I reviewed the author’s previous book about five years ago. That seems an eternity ago. It was before the ham-handed responses to the Covid outbreak that had more to do with political and corporate power than with real medical necessity. There was polarization in the United States, but it wasn’t as bad as it is now, and inflation wasn’t out of control.
How times have changed. In 2021, when the lockdowns were still biting with full force, Professor Ammous released The Fiat Standard, which describes the evolution of the modern paper and electronic fiat currency system. Professor Ammous defined fiat “as a compulsory implementation of debt-based centralized ledger technology monopolizing financial and monetary services worldwide. The fiat standard was born out of the need for governments to manage their de facto default on their gold obligations.” Governments are free to alter the money supply by physical printing of money or through “quantitative easing”, which is printing money electronically.
As usual, Professor Ammous brings a rapier wit to his examination of fiat currency:
“This was the fiat standard protocol installation, and the whole world copied it: run unsustainable deficits, default by confiscating and restricting the movement of gold, suspend redemption, increase the supply of paper notes, and if you can, try to get other countries to hold your currency as reserve. The U.S. did it best.”
“Governments effectively took over the banking sector everywhere, or depending on who you ask, the banking sector took over governments. Details of who wore the pants in this relationship are of no concern to this book, which focuses on its bastard spawn.”
“After a century, it is fair to say fiat has successfully destroyed the modern university as a center of learning and research, transforming a once noble institution into a make-work welfare program for nerds, a highly overpriced credential mill, an inescapable debt trap, a country club experience, a political indoctrination camp, and a corporate advertising agency.”
Professor Ammous takes readers behind the scenes to show how the modern fiat currency system evolved. He also discussed the many ways that the easy production of fiat currency has corrupted modern societies, from investment decisions to science funding to education to family life to the unhealthy diet choices promoted by governments and industry. I nibbled around the edges of this in my previous post, but Professor Ammous deserves credit for a real deep dive into this widespread corruption of society. “Very often, fiat’s most catastrophic effect is not price increases but the myriad distortions – and outright destruction – of incentives it brings to many areas of human life,” he warns. Particularly important is his explanation of high inflation as causing people to heavily discount the future. Discounting the future is another way of describing lack of faith in the future. “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…families break down under financial strain.” Sound familiar?
Other major takeaway points are Professor Ammous’s explanation of the concepts of salability across time, space, and scale. Professor Ammous compared three methods of payment: gold, Bitcoin, and fiat. Gold has low salability across space, given that it must be physically transported. Fiat has high salability across space and time, given that most fiat currency is electronic. Bitcoin combines the scarcity of gold with the speed of settlement of electronic fiat currency, but Bitcoin cannot at this time handle as many transactions as the regular fiat currency system.
The main reason for the survival of the fiat currency system is that it keeps governments and corporations in power. If people are working and hustling to survive, then corporations have workers and governments don’t have to worry too much about people protesting. The FIRE (financial independence retire early) goal is difficult for most people to achieve because inflation is a constant movement of the financial goalposts. (It’s also a lot harder for people with children; most of the FIRE practitioners choose not to have any.) If people were more easily able to achieve FIRE, employers would have a harder time finding workers. Yes, fiat currency causes inflation, but the largest enterprises can afford the cost of inflation. Their smaller competitors cannot. Hence, less competition.
We cannot expect that a Bitcoin or gold standard will create paradise on Earth. There were, after all, wars and corruption and fraud before modern fiat currency became widespread. Furthermore, gold or other precious metal currencies can be debased; this happened during the Roman Empire, and has also happened in modern times. Even Bitcoin might be damaged by a coding flaw (which Professor Ammous discusses in this book). Yet the main point of The Fiat Standard is to describe how the fiat currency system has some useful aspects, but that it is harmful for individuals and countries. In that, Professor Ammous succeeded.
It's no wonder that Professor Ammous left academia to set up his own business. He’s too real and too direct for the tired statists of academia. He’s a young hell-raiser bringing new life to Austrian economics – that strange notion that sound money and freedom (both individual and entrepreneurial) are important. He is truly anti-establishment in a way that few others are. It would be greatly entertaining to watch him debate Jay Powell, Janet Yellen, Paul Krugman, or other statists.
For those who are infuriated – as I am – by high prices for everything, and who wonder how it happened and what might be done about it, The Fiat Standard is well worth reading.