A slow drain of the value of money over time is a slow transfer of wealth from those who hold money to those who produce it. The government produces money, whether printing their pieces of paper or conducting quantitative easing or creating credit at the overnight repo window. They declare their intent to make the money decrease in value by 2% every year. They can print unlimited amounts for themselves and their cronies, while you and I, who can’t produce money but must use it and hold it, face a guaranteed loss of value.
In The Bitcoin Standard, a book about Bitcoin as a decentralized alternative to central banking, Prof Saifedean Ammous starts his argument from this point. Clearly, the government has great power over us when it can rob us of a guaranteed 2% of our money every year. It is as a result of this process that the dollar in our pocket is almost worthless compared to its value in 1913, when the central bank embarked upon this long journey of declared robbery.
But the problem is far worse than the guaranteed annual theft of 2% of our wealth.
Allowing a sovereign the control of the money can only lead to them increasing their control of everyone’s life. Civilized human living itself rests on the integrity of money providing a solid foundation for trade and capital accumulation.
Professor Ammous lists several examples of the cultural, sociological and political depredations due to government money.
Government control of money has turned money from being the reward for producing value to the reward for obedience to government officials. It is impractical for anyone to develop wealth in government money without government acceptance. Government can confiscate depositors’ money from the banking monopolies it controls, inflate the currency to devalue holders’ wealth, and reward it to the most loyal of its subjects, impose draconian taxes and punish those who avoid them, and even confiscate other wealth that citizens hold.
Fiat currencies reduces people’s sovereignty over their wealth and leaves them helpless in the face of the slow erosion of the value of their money as central banks inflate the money supply to fund government operations. It becomes increasingly impractical to accumulate capital and wealth without the permission of the government issuing that money.
It is government’s ability to finance its operations through inflation that allowed for the birth of the heavily interventionist managerial state, with all its associated totalitarian and authoritarian tendencies.
Sound money, not controlled by government, is an essential requirement for individual freedom from despotism and repression, as the ability of a coercive state to create money can give it undue power over its subjects, power which by its very nature will attract the least worthy, and most immoral, to take its reins.
The cause of the Great Crash of 1929 was the diversion away from the gold standard in the post WWI years, and the deepening of the depression was caused by the government control and socialization of the economy in the Hoover and FDR years.
Currency manipulation emerged as a tool of trade policy between governments who deserted the gold standard in order to print unlimited amounts of their own money; trade barriers were erected, with disastrous consequences. Loud and violent nationalism followed.
War And Militarism
In Keynesian economics, spending is deemed the driver of the economy, and when consumers are saving too much and not spending enough, in the eyes of the Keynesians, the government must step in and do the spending. All spending is spending, in this naïve economic thinking, and so it does not matter if the spending comes from governments mass murdering foreigners. It all counts in aggregate demand. In fact, Prof Ammous describes government’s standard economic war policy as “violent militant Keynesianism”.
In the presence of unlimited fiat money to finance government, political differences between parties disappear as politics no longer contains trade-offs, and every candidate can champion every cause.
Democracy becomes a mass delusion of people attempting to override the rules of economics by voting for politicians who promise a free lunch, and being manipulated into violent tantrums against scapegoats whenever the bill for the free lunch arrives via inflation and economic recessions.
The academic system is completely corrupted by government money. Government schools become propaganda mills, where the curriculum is not determined through its accordance with reality, but through its accordance with the political agenda of the government funding it.
In academia, professors spend very little time and effort on the teaching and mentoring of students, focusing most of their time on publishing unreadable research to get government grants and lucrative government consulting and projects.
Big Companies, Bad Food
In a world where central banks allocate credit, both directly and through its captive monopoly banks, the larger firm has an advantage in being able to secure funding at a low rate that its smaller competitors cannot get. This helps explain why large-scale food producers proliferate so widely around the world, as their lower interest rates allow them to finance growth and bloat. The triumph of mass produced, highly processed junk food cannot be understood outside the effects of large scale that government money affords to producers.
Sound money protects value across time, which gives people a bigger incentive to think of their future – to lower their time preference – and to save and invest in order to accumulate capital, increase production and elevate the quality of life for all. The lowering of time preference is what initiates the process of human civilization and allows for humans to co-operate and live in peace.
Government money has the opposite effect. It increases time preference, and lowers incentives to save and invest. It reverses the process of civilization.
Bitcoin Is The Workaround
Friedrich Hayek believed that there will never be good money again until it is taken out of the hands of government. “All we can do is by some sly roundabout way introduce something that they can’t stop.”
Also published on Medium.