Muse 005: Fiat
Origin Story
In Greek and Roman mythology, a muse referred to each of nine goddesses, the daughters of Zeus (god of sky and thunder) and Mnemosyne (goddess of memory), who preside over the arts and sciences. The above is, of course, the definition of a muse as a noun but it can also be used as a verb. That can be defined as “ to be absorbed in thought” or “say to oneself in a thoughtful manner”. I like all of this as it relates to what I intend these writings will to be for both myself, as well as, anyone who finds value in them.
Fiat
This word has been flying around a lot over the last 24 months or so. What does it mean? And no, people are not talking about the Italian car manufacturer. Per Merriam-Webster, it is defined as an authoritative or arbitrary order. In other words, this _object_ is worth what I say it is because I said it is. Wow. How did we get here? Gold was money for 5,000 years. Gold is nobody else’s liability. Why did we remove it from the equation altogether? I will do a shallow dive into this very question in today’s piece but would recommend picking up The Bitcoin Standard by Saifedean Ammous or Layered Money by Nik Bhatia, which are listed under the Education tab of this website, for those interested in a deeper dive. Also, Robert Breedlove’s YouTube channel is full of conversations with a multitude of guests talking about this question.
What characteristics made gold the cream that rose to the top of the monetary order? Scarcity, durability, divisibility, and verifiability. The major issues that arose were the lack of velocity (i.e., cannot send gold quickly) and while it is verifiable, it is a very arduous task. What governments did to manage these were to create paper certificates backed by gold. This got rid of the task of verifying gold because it was now a paper note with the gold backing it in a safe at the central bank that only needed to be verified once. This, of course, introduced counterfeiting into the equation and issuers have used increasingly sophisticated methods of insuring these notes were indeed legitimate but that risk is not zero. Credit was the way around the lack of velocity. Rather than settling transactions on every trade, counterparts would keep a running tally of the money owed in a database, then settle it with gold whenever it was convenient or necessary. The risk was that you relied on your counterparty not going out of business and thus unable to pay what was owed, so you needed to be diligent in who you lent credit, which is still the case today. This brings us to WWII, a lot of the gold in Europe was shipped to the United States because the leaders of those nations were worried that Nazi Germany would seize the gold as they were expanding their empire. Then in 1944, with victory within reach, the US met with 43 other nations in Bretton Woods, New Hampshire, and agreed to use a gold standard to create a fixed currency exchange rate. Essentially the US would be the custodian of the gold, because we already had a lot of it, and they would be able to get the gold back at a rate of 35 dollars per ounce of gold. Keep in mind that it was still illegal for US citizens to own gold at this time, which was FDR Executive Order 6102, signed on April 5, 1933, gave citizens less than a month to turn in all their gold savings, and this decree was on the books until 1974. It’s not a coincidence that Satoshi’s birthday is April 5. By the late 1960s, the rest of the world was growing concerned that they wouldn’t get the gold for the paper claims they had, which was first voiced by President Charles de Gaulle of France in 1965. Then on August 15, 1971, Richard Nixon removed gold from the equation creating fiat currency. He did this allegedly to “defend the dollar against speculators”, which feels like political speak for we don’t have the gold. This experiment is still underway today and the answer to the two flaws mentioned above is bitcoin (plus the Lightning Network, a second layer technology on top of bitcoin), which shares the attributes of scarcity, durability, divisibility, and verifiability, but it does not share the flaws of gold — lacking velocity and arduous verifiability because there is no need for credit and it is very easy to verify the authenticity of bitcoin. Might make sense to get some just in case it catches on. That is the condensed story of fiat money with a peek into why bitcoin is the answer to the chaos we are seeing today.