Economic policy this past year revealed one of the most harmful effects of fiat money: by allowing governments to survive without taxes, to just print up whatever they need, fiat money can convert governments from symbiotic parasites into predators that attack our livelihoods. Bitcoin fixes this.
A couple weeks ago I laid out one of the severe consequences of fiat money: the modern boom-bust cycle with its devastating recessions. Today I want to tag another enormous cost of paper money: what it does to governments.
By eroding the natural symbiosis between tax-eater and taxpayer, fiat money turns governments from imperfect ally to imperious destroyer.
Essentially, fiat money allows a government to declare economic independence from the people and either print what they need, or mandate that a captive financial system shell-game it into their pocket.
This perverts the natural symbiosis where tax-reliant governments succeed when we succeed but hurt when we hurt. Instead, we get gatekeepers with little interest in nurturing producers so long as they can print enough for the bread and circuses.
This is an old problem of fiat money, and is economically similar to what happens in resource-rich countries like Saudi Arabia, where governments that subsist on natural resource royalties lose interest in fostering the wider economy. Indeed, Saudi Arabia features amazing levels of poverty for a country that, on paper, is swimming in wealth.
Fiat Money’s Doomed Debut: Song China
To sketch the process, we can go all the way to the beginning of fiat money in Song Dynasty China (960-1279). The period is interesting for two reasons. First, it was one of China's great Golden Ages, starting with widespread prosperity, social harmony, and innovation. Contemporaries complained that marriage-age women couldn’t cook any more because everybody ate out and life was too easy. The era gave us world-changing inventions widely used today: porcelain, gunpowder, tea, the compass, movable type printing, and, ominously, paper money.
The second reason the Song Dynasty is interesting is that it collapsed rather spectacularly. Not once but twice, both times in the wake of what turned out to be history’s first hyperinflations. The first collapse lost half the empire, the second sealed China’s fate as the war machine that Mongol armies would ride to the gates of Vienna. Even today, China’s national psyche still resents those 600 years in the wilderness, during which a once-glorious civilization was humiliated by whomever happened to wander by, from the Portuguese to the British to the Japanese, long derided as semi-civilized pirates running around in underpants.
The seeds of the Song collapse began with warehouse receipts for commodities like silver or tea. These receipts gradually came to be traded as a peer-to-peer money, a practice called “flying money” to contrast with metal coins. Historians of money will recognize this as similar to the West centuries later, where goldsmiths issued paper receipts for stored gold, with those receipts trading as a general money -- for details see Saifedean Ammous’ Bitcoin Standard or Nik Bhatia’s Layered Money.
Initially, the Song government didn’t interfere as the paper came to be treated as real commodities. Until it created an economic crisis, at which point authorities realized they could simply print up fake receipts and order the people to accept them. And that’s just what they did.
As background, destructive economic policies had been imposed under the Song Prime Minster Wang Anshi, who wanted to centralize economic power in the hands of the government. Wang dramatically raised taxes and controls on landowners and merchants, enforced with seizure and redistribution of assets, and systematically poured free or subsidized money out to peasants in a 12th century version of Universal Basic Income.
These reforms devastated the wider economy, alienating landowners and merchants -- some of whom, incidentally, went on to collaborate with the Mongol armies. More concerning to the Song government, shriveling tax revenue left them unable to pay the army, which tends to concentrate the mind. Rather than reversing his economic policies, Wang reached for the presses, printing up enormous quantities of receipts and going as far as to mandate the death penalty for refusing to accept government paper at face value.
Historians of money know what happened next. After dipping a toe, the printing presses quickly ramped up, reaching over 60 times the Tang-era money supply. Rice prices doubled, then doubled again, leading to widespread revolts from a starving peasantry. By the end, over 140% of the Tang-era money supply was printed in the single year of 1234, the very last year before the Mongol armies seized the palace and, with it, the money-printing blocks.
Lessons for Today
The modern lesson is that if we are to have governments, they should want the same things we want: prosperity, harmony, peace. Their incentives should be aligned with ours, so that they only succeed when we succeed.
Above all, we should avoid mechanisms where a government prospers specifically by impoverishing its people. Fiat money is the starkest of these mechanisms today in the economic sphere: It siphons wealth from the people whether or not they are starving, indeed outright encourages governments to destroy private savings by magicking up fresh paper to pay their bills.
This mechanism is yet more dangerous because inflation tends to be painless in the beginning, but can quickly accelerate, become more harmful, and become very hard to stop. It is the economic equivalent of drinking antifreeze -- it tastes great, the dinner guests will compliment you at the next election, but by the time they start feeling sick it's too late.
Bitcoin fixes this on a number of levels. First, in a Bitcoin economy governments cannot destroy private savings by simply printing up new Bitcoins — it cannot be done. Second, under Bitcoin governments would have to live on the taxes they collect, giving stronger incentives to safeguard and nurture commerce and prosperity. Rather than a government that is against the people, a hard-money standard gives us a government that, at least in the monetary and fiscal realm, wants us to be rich.
Why Not Gold?
One might ask “doesn’t gold fix this?” After all, gold is plenty hard. Unfortunately, one of the hard lessons of the 20th century was that gold has a fatal flaw: centralization. Because gold is physical, it can only be used in a modern economy by using intermediaries like banks, credit card companies, and brokerages. This reliance on intermediaries turned out to be gold’s Achilles Heel as governments regulated, even seized, those intermediaries and the customer gold they held.
This means that gold today can only be a widely-used money if it pleases the crown. And it hasn’t pleased the crown in some time. In fact, up to the very eve of Bitcoin’s immaculate conception, governments were diligently destroying gold-based startups and threatening their founders with long prison sentences. Many of these gold entrepreneurs ultimately turned to crypto as the only hope.
In contrast, because of Bitcoin’s decentralized architecture and precisely because it lacks physical mass, it is literally unseizable. Bitcoin end-runs gold’s terminal flaw. Meanwhile, because Bitcoin is likely far more resilient to sovereign attack than other cryptocurrencies, it sustains that end-run.
Now, if governments were run by angels, we could calmly use gold-backed debit cards or Ethereum-denominated brokerage accounts tenderly husbanding our life savings as we relax poolside with fat steaks and zero-tax booze. Alas, governments are not run by angels, and so we need Bitcoin.
A hard-money economy fixes one of fiat’s most pernicious harms, helping re-establish the natural symbiosis that renders government a parasite we can live with, rather than a predator we fear. Given fatal vulnerabilities in both gold and alternative cryptocurrencies, Bitcoin alone is our best chance to return to a world where money serves us rather than victimizes us.
Fiat money has collapsed history’s greatest empires, it has launched history’s greatest tragedies, and yes Bitcoin fixes this.
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