The money we use is fake; the consequences are real.

For most of my life, the question of “What is money?” barely ever occurred to me. I took for granted that the stuff we use for money is indeed money. I learned in economics that money is a tool for trade, and whatever we choose to use — whether that’s beads, gold, cows, or paper — as long as everyone believes it’s money, then it’s money, and that’s all that matters. Most people, whether they take economics or not, go from the cradle to the grave believing this, and I almost did, too. But once I started to pull the thread on Inflation, I was inevitably led down a path of critical and deliberate inquiry into this idea, and the result has been a personal revolution in the way I think about money and the world around us.

I no longer believe that the choice of money is an arbitrary or unimportant one, but one that’s foundational to our civilization. And we’ve made a very poor choice. Before we dig deeper on money itself, let’s revisit Inflation, which was introduced in the previous essay.

Inflation and Time Preference

One useful tool to understand how inflation fundamentally impacts us is the concept of time preference. A person’s time preference is the extent to which they prefer the present to the future. Let’s say you have a choice: You could either have an outstanding dinner tonight or ten years from now. All else equal — the quality of the meal, the cost of the meal, and assuming you don’t already have plans, you’ll probably opt to take the dinner tonight. In general, we prefer the present to the future. But to what extent? What if the offer were changed, such that if you opted for the 10 year delay, you also received a sum of money at the end of that time? How large a sum would you require to make the wait worthwhile? In other words, how high is your time preference?

Time preference is a fundamental driver of decision-making at the individual, institutional, and societal level. Consider learning a language, or a musical instrument, or a highly specialized skill — these undertakings require a sufficiently low time preference. So does creating something beautiful or building something durable. Recall The Three Little Pigs — this is a classic lesson on the virtue of a low time preference, often called “delayed gratification”.

While we may wish for our children to have a low time preference, the constant pressure of inflation makes it very difficult, if not outright foolish, to live this way. Why would you save your money, or delay receiving income, when you know that with every passing month, the value of that money goes down and anything you want to buy will only go up in cost? What’s more — inflation is always accompanied by artificially low interest rates (this is how the government / bank creates inflation). We might say “saving is good, debt is bad”, but this is hypocritical lip service. When we inflate our currency and subsidize debt (not to mention taxing savings), we’re strongly encouraging the exact opposite, and we’ve been doing this for decades, degenerating into an increasingly High Time Preference Society.

There are examples of this high time preference everywhere you look. Look at the prevalence of sequels, prequels, spin-offs, and remakes in today’s movies and TV series. Yes, art from any era will entail some imitation, but today it’s not even pretending to be original. There are exceptions, but they’re exceedingly rare. Consider Game of Thrones — a TV show based on a popular series of original novels. The production and the writing were breathtaking in their scope and depth — far beyond anything else on TV or the big screen. But if you saw the entire series from beginning to end, you probably noticed a stark contrast between the first six seasons and the last two. In the latter, the production quality was still good, but the originality — what made the show so captivating and exceptional — was sorely lacking. And this is no surprise when you consider how the seasons were written: The first six were based on novels, written over decades by an exceptionally dedicated genius. The last two were written the same way everything else today is written: by a room full of high time preference writers.

Beyond Hollywood, examples abound in commerce and even social life. Why cook yourself a meal when you can Uber EATS something? Why play with your child when you can hand them an iPad instead? Why spend time on that handwritten note to a friend when you can just send an email, or a text, or nothing at all?

But, by far, the most obvious and deadly manifestation of this high time preference is the balance sheets of our households, companies, and governments, which are loaded with debt and devoid of savings. Many are living paycheck-to-paycheck and will pass on debt rather than wealth to the next generation. This is, by definition, a Ponzi scheme. Inflation is leading us to ruin at an accelerating pace, and most people don’t know it.

Money Matters

Choosing inflation is choosing high time preference, it’s choosing debt over savings, it’s choosing an ever-expanding wealth gap, it’s choosing sickness, poverty, and despair. And the most tragic aspect of all is that it is a choice[1].

Inflation is a choice, and it is fundamentally based on our choice of money, because certain forms of money are more prone to inflation than others. Thus, the notion that “Whatever form of money we choose, all that matters is that we believe it’s money” cannot be true. Our choice of what to believe matters tremendously. If we choose to believe that a form of money with inherently more inflation is a better choice, we are choosing to believe a lie; we are choosing to live in complete denial of reality.

And that is what we’re currently doing. For the last 49 years, the U.S. Dollar has been a pure fiat currency. “Fiat” is a Latin word meaning decree. Thus, fiat money is something that the government wills into existence. It has no intrinsic value and can be produced at no cost. It can be printed, but more often it’s created merely by a few keystrokes — electronically creating money by issuing debt to a bank, for that bank to create more money by issuing more debt.

In theory, a fiat currency need not be inflationary — a very disciplined central bank could issue money only once or on a fixed schedule, refusing to manipulate the money supply at will. But resisting this temptation to exercise enormous power would run counter to human nature, and that’s why we’ve never seen it done on a large scale for any considerable length of time in human history.

The monopoly power to create money at no cost means governments are no longer confined to taxation as their means of raising funds — they can simply create more money, siphoning purchasing power from the poor and condemning future generations to a life of debt and misery. This allows governments to prosecute long or unnecessary wars without their population growing weary in the short-run from taxation and austerity. In the more extreme, this power enables a despotic dictator to embark on an unbridled reign of terror. Indeed, it was fiat money that fueled the horrific campaigns of Stalin, Mao, Hitler, and Napoleon, to name a few. The death toll from fiat money is incalculably high, running in the hundreds of millions, not to mention the devastating impact on the lives of its survivors. So why do we use it?

The Long Con

The tyrannical potential of fiat money is obvious. No free country would consciously allow its government the monopoly right to create money without limitation. Indeed, the original U.S. Dollar, authorized in the Coinage Act of 1792, was made of silver. Other coins were made of gold, and pennies were made of copper. No coin could be minted without disposing of a scarce resource, which limited the issuing government’s ability to impose inflation on its citizens.

In 1913, the Federal Reserve Act was passed, establishing the Federal Reserve System as our Central Bank and authorizing the production and use of the “Federal Reserve Note” to be used in place of gold and silver money. However, while this new currency was only made of paper, it was mandated by the Act to be redeemable for gold. Thus, the American public could rest assured that, while their currency wasn’t made of scarce material, it was at least redeemable for scarce material.

That assurance ended in 1933, when President Franklin D Roosevelt issued Executive Order 6102, outlawing the owning of gold by citizens, making it clear that nobody would be redeeming their dollars for gold any time soon. After the citizens’ gold was confiscated, the dollar was devalued by 40%, but the U.S. was still confined by reserve requirements. The Bretton Woods Agreement was ratified by virtually all major western nations in 1945. This landmark international monetary policy agreement crowned the U.S. as the keeper of the world’s gold, and made the U.S. Dollar the standard reserve currency of the world. Foreign governments were given dollars in exchange for their gold, but they could rest assured that, at any time, they could redeem their U.S. Dollars for gold at a rate of $35 per ounce.

That assurance ended in 1971, when President Richard Nixon issued Executive Order 11615, which rescinded the U.S.’s obligation to convert U.S. Dollars to gold. The promise we had made to other Western nations that the dollar would be “as good as gold” was no more. Having defaulted on this obligation, the U.S. no longer had to maintain reserves to back its currency. Though it took the better part of a century, the transition was finally complete: The U.S. Dollar was now a pure fiat currency. The government now had the monopoly right to create money without limitation.

As one might expect, this monetary regime has subjugated our population to extraordinary inflation for the last 49 years, and counting. The most comprehensive, yet concise, summary of the data is WTF Happened in 1971, which really speaks for itself. The purchasing power of the dollar has declined by 85%, and that’s according to the government’s biased CPI. Wages have stagnated, living costs have soared, wealth inequality has ballooned, and our debt is unimaginably high, and all of these things have an undeniable inflection point at 1971. And we’ve brought everyone else down with us — since the U.S. Dollar is the world’s reserve currency, its status change to a pure fiat currency rendered virtually every other currency into pure fiat, so that their citizens have suffered a similar fate in watching their purchasing power vanish at the hands of their irresponsible governments.

All the productivity we’ve gained in the last 49 years — during which time we’ve seen mass adoption of the internet, one of the greatest inventions in human history — everything that’s made our lives better, and should have reduced our cost of living — these gains have all been swallowed up by inflation, systematically ensuring that today our cost of living is higher than ever before. Inflation continues to steal our opportunities, our joy, our achievements, our productivity, and our time, debilitating the most economically disadvantaged among us more than anyone else. And the greatest tragedy is that this menacing terror is something we’ve unleashed upon ourselves by choosing to use fiat money in place of money.

A Foundational Lie

Money must, among other things, be a reliable store of value — it must be salable across time. The extent to which that criterion is violated is the extent to which the “money” you’re using is not true money, and no government decree can change that. Therefore, to pretend that Fiat Money is Money is to lie to ourselves.

And when this lie is adopted as reality, other lies follow. For example, the fact that our economy grows every year — that we have “the greatest economy in the history of the world” (or that we did before COVID), is only true if you believe the false premise that the U.S. Dollar is real money. Indeed, growing Gross Domestic Product (GDP) is easy when you can control the unit of measurement. If I can reduce the length of a foot every year, I could show you how my refrigerator continues to grow in height, and today it’s taller than it’s ever been! But what if we remove this distortion of inflation — what if we measured GDP in terms of a non-inflationary asset, like gold[2]? Here, we see a very different picture.

This striking contrast is a testament to the power of fiat money to distort our view of reality, imposing a lie on us. We’re made to believe that our economy can be expertly “managed” to continually grow, where that management consists of creating money, whose consequences can only be for our own benefit. While we know our household could go bankrupt from consuming more than we produce, or from borrowing rather than saving — we’re assured that countries are entirely different, and thus exempt from these natural laws of economics. It appears that the U.S. can consume more than it produces for an indefinitely long period of time, all the while becoming richer.

We’re told that today’s massive wealth gap is just some spontaneous thing that naturally arose out of our own greed, which seemed to ramp up right around 1971. The idea that the growth of this wealth gap coincides exactly with our use of Inflation, and that Inflation is a systematic tax on the poor, does not seem to bother any of our politicians who are too busy feigning “empathy” for the very people they cause suffering to take notice.

Another lie that you will notice all around you is the way fiat money makes unproductive enterprises appear productive. The U.S. higher education industry thrives on fiat money — an eighteen year old can take out a six-figure loan to hand over to a university in exchange for an education worth about 1/3 of that. While you would expect the internet revolution to have drastically reduced the cost of higher education, you’ll see the opposite on our college campuses, where new buildings and administrators are being added every year. This widespread misuse of resources is made possible by fiat money, where new loans can be created and foisted upon our youth without any regard to the activity those loans are funding.

But we shouldn’t single out universities. Everywhere you look — from the military, to industrial agriculture, to mega-corporations in general, to the entire industry of finance and wealth management — you see companies, industries, and projects that survive only because of fiat money. If a company had to raise money by convincing investors to part with bona fide savings, that company would have to prove its worth. They would have to prove that the thing they’re building, or the software they’re writing, is a sufficiently productive investment. But that’s not the case with fiat money, because savings lose value — those investors would rather invest in a bad project than let their money rot from inflation in a savings account. And most businesses — particularly large ones — have an even better alternative: bypass the investors altogether and go straight to the bank, who will ask few questions before wiring over some freshly minted fiat money in the form of a cheap loan.

Lest I be accused of throwing stones from a glass house, it’s entirely possible that our little brewery, Holler Brewing, benefits from this as well. Convincing a customer to part with $6 is much easier when they know that that money will only lose value, and when they know they can always borrow more money. Perhaps in a non-fiat world we could still sell our beer for the same price, but there is no way to tell. Fiat money has distorted our economy so much that it’s impossible to disentangle its impact — in many cases, it’s impossible to tell the difference between a productive enterprise and a wasteful one. The chilling implication of this is that it is even impossible for you to know whether you, yourself, are being productive. Fiat money has so severely distorted our reality that we’re now incapable of validating our own self-worth. Could there be anything worse for our mental health?

Just as believing that 2 + 2 = 5 would give way to an entire world of non-sensical mathematics and science completely divorced from reality; the belief that fiat money is money is a foundational lie, upon which we’ve built fantastic delusions that have crippled our existence at every level.

“Rather than love, than money, than fame, give me truth.” — Henry David Thoreau

The pursuit of truth is an incredibly rewarding endeavor. My worldview has been turned upside-down, my preconceived notions have been called into question, and many of the revelations I’ve encountered are unpleasant and shocking; but despite all of this, I have found incredible fulfillment in this journey. While I do not pretend to see the world exactly as it is, I now know that I’m far closer to the truth than I used to be.

This quest to find truth — to work hard to continually reform and refine our view of reality, informed by our observations, the opinions of others, and our own analysis — this is a fundamental part of the human experience. Too often we fail to do this. We veg out watching Netflix, or watching the news, or scrolling social media. The observations we get are filtered and digested for us by gatekeepers of reality. Our schools teach obedience, which is the opposite of critical thinking. We outsource this quest for truth to others, allowing them to think for us. And that is how we ended up with fiat money.

So how could we fix it?

On a personal note, I’ve gotten a lot of engagement on this topic since we posted the inflation essay. While not everyone agreed with it, it clearly struck a chord with a lot of folks. One theme that seemed to come up in several comment threads was, “So, how do we fix it?”, which is a natural question to ask.

The solution always lies in the heart of the problem. Rushing to a solution without fully appreciating the problem is how you make the problem worse, and that’s what we’ve been doing for decades. Consider that we have a presidential election coming up in November, and no debate, rally, or press interview will see either candidate say a word about this problem, even though it is the root cause of many of the issues they pretend to care about.

I do have thoughts on a solution (the subject of the next essay), but I didn’t come to it until I had carefully thought about inflation and fully internalized the initially jarring, yet now undeniable truth: That our money is immoral by design.

Thank you for reading. Please feel free to leave a comment.

Note: This was Part 2 of a 3-part series. The next essay is here. Part 1 is here.

[1]By this, I mean inflation of the chronic form as we’ve seen since the creation of the Federal Reserve — whereby the dollar has lost 96% of its value by design, and prices almost always go up. Some will point out, correctly, that it is possible to experience inflation without currency manipulation. If productivity is falling — say, in the case of a famine or disease or war, prices will tend to rise. But these are short and temporary, as prices will tend to fall back down when conditions recover.

[2] Some will argue that an alternative to this method is to examine “Real GDP”, which is GDP “deflated” by taking the Consumer Price Index (CPI) into account. This method is valid so long as you believe that the CPI, a biased metric manufactured by academics with a political interest, is a more reliable indicator of inflation than the price of the most stable asset in history, set by hundreds of thousands of market participants with skin in the game.

Co-founder, Holler Brewing Co