link to original reddit post by /u/LateralusYellow

I want to start by just giving a little bit of information about myself, for context to understand my perspective. I first took an interest in libertarian philosophy and austrian economics about 8 years ago, maybe longer I can't really remember. It was long before this subreddit even existed, and when most of the smart people who hang out here and started this subreddit would hang out on /r/anarcho_capitalism. I still consider myself an austro-libertarian and market anarchist, but some of my views expressed here may seem very unorthodox to those who would count themselves among me. I don't take the time to follow academic circles and debate closely, the time I do spare goes to paying attention to what goes on outside of scholarly circles. So for example, I would say I get the feeling I'm one of the minority of libertarians who both loves Dave Smith and his podcast, while also being in complete disagreement whenever he starts talking about money or gold or central banks.

I'm here to put forward my theory about the flawed origins of the use of the term "fiat" in reference to non-commodity money, and to explain why I think it is a serious problem. I will emphasize in this essay that even though I touch on the subject of monetary theory itself several times throughout, my aim is not to discuss monetary theory itself, rather it is more about issues I take with the framing of the discussion.

First understand that "fiat" is a Latin term that I would argue best translates to "by sovereign decree". Unfortunately because it is broadly understood and acknowledged (within the segment of the population that has retained their sanity) that every sovereign power in the history of the world has inevitably abused their monopoly on the issuance of currency, the term "fiat" has taken on a double meaning. "Fiat money" now carries the extra connotation of "legal counterfeit".

I see this double meaning as a problem because it frames the debate about the ideal form of money in such a way as to portray anyone who tries to argue in favor of non-commodity money or blockchain equivalents as implicitly defending a sovereign monopoly on the issuance of currency. This is partially because for various reasons many people believe non-commodity with a flexible supply expanded through credit issuance never would have existed or have been very popular in a free market for money and banking, but most will also admit that this is begging the question and is simply circular reasoning. So it is mostly because of the double meaning of the term fiat. This is sort of like how the term "fascist" has a double meaning, where communists use the double meaning intentionally to equivocate between completely different sets of ideals and philosophies. They use this double meaning to put Mussolini and Thomas Jefferson in the same categorical box, and it works to a surprising extent because so much of the population is just utterly ignorant. Notice that while they broaden the definition of words like "fascist" and "capitalism" they will arbitrarily narrow the definition of communism at the same time, this is no coincidence, but now I'm going off on a tangent.

Don't get me wrong I don't mean to equivocate here and paint anyone with the character of such people, obviously the double meaning of the term "fiat" wasn't intentional, words can acquire double meanings by accident as well. But even when the double meaning is unintentional, sometimes people still allow their biases to lead them to unwittingly exploit this double meaning during debate. Basically what I'm saying is that when people use the term "fiat" to refer to any proposed form of money that can be inflated through credit issuance, they're begging a lot of questions that some people (like myself) are trying to put forward in these discussions. Now of course not everyone does this, particularly in more scholarly circles, but let us not pretend like what happens outside of scholarly circles doesn't matter since it is arguably what matters most at the end of the day. For this reason, I propose that the whole discussion of monetary theory should be reframed to emphasize the use of the term "institutional money" as the alternative to commodity money. I would also suggest the term "secured money" be used when needing to refer to both money that has a supply "secured" by reserves of a commodity, and money that has a pre-determined supply "secured" through blockchain cryptography. In contrast I would define "institutional money" as money with a flexible supply whose value reflects the reputation of the institution that issues it, of which is based on the level of service and security they offer relative to rate of inflation (because if we're talking about a competitive market the higher the rate of performance on loans the less new money they need to issue to cover their costs of doing business, and thus the more attractive the currency).

Ignoring blockchain technology for a moment and looking back historically, yes I do see institutional money as superior to commodity/secured money, assuming that institution is truly is reputable (obviously not the case in regards to sovereign powers/"the state"). I suppose I could get into why as I understand it seems absurd to many people, especially in more casual austro-libertarian and quasi-libertarian cryptocurrency circles — where proposing that monetary inflation from the seemingly arbitrary issuance of new money in the form of credit is not necessarily a bad thing — will elicit looks of puzzled bewilderment and even frustration or anger. But honestly I think before such discussion and debate can even be had, there needs to be a broad acceptance that the use of the term "fiat" should more or less be done away with except when specifically referring to a sovereign monopoly on money. I must emphasize the implication that this would include any historical or theoretically ideal sovereign-issued commodity standards such as a Gold standard under the definition of fiat. That does not then also mean I am asking anyone to accept institutional money with a flexible supply as legitimate or ideal. Yes that is my view but debate over monetary theory itself is not the point of this essay, rather I want to emphasize that I am just trying to sharpen and clarify the terminology used in order to facilitate more orderly and productive debate and discussion on the subject in the first place.

You might also ask, why bother with all this when blockchain technology exists and we no longer need to put our trust in institutions anyway? I would put forward two reasons:

  1. If we can come to understand how money institutional money would have worked in an alternate version of history where people were far more skeptical of sovereign powers and denied them monopoly privilege on the issuance of money, it could also help us design better cryptocurrencies. Reason being is that I believe in such a scenario where money was seen as a product/service like any other, with different competing offerings, I think issuers (maybe banks, maybe distinct separate entities, or both) would likely have competed to offer the lowest inflation possible while still offering equivalent or superior services and security over their competitors. The revenues from repayment of loans would fund the overhead required to improve and maintain service and security. I have some theories about a new kind of cryptocurrency which would implement credit issuance (loans issued from new "coins" created on demand), that would involve a symbiotic relationship between miners (who profit from deflation) sharing in the profits of lenders (who create inflation). It would involve governance mechanisms that set inflation targets to try to compete with other currencies, and would automatically approve wallets to issue new currency once they have established a track record of issuing loans at minimum rate of performance (repayment) using their existing balances.
  2. If we assume a never ending race between encryption and decryption technologies (quantum encryption vs. quantum decryption), we may see a world in which institutional money and blockchain money coexist so as to make the economy more anti-fragile. I'm not entirely sure about this second point.

In regards to the first reason I realize again that some of what I was saying there will have a lot of people scratching their heads because I'm talking about monetary inflation from new money credit issuance as if it could ever be a good or desirable trait for any currency. I'm not asking anyone to agree with me on that point. I realize there are going to be many people thinking "What is this fool talking about? Everyone knows such sources of monetary inflation are fraudulent! Fractional reserve banking is the greatest scam in the history of mankind!". Again, I am not denying that is a point of a debate, and you don't need to accept my views on monetary theory itself to understand and agree with me that such discussions by necessity require more neutral and clarified terminology.

To end, I would say I suspect some might feel that it is not constructive to take issue with the use of the terminology surrounding discussions of monetary theory, banking, cryptocurrency, etc. unless I'm going to address the subject itself at the same time. The problem is that explaining why I think monetary inflation could be a desirable trait for a currency is a whole other essay, which would involve explaining some distinctions between different sources of monetary inflation and their effects on the economy. So my hope is that people can understand this and then compartmentalize their disagreements with me on that issue, while still entertaining my ideas about why one should take issue with the terminology surrounding such discussions.