The Fiat Standard book summary

Ljubljana, 22.5.2023: Bitcoin Society of Slovenia in cooperation with Blockchain Alliance Europe organized Bitcoin Pizza Day to celebrate the 13th Bitcoin Pizza Day. the anniversary of the first commercial bitcoin transaction. In addition to an interesting panel discussion and a record-breaking bitcoin pizza with a diameter of three metres, the event also saw the release of the Slovenian translation of the book Fiat Standard by Dr Saifedean Ammous. His first book, Bitcoin Standard, was translated in December last year and this year he
Bitcoin Library
has added a sequel to its collection of translated Bitcoin literature, which will be briefly restored in this post. You can read a summary of the first book here and a summary of the event here.

TL:DR

The book Fiat Standard analyses the modern monetary system through the lens of bitcoin technology, which the author considers to be an upgrade of the fiat system. In this way, it evaluates the advantages of this monetary system, created during the industrial age, compared to the gold standard, while highlighting its disadvantages by comparing it to a system adapted to the information age, i.e. the bitcoin network.

Renewal

In the first chapter, the author starts with an introduction to the history of the fiat system and tries to find an equivalent to the Bitcoin White Paper, which he chooses as the year 1914, when the Bank of England issued war bonds to finance the fighting of the First World War, confiscating gold from its citizens and exchanging it for the pound sterling. This began a century of weak money and all-out war, and world currencies have lost more than 95% of their original value since then.

The event was perfectly organised, which delighted the participants with an unforgettable experience. The Bitcoin Society of Slovenia demonstrated its commitment to raising awareness of the Bitcoin network and fostering a supportive community spirit. Their efforts were further demonstrated by providing the latest Slovenian translation of the book Fiatni standard from the Bitcoin Library, a special discount on hardware wallets and accessories from Bitcoin Shop Slovenia and discounted tickets for the upcoming BTC Prague event .

Ammous makes an interesting comparison between the creation of fiat “tokens” and the mining of bitcoins. Every time any organisation licensed by the authorities issues a new loan, it creates a new amount of fiat money. Since the authorities guarantee the entire functioning of the banking system, any loan issued by banking institutions is essentially a credit to the authorities and thus part of the wider money supply. The problem with this system is that it equates money with credit, which makes it extremely difficult to measure the money supply. Unlike the supply of bitcoins, it is virtually impossible to measure or audit the amount of fiat money in circulation in order to have an insight into its actual state.

In the modern banking system, when someone borrows $1,000,000, the bank does not take that money out of its reserves, but creates it anew. This means that every borrower who borrows money to buy a property or something similar is guaranteed by the whole economy. If the latter is unable to repay its debt, it puts the burden on all the other individuals whose purchasing power is reduced when the new money is created.

In Chapter 4, Ammous points out that mining, in crypto terminology, is equivalent to lending fiat money. When banks issue loans, they are printing or mining fiat. Borrowing is thus equivalent to mining gold or new bitcoin blocks. The most effective way to curb excessive borrowing is through recessions, as this phase of the business cycle reduces the money supply, thus preventing the economy from hyperinflating.

In Chapter 5, the author continues the discussion on the quantity of fiat money and its balances. This leads to the interesting observation that the richest people tend to have negative fiat money balances, which means they use debt to finance investments in scarce goods.

As inflation in 1971 made it impossible to maintain purchasing power through saving fiat money, people had to find new ways to save, and the stock and bond markets became the new alternatives to savings accounts to fight inflation.

In an era of inflation-proof hard money, such as gold, people can save by holding gold as its purchasing power increases over time. This means that by saving in gold, we can buy more goods each year, as their price falls as production rises.

But in an era of weak and inflationary money, such as modern fiat, people have to look for various ways to save, such as government bonds or company shares, to protect their purchasing power against inflation. But the price of goods in units of fiat money rises every year, meaning that people who save this money can afford a smaller amount of these goods each year.

The problem with this type of system is that people have to spend some of their valuable time actively managing their savings portfolios. As the author says so well in his book, fiat money has to be earned twice; firstly, when it is earned through work, and secondly, when we need to find an efficient mix of investments to protect its purchasing power. And we are always threatened by professional investors who are in this for a living and who, for the most part, beat the average person in the market.

This has made borrowing the best strategy for maintaining purchasing power, but the problem is that we need to have enough income each month to pay the principal and interest, which puts us under stress and increases our time preference. This means that we are more focused on the present and do not think long-term, knowing that if we default, we could lose our assets. It is a process that returns people to a primitive state where any quick buck is good, regardless of the long-term consequences.

In Chapter 6, the author turns things upside down and tries to find the advantages of the Fiat system. What he finds is that the greatest advantage of fiat money is that it is marketable across space, allowing global trade to flourish, which gold has not been able to do. Currencies are simply records in bank accounts, allowing money to be sent over the telecommunications networks of banks and other organisations, and light paper money can be sent quickly via postal intermediaries. This gives fiat money a high marketability, making it a superior means of payment compared to gold, whose biggest advantage is the preservation of value over time. In an era of Keynesian economics, which argues that consumption is the fundamental driver of the economy, national currencies are thus the most appropriate candidate for a currency.

Chapter 7 analyses the impact of fiat money on different aspects of our lives. This launches a comprehensive discussion of the negative effects of weak money not only on our economy but on our overall quality of life, covering chapters 8-11. Because inflationary money increases our time preference and forces us to consume instead of save, it has consequences for the quality of our diet, the credibility of science, the emergence of international institutions that hinder the development of underdeveloped countries, and the emergence of “nanny states” that, through public goods, take away from individuals the responsibility for their lives and offer them free education, health care, security and other Mephistophelean promises, always underpinned by the desire for control and power.

In Chapter 12, Ammous carries out a cost-benefit analysis of the fiat system, in which he concludes that the biggest benefit is that it saves a large part of the cost and time of moving gold over long distances. It divides the costs of such a system into four categories:

    • Destroying savers’ wealth through inflation
    • Determining the role of money in economic calculations
    • Increased power of government to shape the economy and wider society
    • Increased likelihood and cost of conflict

Chapter 13 explains in detail how bitcoin solves this problem by completely replacing the role of government bonds, gold, investment property and securities, thus becoming humanity’s universal savings account.

Chapters 14-18 are devoted to comparing the bitcoin network with the fiat system and discussing how bitcoin replaces and improves on all its shortcomings. In doing so, the author addresses the scaling of the bitcoin network, the banking of bitcoins, its energy issues, performs a cost-benefit analysis, and answers the question of the last chapter, “Can bitcoin fix this?”

The book is now available for purchase on the Bitcoin Library website along with its predecessor, Bitcoin Standard. They will soon be joined by the third book of the Ammous trilogy, Principles of Economics, in which the author attempts to explain in general terms the principles of Austrian economic theory, which has seen a resurgence since the emergence of the bitcoin network and is the only coherent and consistent economic theory.

On the author’s website saifedean.com you can find online courses on his books or attend his weekly online seminars. And here is a short reconstruction of the book from the author’s YouTube channel:

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