Walking Up the Down Escalator:

How Fiat Currency Erodes Your Wealth and Throttles Human Progress

This isn’t another article about cryptocurrency and how certain ones like Bitcoin can’t be inflated by politicians. This is about the alternative that humanity has been living with for thousands of years: fiat currency.

Fiat currency is issued by a nation state and declared to be legal tender, but is not backed by a physical commodity like gold or silver. Its value comes from the trust that people and other nation state’s place in it.

I want to use two excellent examples of the financial sleight of hand used by the issuers of fiat currency that is used to cheat ordinary people. Instead of picking on the US, this time I’ll use another of my favorite countries as an example, the United Kingdom.

Seigniorage: It’s Good To Be King

Here’s what a king can do. He can take, in today’s terms, one hundred dollars of simple tin, zinc or copper and have it made into coins with his portrait and an arbitrary value embossed onto them. Then he can declare the total value of all the coins is one million dollars. Presto - he turns one hundred into one million.

Next the king declares that this is only legal tender in the realm and if anyone tries to make a competing currency, or tries to use their own copper to counterfeit the currency he will be executed in some horrible and spectacular way, to show an example to any others.

Now the king has a million dollars conjured from thin air, cheap metal, and his alleged divine right. He uses it to pay highly skilled laborers to build him a palace, a few castles, some monuments, and anything else that will aggrandize his existence. Pretty soon he needs another million and so the coin makers are put back to work. Boom - thanks to the concept of Seigniorage, the king gets the difference between the actual value of the money and what he declared it to be, so he has new money to pay for an army and foreign conquests to plunder more tin, zinc, and copper. Today nation states still do the same thing to their citizens.

Economics 101 teaches that adding money into the supply this way causes inflation and that reduces the value of the currency.

Crown of Charles II

Crown of Charles II (1676) Attribution-ShareAlike License version 4.0 (verified 2020-11-10)

Here is a photo of a 1676 Crown coin, which was worth one quarter of a pound in the UK, similar to how twenty five cents is a quarter of a dollar in the US.

According to The National Archives of the UK, in 1680 (the nearest year) one pound would purchase eleven days of skilled labor. I doubt they worked eight hour days, but I’ll use eight to be conservative, meaning a single pound would buy 88 hours of skilled labor.

That means the crown coin pictured above would pay for 22 hours of skilled labor in 1680. Today those skilled hours in the UK would cost £352 which, if they still used crown coins, would be 1,408 crowns.

So what one single crown coin would purchase in 1680 would now require 1,408 crown coins. That means 99.96% of the purchasing power of that money has disappeared from the holder of the currency over 350 years.

You might be inclined to think that long timeline renders the inflation moot for a single lifetime, but it’s enormously important to the accumulation of all wealth.

Today’s UK Pound

The legal tender fiat currency in the UK today is called the pound sterling. It has that name because in the past the pound was worth 240 silver pennies that together weighed one pound.

In 1717 a single British pound sterling was worth 111.4 grams of silver. Today that much silver costs about £78. That means 98.7% of the value of a pound has gone away in just over three hundred years.

These two examples show you that 99.9% and 98.7% of the value of the money you are forced to accept can be taken back from you by reducing the purchasing power of it. Most of us call this debasement by the common name, inflation.

In Your Lifetime

The US dollar is the strongest major currency in the world and has been since the end of WWII, yet it has done very little to protect people from the same erosion of value seen in the UK for centuries.

Suppose a person starts earning money at the age of twenty and retires at sixty-five. That’s forty-five years of accumulating wealth. Over the last forty-five years (1979-2023), using numbers from the Bureau of Labor Statistics, the average inflation rate in the US was 3.45%.

When you lose 3.45% of the purchasing power of your money every year, over the course of forty-five years the total loss to you is a whopping 78.2%! Just in your lifetime, never mind what wealth you might have hoped would accumulate value in the additional years after you die.

Somebody Got Your Stolen Value

When the king inflated the currency he minted new money and distributed it to his nearest allies. That meant dukes, earls, and the church got the benefit of holding the money before the inflation actually occurred. Some of that was spent on the castles and cathedrals that remain in the old world. Some was squandered on their lavish lifestyles and petty military skirmishes.

By the time the inflation filtered down to Mr. & Mrs. Serf they just felt the pinch of rising prices and wages that weren’t keeping up. So they couldn’t afford things like higher education for their kids or consistent medical care. Humanity will never know the price we paid for millions of people not being better educated or living longer. The dukes and earls lived well, but how many additional Newtons, Pasteurs, and Keplers we might have had?

When the US inflates the currency the new money is distributed to its nearest allies. The first to get that new money are the banks, the hedge funds that borrow that money, and the biggest government contractors. Similar to the medieval cathedrals, in most major cities of the world the largest building today is nearly always a bank building and our form of dukes and earls are now investment bankers and CEO’s who work in league with governments.

Meanwhile, over their working lives today, Mr. & Mrs. Citizen have the actual purchasing power of their lifetime earnings reduced by 78.2%.

The Takeaway

The fiat currencies coercively forced on us by nations states condemn billions of ordinary people to walking up the down escalator of financial security their whole lives. They are literally paid with money that is slowly but constantly losing its value, making it far more difficult for individuals to ever have enough to achieve their full potential in life. The stolen difference is delivered to people who didn’t work for it. The cost to humanity for centuries of unrealized human potential is incalculable.

This is one of the big reasons that perceptive people are so interested in impossible-to-inflate Bitcoin.

Please share:

100% of subscription revenue is used to reach a wider audience. It is imperative that we build a better world as quickly as possible. Your help is appreciated.