How We Got Used to Fiat Money

Most false or irrational ideas about money are not new. For example, take the idea that government can just fix the price of one monetary asset against another. Some people think that we can have a gold standard by such a decree today. This idea goes back at least as far as the Coinage Act of 1792, when the government fixed 371.25 grains of silver to the same value as 24.75 grains of gold, or a ratio of 15 to 1. This caused problems because the market valued silver a bit lower than that.


The gold-silver ratio from 1800 to 1915. In the 1870s, numerous nations around the world dropped bimetallism in favor of a gold standard (France was a noteworthy exception). Thereafter it quickly became obvious that silver had been vastly overvalued at the official exchange ratio. It was essentially a subsidy for silver miners. Once a pure gold standard was adopted, mild consumer price deflation became the norm, as economic productivity grew faster than the supply of gold. Contrary to what virtually all central bankers nowadays assert, this had no negative effects on the economy whatsoever. On the contrary, the four decades following the adoption of the gold standard produced the biggest and most equitable real per capita growth the US has ever seen – such growth rates were never again recaptured. Of course, at the time government spending represented between 3% to 4% of total economic output, i.e., government was but a footnote in most people’s lives. The reason why governments subsequently sabotaged the gold standard was precisely that they wanted to grow without limit. [PT]


So people were happy to bring their silver to the U.S. Mint to be coined. Silver had a higher value as a coin than it did in the market, and it was the opposite for gold. Gresham’s Law teaches us that if two monies must be treated by law as the same value, then the one of lower value will circulate and the one of higher value will be hoarded. This put the fledgling America on a de facto silver standard.


Eight Spanish silver reales, or “pieces of eight” which consisted of 387 grains of pure silver (the coin on the upper right is a Mexican piece of eight, with Chinese chop marks). These coins were minted by the Spanish Empire since 1598 and were of the same size and weight as the German Thaler, which in turn was standardized across all German territories since the 15th century. These coins were legal tender in the US until 1857 and for a long time were the by far most widely used coin. The Coinage Act of 1792 established that the new US dollar was to be equal in value to Spain’s pieces of eight, but people soon found out that the US Mint used a slightly different standard of fineness (0.9 instead of 0.8924), which meant that about 1% more silver was needed to mint a dollar. This made them reluctant to bring silver to the mint, hence the Spanish coins continued to dominate in daily life. Spanish reales were actually the first world currency, and it worked splendidly for almost 300 years (incidentally, over the time of its existence, this was the least debased coin in the Western world, which explains its popularity). People would cut the coin into 8 pieces (“bits”) of equal size for smaller transactions and to make change – prices on US stock exchanges were quoted in fractions based on these 8 bits for a very long time. The United States Assay Commission which kept an eye on the quality of the production of the US Mint was one of the few bureaucracies to ever be disbanded – in 1980. This is actually testament to the stickiness of bureaucracies – gold coins had been out of circulation since 1933 and silver coins since 1965 (a rudely debased half dollar existed until 1970).  [PT]


Or, bad ideas have their roots in historical precedent but something is lost (or sabotaged) along the way. Back in 1792, there was no question that money meant gold and silver. There was no question that, when you deposited money at a bank, you had a right to get the same amount of money back. However, if each bank had a different unit of deposit, it would be hard to understand if someone said “I will pay you ten dollars”. Is that ten Road Runner Bank Dollars or ten Bank of Wile Coyote dollars?

The Coinage Act standardized the unit, but it did not change the rights of depositors or the obligations of banks. However, today, many people think that the government can, post hoc, change the definition of a unit and thereby change the value of everyone’s debt obligations and bank balances (and presumably cause a repricing of every extant asset).

We see this in many discussions of China’s future monetary policy. Many gold bugs have said that China will announce a gold-backed yuan. No one can know what a government may do in the future, but we can say in principle that it is impossible to fix the price of gold in yuan (or dollars or anything else). We can say that it won’t work if they try to change the value of the yuan by simple changes of law.

Another bad idea today traces itself back centuries. People use the paper bank note (and now electronic credit) as the equivalent of money for most situations, such as making a payment. Back in 1792, everyone understood that the paper note was redeemable for money. If you went to a bank, and pushed a twenty dollar bill over the counter, you would get just over 1 ounce in gold coins.


A $5,000 and a $50 gold certificate issued by the US treasury in 1882 and 1928. These bearer certificates were in use from 1882 to 1933 and were freely convertible into gold coins at a fixed rate of $20.67 per troy ounce. The treasury began to issue gold certificates in 1865 already, but before 1882 the depositor was identified on the certificate by name. The background to this is that US greenbacks, a fiat money used to finance the civil war, only came back into line with the gold value of the dollar at around 1879. Once the treasury started to redeem these so-called United States Notes in gold again, gold certificates were introduced for general circulation as well. [PT]


So long as the banks are trustworthy, few people have a reason to redeem their paper and withdraw their coins. So most become comfortable with the idea of paper bills. They may even begin to think of it as money. However, the concept of money cannot be entirely forgotten, so long as redemption occurs every day. If you redeem paper to get gold, can you call the paper “money”? If the paper is money, and you’re turning it in to get gold, then what is the word for the gold? In a system where redemption is possible, people are clear that the paper is currency and the gold is the money. No one would imagine redeeming money for … __________? (we literally cannot think of what word would go in the blank.)


Private bank notes issued in the 1850s an 1830s. It is stated on them that the bearer will be paid the sum on the note in dollars on demand. In other words, it was crystal clear that the notes themselves were not money, but merely money substitutes. [PT]


Going further, another idea is that it’s OK if a bank note is not redeemable, so long as the backing is there. This idea became policy in 1933. The government redefined the dollar, from 1/20 ounce of gold to 1/35. Just like that, the people were left with bank notes but not money. Per the Stockholm Syndrome, they came to at last think of the paper as money. If paper bank notes worked as money previously, then no reason to worry if they will stop working.

At the same time, every creditor was made poorer and every debtor was made richer. That is what, in fact, decreeing a change in value does. As economist John Maynard Keynes wrote (citing Vladimir Lenin):


“…the real value of the currency fluctuates wildly from month to month, all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless; and the process of wealth-getting degenerates into a gamble and a lottery.”


Keynes and Lenin: they sure knew how to best ruin free market Capitalism. [PT]


The bad guys 100 years ago understood something that most good guys today do not. Distort, pervert, undermine, and destroy the relationship between creditor and debtor at your peril. Whether you realize it, or not, the stakes are nothing less than capitalism. Lenin knew it, and hoped to use it to usher in his utopia where he could get away with mass murder on an unprecedented scale.


Bitcoin  – The Next Step?

This point relates to our ongoing theme of bitcoin. Bitcoin’s value is, to say the least, fluctuating. Lenin aptly described it: “the process of wealth-getting degenerates into a gamble and a lottery.” With such value fluctuation, bitcoin is manifestly unsuitable for lending and borrowing. When instability comes to the legal tender paper currency, people are surprised and may not have an alternative. But with bitcoin, they can see it in advance. Checking back at Bitbond, we now see two bitcoin loan requests. Both are bitcoin miners, and the total between both loans is ฿9.3.

And note the final and most important connection between the bad idea that bitcoin is money and ideas that recur in history. In 1933, the US government forced all citizens to treat irredeemable paper as if it were money. There was still some gold in the monetary system, though no longer moving, no longer deposited and redeemed. But in 1971, the government finished off gold. The dollar was declared to be purely irredeemable, and this rippled through to all other paper currencies.


Bitcoin, daily – after running to a high of nearly $4,500, bitcoin has corrected again. From a technical perspective the uptrend remains intact so far. An aside: we do not agree completely with Keith’s arguments regarding Bitcoin; we hope to soon get around to posting our 2 cents as well, or rather our 2 satoshis. [PT] – click to enlarge.


We have now had about two generations for this to seep into our culture, our souls, our sense of How Things Are. Money means irredeemable paper, and irredeemable paper is money. All Right-Thinking people know this. Try a Google Images search on the term money, to see what we mean.

With the idea of redemption of paper for money taken off the table, where next will people go? What new distortion can be manufactured for fun and profit?

The dollar is borrowed into existence. It is backed, but only by debt and that debt is payable only in dollars. There is something there, but it’s circular. The next logical progression is to remove the backing, which is what bitcoin is. To pugnaciously put a chip on one’s shoulder, daring anyone to knock it off — to say that a currency printed into existence, printed ex nihilo out of thin air (albeit at a metered rate and with a maximum limit) is money.

Bitcoin is a liability of its issuer, without any asset to balance it. It is a currency believed to be money because there is no asset. Many who rightly attack the dollar as debt-based money, seem happy with bitcoin because the debt backing it is removed.

The central banks have taught us well. They have trained us to think of money as the piece of paper which once redeemed for it, the electronic balance which once represented it. So why not experiment with removing all that?

If by now, you are picturing a cargo cult, that’s precisely right. The cargo cults that sprang up on Pacific islands after WWII would go through elaborate motions that they thought would bring the cargo just as they observed the US military do. Of course, they substituted coconut shells tied with vine for headsets, and tiki torches for flashlights. And they had no radios, and no airplanes to call on those radios they didn’t have. They simply had faith that appearances could cause the magic effect they wanted.

Bitcoin is carefully designed to appear just like an irredeemable government-issued currency. Which is carefully designed to appear just like a gold-redeemable government-issued currency. Which was carefully designed to appear just like a bank-issued gold-redeemable bank note. Each is a deliberate adulteration, to the final one with bitcoin today.


Bitcoin Cash (BCH), which recently split off from BTC – as it became known that several large mining pools are dedicating a part of their hashpower to BCH, the spin-off currency rallied, while BTC corrected concurrently. Meanwhile, Segwit 2x and Core supporters continue to bicker. [PT]


Having indoctrinated people to accept irredeemable currency, the Fed has opened the door for bitcoin. In a way, bitcoin is a perfect denizen in the Fed’s worldwide regime of irredeemable currency. That is, a regime where each printed promise to pay has fine print saying “this promise will not be honored”. So why not substitute it with “this is not even a dishonored promise” and see how it flies.

The philosophy of postmodernism seeks to “deconstruct” truth. A fitting money of postmodernisn, would be “deconstructed” too. Like bitcoin.


The effective hash-rates dedicated to BTC and BCH mining. At nearly 3 exahash it commands about 31% of the combined BTC & BCH blockchain hashrate. Since it is still more than 700 blocks behind the BTC chain. Miners are likely to switch back and forth between producing the two versions of the currency, depending on the prevailing combination of price and difficulty which determines the profitability of mining crypto-currencies. [PT] – click to enlarge.



P.S.: We have chosen to focus our case on the monetary theory of bitcoin. We do not want to rest our argument on the risks that its price will crash, its encryption algorithm will be cracked, or its user accounts will be embezzled. If we address price, it is not to equate “bitcoin is bad” with “price will fall”, but to observe that unstable value makes it unsuitable for saving and borrowing.

P.P.S.: However, it is worth saying something we have not seen elsewhere. Everyone knows that bitcoin has a strict limit of 21 million. However, this limit can of course be changed by a majority of the bitcoin miners. Miners, of course, profit by mining, so they may have an incentive to increase this limit. The way Congress has an incentive to increase the debt limit.


Charts by Milton Friedman, Cryptowatch, Cryptocompare,


Chart and image captions by PT


Dr. Keith Weiner is the president of the Gold Standard Institute USA, and CEO of Monetary Metals. Keith is a leading authority in the areas of gold, money, and credit and has made important contributions to the development of trading techniques founded upon the analysis of bid-ask spreads. Keith is a sought after speaker and regularly writes on economics. He is an Objectivist, and has his PhD from the New Austrian School of Economics. He lives with his wife near Phoenix, Arizona.




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10 Responses to “Bad Ideas About Money and Bitcoin”

  • First of all, I read all this blog all of the time and really appreciate the great articles, comments and insight! Thank you.

    In my humble opinion BitCoin is an accounting system and not money. It is used as a means of tracking exchanges of currencies, nothing more. I used to work for a company that implemented BitCoin as a form of payment, we never held on them for more then a fraction of a second. The payment came in and we swapped it to a given currency based on either the suppliers we need to pay or the jurisdiction of the site.

    It seems to me that the customer most likely swapped their local currency for BitCoin and then purchased the given goods, and then the merchant swapped them back for their desired currency. BitCoin seems to be a bigger threat to systems like SWIFT or big banks that normally handle currency swaps.

  • Russellreader:

    Gresham’s law applied to debt means that borrowers will seek to borrow fiat and will buy Bitcoin. Banks in weak countries will soon realize that they are being repaid in a depreciating currency while they also realize that Bitcoin is excellent security as it appreciates, is recorded on the blockchain so is verifiable and is digital allowing automation. So interest rates on loans will rise as demand rises. Ironically this means increased money creation. But Gresham’s law likewise predicts investors will favour Bitcoin like assets over depreciating assets and will sell debts where they earn fiat driving up interest rates. Businesses will boom especially crypto businesses as Governments cease interfering through their inability to borrow money. Liquidity in bond markets will dry up in weak countries first then the strong. Debts in the strongest fiat the USD will become unrepayable as the USD rises while Bitcoin will rise more. Fear is a greater driver than greed so investors will flee perceived failure. This is likely the purpose of Bitcoin, to destroy the ability of weak countries to issue bonds forcing the formation of Regional governments as the ability to run governments funded by growth in debt which will never be repaid ends. This will continue until the current system of debt issuance creating fiat making bankers rich. Instead the super banks who embrace Cryptcocurrencies will take over and enjoy increased bargaining power as against weakening nation states. The trend of the growth of the Leviathan State will continue as empire replaces republic, nation based banks mostly disappear and state phoney capitalism is replaced by laissez faire capitalism. Empires will renege on all the false promises made to the electorate while competition for who will be the top dog will force empires to focus on efficiency and war making power. Fortunately the new weapons are too powerful to be utilized but we still must expect the corruption and ruthlessness seen in the Roman empire after Caesar with lots of bread, circuses and petty wars to distract the masses and to give the Leviathan State a continued reason for its existence. Your article seems to suggest debt creation will end while I expect increased debt creation of fiat until fiat brings about its own collapse predicted to occur after a huge boom into a 2032 depression (Martin Armstrong). The bigger the boom the bigger the bust. Technological advance means that gold will fall in value compared to silver as it is so common as predicted by Buckminster Fuller. Meanwhile silver will rise for demand reasons as it enables the creation of light and therefore electricity from lowering hydrogen below the ground state as developed by Randall Mills. The Super-state that allows cheap energy will prevail so competition will speed adoption driving the boom caused by cheap energy. Gold is stable in its high energy state while silver is not as proven by the deep ocean vent black smokers being comprised of 70% silver with little gold while the gold is abundant in the oceans. Cheap energy will allow gold’s extraction from the ocean and salt lakes. However gold in its high energy state is useful for growing plants so we can expect a rise in price after we see a rise in food prices. The pillars of Marxism and Socialism are ending as they rely on debt creation, lies and heavy regulation. Any Socialist superstate will not be able to compete. They will not be missed.

  • No6:

    Of course this isn’t money.

    It is effectively of unlimited supply as the Bitcoin split demonstrated.

    It has no backing except the existence of increasing tyranny.

    Its main value right now is to lure people into buying this crap who would otherwise have bought Gold and Silver, thus keeping the price of the PM’s lower for longer and allowing me to obtain real money at a discount!

  • jks:

    Keith’s arguments rest on false analogies and misunderstandings of cryptocurrencies. First, BTC is not created ex nihilo. It is “mined” at considerable expense in equipment and electricity. But even if it were created ex nihilo “at a measured rate”, who cares as long as the measured rate is acceptable to the users? Keith refuses to acknowledge why currency became necessary with gold. It’s because gold was too cumbersome to use as spending money. It is too difficult to assay for each transaction and make precise change with it. It was too difficult and cumbersome to carry. That’s why people traded currency instead for most transactions. Bitcoin is the first money that is simultaneously a currency. It is money because it meets all the qualifications for money i.e. durability, portability, divisibility, uniformity, limited supply, acceptability. It is currency because it is easy to spend, carry, and make exact change. Because it needs no currency, BTC doesn’t have all the many problems currencies have.

    BTC is better than gold as money because, in this modern age of telecommunications, good money has to have the additional quality of transferring electronically. Cryptos satisfy this requirement without any third party trust. Gold utterly fails this important requirement. To transfer gold electronically it has to be converted to a currency by a trusted third party with all the many problems and risks that entail. As governments become more tyrannical, as the banking system becomes more insolvent, as bail-ins become more common, as currency controls tighten the net, people need to have a private, safe, inconspicuous way to get their wealth from one bad jurisdiction to a better one. This is why you see cryptos gaining in value by leaps and bounds and why they’ll continue to gain in value much more than gold.

    • DismalScienceMonitor:

      Let me tell you, from Hurricane-ravaged Houston, that Emperor Bitcoin has no clothes: I stopped by Spec’s liquor store, and was told that due to one of the rolling electric blackouts, they were only taking cash. Money talks, bullish*t Bitcoin walks. And when people recover their sanity, and realize there is no telling at any moment how many paper+digital dollars there are out there, they will demand that good and silver be legal tender. Central bankers t the guillotine.

  • numeflua:

    You completely and thoroughly misunderstand Bitcoin.

    Bitcoin *is* the asset. It’s digital scarcity. Until it was invented, everything digital could be duplicated, and hence digital scarcity was impossible. With Bitcoin, digital scarcity is possible. Yes, you can copy Bitcoins, but you can only spend them once. That was the genius invention behind it: figuring out how to keep people from spending it more than once without a central authority.

    I’m an old-school goldbug. I have a pile of gold. But Bitcoin is better money because it has a better supply function. Fiat is potentially infinite in supply. Gold has self-regulating steady low inflation because miners will dig it out of the ground when the price increases and go out of business when the price decreases. Bitcoin, on the other hand–there will only ever be 21 million, or which 16 million have already been born.

    I first bought Bitcoin in the single digits in 2011. You’ll keep on writing these articles while the prices goes to six digits. Don’t say you weren’t warned.

    • CNONC:

      “I first bought Bitcoin in the single digits in 2011. You’ll keep on writing these articles while the prices goes to six digits. Don’t say you weren’t warned”

      Is not “money” supposed to be neutral in financial transaction? If you expect your money to rise in value substantially, particularly when an alternative exists, why would you use that “money” to purchase consumables or things of fixed value? Spending your Bitcoin puts you in a position of being short Bitcoin, while the merchant you transact with is long. If you are right about the future value, the vendor gains at your loss. You and the vendor must agree on both the value of the goods traded and the present and future value of the “money,” adjusted for the expected length of time you and he would be expected to hold the “money.” It is unlikely, in such circumstances, that any transaction would take place. Under current conditions, Bitcoin can’t be considered to be a transactional medium because its volatility, even one way volatility, is a barrier to the price discovery required to support economic transactions.

      Money must have a stable value. I challenge you to explain how Bitcoin’s price activity is consistent with value stability. Would you pay your mortgage with your Bitcoin? Would you lend me your Bitcoin? At what interest rate? Over what term? Would you sell me your Bitcoin? At what price? How can it be a store of value if you continue to expect it to rise in value, and therefore will not conduct any financial transaction with it? Will Bitcoin stabilize at some point? At what price? In terms of Dollars? Yen? Gold? When do you stop hoarding it and begin using it? How can it be a store of value or a unit of account if you can’t predict its value in terms of something quantifiable?

      I am not really an opponent of cryptocurrencies, but I don’t see how it becomes a transactional currency or a store of value. Since cryptos are the unbacked liabilities of their issuers, their value must lie in their utility. As I have explained above, they currently have no utility as money. From where, then, do they derive their value?

      • numeflua:

        >Money must have a stable value. I challenge you to explain how Bitcoin’s price activity is consistent with value stability. Since cryptos are the unbacked liabilities of their issuers<

        Cryptos are not liabilities. They are no debt. There is no "issuer".

        • CNONC:

          Cryptos are not liabilities? What is an ICO? Who issues those coins? Equities are not debt, yet are they not the liabilities of their issuers? With respect to Bitcoin, when a miner performs the calculations required to obtain a bitcoin, from where does the bitcoin originate? The network which links Bitcoin traders, owners, vendors, and miners ultimately is the issuer. It creates (note the word “creates”) a unique encrypted identifier which verifies the existence and ownership of the Bitcoin created in mining, and then tracks that ownership through its chain of transactions. The Bitcoin would not exist without the network, therefore, the network is the creator, or issuer, of the Bitcoin. Since it cannot be argued that a miner has created anything of real value by his consumption of electrical and capital resources in Bitcoin production, the value represented by a newly mined Bitcoin, if it is real, must be a transfer of value from the issuer to the miner. Therefore, the Bitcoin is the liability of the issuer. Since it cannot be redeemed by the issuer for anything of value, it must be, as I originally stated, the unbacked liability of the issuer.

          You failed to address the main points of that line of reasoning. Again, if cryptos, as shown above, represent the unbacked liabilities of their issuers, and cannot serve as money, from where does their value derive? At what price, and in terms of what asset, would you be a seller of Bitcoin? In other words, today, right now, what is Bitcoin worth?

  • therooster:

    The proper use of gold as a medium of exchange, as per market law, must display flexible trade value. The “destruction” of the defunct gold standard was likely about a reconfiguration of the global price model, one that could accommodate gold as a market currency with a floating and accommodating trade value that suits the law of weights and measures, where the fiat model supports with measurements.

    Isn’t this the exact threshold that we are standing on with gold payment systems like ?

    If the dollar is making real-time measurements of gold to support debt-free trades, who the hell needs a petro-dollar anymore ??? :-)

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