Fiat Money Breaks Capitalism, And Bitcoin Fixes It

The problems of today are constantly criticized under the label of capitalism, but fiat money has warped free market interactions.

This is an opinion editorial by Hannah Wolfman-Jones, author of “System Override: How Bitcoin, Blockchain, Free Speech, & Free Tech Can Change Everything” and founder of We The Web.

Capitalism is controversial these days. Many look at societal problems today and lay the blame squarely at the feet of capitalism. What these crusaders who proudly label themselves as “anti-capitalists” fail to realize is the global fiat system we have today is not really capitalism.

Under capitalism in its pure form, people with capital invest in businesses and ventures that they believe have merit and thus are likely to generate returns. Investors need to make difficult prudent judgments and take on the risk of losing big. Their capital — when invested in a successful business — allows for the creation of services, goods and jobs that are desired by people, making the profits awarded to successful investors just. Through investors in a free market, worthy ventures can get the capital they need to launch or expand a successful business, increasing prosperity across society in a meritocratic manner.

Unfortunately, this system has been greatly disrupted as the decentralized judgements by millions of independent actors in a free marketplace have been supplanted by the unilateral judgements of a few bureaucrats. Under the fiat monetary system, money itself is controlled by a small cabal of unelected economists and bankers. Capitalism is all about free markets. When it comes to our money itself, the currencies used, their supply and interest rates are not market-determined but rather calibrated by bureaucrats. This is not capitalism.

So, instead of spending all their considerable analytical efforts looking at possible business ventures and market needs, savvy capital allocators must follow and predict the actions of central banks, whose edicts can tip entire economies into bear or bull runs. “Don’t fight the Fed,” is an old mantra on Wall Street referring to the idea that investments must align with the current monetary policies of the Federal Reserve to be successful. Investors thus have to follow and theorize around the actions of unelected, unaccountable, powerful centralized actors such as the Chair of the Federal Reserve Jerome Powell. This creates wasted effort and a huge misallocation of resources as the capital available to value-generating businesses fluctuates hugely on the words of one man — Powell — whose actions these businesses do not control. For example, Powell’s speech on August 26, 2022 precipitated a drop in the Dow Jones Industrial Average, the S&P 500, and the Nasdaq Composite of 3.03%, 3.37%, and 3.94% respectively — a staggering fall for just one day. This greatly hinders the meritocratic value creation of capitalism: Savvy investors must make decisions based on Powell’s words rather than a business’s value.

Moreover, under the fiat system, designated legal tenders such as the U.S. dollar are in a perpetual state of inflation. This inflation forces ordinary people looking to save money to risk their capital on investments or else watch their purchasing power be steadily eaten away. Thus, people who are not investors, who lack the skill and desire to risk their capital on business ventures, are forced to do so. Without a venture they believe in for investment, hard-working normal people put their money in indexes and mutual funds. “Zombie companies,” — economically unviable companies that survive through investments while failing to deliver sufficient products and services to the market to cover their costs — can persist for many years due to their inclusion in these indexes and funds. These “zombie companies” receive passive investments from ordinary people who do not know company fundamentals but are forced to invest in indexes and mutual funds to preserve their savings in the face of constant fiat inflation.

If Bitcoin were adopted globally, it would provide hard money that does not depreciate in value long-term. Thus, ordinary people could save in Bitcoin rather than risk their retirements on companies they themselves have not evaluated through mutual funds and indexes. Moreover, the monetary policy of Bitcoin is transparently baked into its code rather than being controlled by powerful central bankers. In a world where Bitcoin dominated over fiat, investors could once again turn all their attention to finding ventures of merit rather than hanging on every word of the Fed. This would largely restore the prosperity-creating engine of capitalism — the least terrible economic system we have.

This is a guest post by Hannah Wolfman-Jones. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.