permanent than nineteenth century architecture because it is more economical. While it is likely cheaper to build in the short-run, it is far more expensive in the long-run, given the regular maintenance costs needed to keep it operational, and the fact that it will need to be replaced far sooner than a nineteenth century building.
A stroll through any city that had parts built in the nineteenth and twentieth century shows a very marked difference in the architecture produced by each era. An entire book could be written contrasting nineteenth and twentieth century building styles and discerning all the ways in which rising time preference has influenced design and construction. This chapter will only use one illustrative example: The Boston Public Library’s two buildings built almost a century apart. The first building, the magnificent McKim Building, was built between 1888 and 1895 in the classical tradition, at a cost of $2,268,000 gold-backed dollars, equivalent to $70,200,000 in 2020 fiat dollars. A century and a quarter after its construction, the building is still one of the most beautiful in Boston, and one of the city’s most important landmarks, attracting locals and tourists to enjoy its splendid interior. Its structure has needed little construction or maintenance to remain standing and beautiful.
The second building, the Johnson building, is a brutalist modernist abomination nicknamed “the mausoleum” by those unfortunate enough to have experienced the gloom of entering it. Built in 1971, it reached such a degree of disrepair and dysfunction that it needed a complete overhaul in 2013, which cost $78 million and took three years to complete. The cost of maintaining the ugly Johnson building, only 40 years after its construction, exceeded the cost of building the magnificent McKim building, which has not required major maintenance after 125 years of uninterrupted and reliably functional beauty, at least according to official CPI statistics.
Our technology today is far superior to what existed in the late nineteenth century, and it is only natural that the cost of construction has gone down with technological improvements. It is not poverty that drove the city of Boston to switch from building beautiful monuments to ugly concrete boxes; it is the high time preference that heavily discounts the future costs of renovation implied with the modern quick-to-build and quick-to-decay construction. Modern architecture only appears cheaper in the short-term, but its cost is deferred into the future through the need for renovation and rebuilding. The millennia-long tradition of classical architecture was not displaced with modern abominations because it is cheaper, but simply because it defers its costs to a future which the twentieth century taught us to discount heavily.
Fiat Capital Destruction
The fiat system’s strong incentives to engage in credit creation makes borrowing an attractive proposition for most people, allowing their lenders to mine new fiat tokens into existence. The result is a society where everyone is indebted and few have savings for the future. The wealthy can protect themselves in these situations by holding most of their wealth in hard assets, but the majority of the population will usually have most of its wealth in liquid assets which are constantly devalued, removing the motivation to work for a better future.
This dissaving is not just reflected in the negative fiat balances everyone keeps; it pervades all forms of capital. Temporally and cognitively, saving is the necessary predecessor to investment and capital accumulation. Individuals have to first decide to defer gratification and delay consumption. In other words, they have to save before they are able to accumulate any capital. The reduction in the incentive to save will lead to a reduction in the availability of capital to invest.
Fiat enthusiasts will respond to this point by arguing that central bank credit expansion amplifies the incentive to engage in productive business rather than hoard cash unproductively. But if we understand saving as the necessary prelude to investing, then the reduction in savings will lead to a reduction in real investments backed by real savings. The investments financed through credit expansion without requisite savings are not a free gift from government that allows us higher productivity without sacrifice; they are simply miscalculations and malinvestments that lead to business cycles, inflation, and crises.
As discussed in chapters 6 and 7 of The Bitcoin Standard, central banks manipulate their monopoly currencies, distorting the ability of entrepreneurs to perform economic calculations. This leads to systematic errors in the allocation of capital, which are exposed when a credit expansion recedes, leading to the recessionary bust part of the business cycle. Each business cycle causes large amounts of capital misallocation into unprofitable and unproductive ventures that effectively consume capital rather than increase it. Credit unbacked by savings cannot generate new capital for investment; it can only misallocate existing capital to sectors where self-interested individuals operating in a free market would not have allocated it. Another way to understand the destructive impact of inflation on capital accumulation is that the threat of inflation encourages savers to invest in anything they expect will offer a better return than holding cash. When cash holds its value and appreciates, an acceptable investment will return a positive nominal return, which will also be a positive real return. Potential investors can be discerning, holding on to their cash while they wait to find the best opportunity. But when money is losing its value, savers have a strong impetus to avoid the devaluation of savings by investing, and so they become frantic to preserve their wealth and are less discriminating. Investments that offer a positive nominal return could nonetheless yield a negative real return. Business activities that destroy economic value and consume capital appear economical when measured against the debasing monetary unit and can continue to subsist, find investors, and destroy capital. The destruction of wealth in savings does not magically create more productive opportunities in society, as childish Keynesian fantasists want to believe; it simply reallocates that wealth into destructive and failed business opportunities.
Fiat’s consumptive and destructive impetus is also reflected in natural capital and the environment. As the possibility of providing for the future becomes less certain due to money’s inability to maintain its value, economic actors discount more heavily the future services provided by soil, rivers, forests, beaches, and water aquifers, which makes depleting these resources a more rational strategy. The desire to conserve these parts of nature wanes when individuals do not value their future services, and the inevitable outcome is depletion and overuse. The next chapter, on fiat food, discusses the impact this has on agriculture and diets.
Related to the general rise in time preference and the heavy discounting of the future is the rise of interpersonal conflict between individuals and the degradation of the manners and mores that make human society possible. Trade, social cooperation, and the ability of humans to live in close contact with one another in permanent settlements are dependent upon them learning to control their base, hostile, animal instincts and responses, and substituting them with reason and a long-term orientation. Religion, civic, and social norms all encourage people to moderate their immediate impulses in exchange for the long-term benefits of living in a society, cooperating with others, and enjoying the benefits of the division of labor and specialization. When these long-term benefits seem far away, the incentive to sacrifice for them becomes weaker. When individuals witness the dissipation of their wealth, they rightly feel robbed, and they question the utility of living in a society and respecting its mores. Rather than a way to ensure more prosperity for all, society appears as a mechanism for an elite few to rob the majority. Under inflation, crime rates soar and more conflict emerges. Those who feel robbed by the wealthy elite of society will find it relatively easier to justify aggressing against others’ property. Diminished hope for the future weakens the incentive to be civil and respectful of clients, colleagues, and acquaintances. As the ability to provide for the future is compromised, the desire to account for it declines. The less certain the future appears to an individual, the more likely they are to engage in reckless behavior that could reward them in the short term while endangering them in the long term. The long-term downside risk of these activities—such as imprisonment, death, or mutilation—are discounted more heavily compared to the immediate reward of securing life’s basic goods.
The family itself is also a victim of the onslaught of fiat inflationism on time preference. In all cultures, people invest their youth and resources into building a family with a life partner, sacrificing present resources to provide a safe fostering environment for children. In return, they get a family to care for them in their old age. Starting a family is a low time preference decision that requires the individual to highly value the future and sacrifice for it. With hard money, the burden of sacrifice is lightened by the ability to save in a money that appreciates in real terms. But when monetary hardness was compromised in the twentieth century, the ability of family members to provide for one another was also compromised. With fiat’s loose supply growth resulting in continuous price increases, and savings becoming ineffective, the financial pressures of fiat have resulted in a large increase in families with two wage earners, resulting in far less time for them to spend together. As the stored monetary savings of individuals are depleted to finance the state, along with it goes the ability to provide. The ability of the state to provide undermines the individual’s incentive to sacrifice to start a family. As education, childcare, healthcare, and retirement become the responsibility of the state, the need for a family decreases, and the sacrifices required for it become less compelling. All the bonds of family will weaken when the state appropriates the power of provision.
In the world in which fiat did not finance the welfare state, family was one’s only hope for surviving childhood and old age, and so everyone had a strong incentive to invest in familial relationships. Children had little choice but to listen to their families, and adults had little choice but to be devoted to their families, as straying away from a family was far more consequential without a welfare state to care for you in your old age. Throughout history, most humans understood that if you spent your youth building a healthy family, you stood a good chance of having loving company in your later years and someone to take care of you. The urge to have children is instinctive for most people, and the happiness kids provide makes many want them, but few think of getting children as a great way to prepare for old age. It is very common to see people extend their adolescence indefinitely and waste their youth on inconsequential nonsense, offering fleeting pleasures but little lasting security, satisfaction, or fulfillment. Even if government is still there to provide for you financially in your old age, it cannot caress and love you as you grow old and frail. Humans have needs beyond just the financial. The need for connection, love, and familiarity is very strong, and long-term investment in family is the most reliable method known for obtaining this. Being relieved from having to provide for the long term by the fiat credit machine, individuals end up investing less in the families that would give them joy and satisfaction in their later years. Nothing in our psyche has changed over the past one hundred years to allow us to overcome this need and sacrifice family. What has changed is our ability to think long term and care for our future selves.
Armed with the advanced and dangerous technologies of his ancestors from the golden age, fiat man finds himself approaching the world with a progressively shorter horizon, stumbling along from one short-term fix to another, depleting his capital stock, devaluing the age-long institutions, mores, and traditions that have allowed his modern existence. Fiat man finds himself descending back into the barbarism of his distant ancestors. By providing a monetary standard built on a hard money that resists debasement, bitcoin is allowing people worldwide to provide for their future selves more reliably, decreasing their uncertainty about the future, lowering their time preference, and offering us the intriguing possibility of reversing the twentieth century’s rise in time preference, and its many attendant catastrophes.