“`html
No aspect is as vital to the operation of a free market as its currency. Currency represents half of every exchange, symbolizing one facet of all value conveyed in the trade of goods and services. But what, precisely, constitutes the price of currency?
The item with the greatest market appeal usually transforms into a society’s chosen medium of exchange — in other words, its currency. Prices stated in this shared medium facilitate economic calculations, allowing entrepreneurs to identify opportunities, generate profits, and advance civilization.
We’ve observed how supply and demand dictate the pricing of goods, yet establishing the value of currency presents more complexities. Our challenge is that there exists no unit of measure to assess currency’s price since we already articulate prices in… you guessed it, currency. And since we cannot utilize monetary expressions to elucidate it, we must discover an alternative method to convey currency’s purchasing power.
Individuals buy and sell currency (exchange labor and services for it) based on their expectations of what that currency will procure for them in the future. As we’ve learned, proactive individuals consistently make decisions at the margin. Thus, the principle of diminishing marginal utility applies. In other words, every action is preceded by a value assessment in which agents decide between their most valued goal and their next most significant desire. The principle of diminishing marginal utility is applicable in this context as it is elsewhere: the more units of a commodity a person has, the less urgent the fulfillment provided by each additional unit.
Currency behaves in a similar manner. Its worth lies in the additional pleasure it can offer. Whether that’s purchasing food, security, or future opportunities is irrelevant. When individuals exchange their labor for currency, they do so solely because they value the purchasing power of that currency more than the immediate use of their time. Thus, the cost of currency in a trade equates to the highest utility an individual could have gained from the sum of cash they relinquished. If someone chooses to work for an hour to purchase a rib-eye steak, they must value the meal more than one hour of sacrificed leisure.
Remember that the principle of diminishing marginal returns illustrates that each consecutive unit of a homogenous good fulfills a less urgent need a person possesses. Consequently, the value an individual attributes to an extra unit diminishes with each additional unit acquired. However, what defines a homogenous good is entirely subjective. Since value is based on individual perspective, the utility of each extra monetary token relies on what the individual aims to accomplish. For the individual, each additional token is not homogenous concerning the service it renders to them. To someone who intends to spend money solely on hot dogs, a “unit of currency” is synonymous with whatever the price of a hot dog happens to be. That person has not added a unit of the homogenous good “money for hot dogs” until they have accumulated enough cash to purchase one more hot dog.
This illustrates why Robinson Crusoe could glance at a mound of gold and consider it worthless. It couldn’t procure food, tools, or shelter for him. In solitude, currency is devoid of meaning. Like all languages, it necessitates at least two individuals to operate. Above all, currency serves as a tool for communication.
Inflation and the Mirage of Idle Currency
Individuals decide to save, spend, or invest depending on their time preference and their anticipations regarding currency’s future worth. If they foresee an increase in purchasing power, they will save. If they predict a decline, they will spend. Investors reach comparable conclusions, frequently directing funds towards assets they believe will outstrip inflation. However, whether saved or invested, currency is perpetually contributing something for its owner. Even currency “on the sidelines” fulfills a specific purpose: minimizing uncertainty. An individual who retains currency instead of spending it is fulfilling their desire for flexibility and security.
This explains why the notion of currency “in circulation” is misleading. Currency does not flow as a river does. It is perpetually held by someone, forever owned, consistently performing a function. Exchanges are actions, and actions occur at definite points in time. Thus, there is no such thing as idle currency.
Without its connection to historical prices, currency would be unanchored, and personal economic calculations would be unattainable. If a loaf of bread cost $1 last year and costs $1.10 today, we can infer something about the trend of purchasing power. Over time, these observations create the foundation for economic predictions. Governments provide their own interpretation of this analysis: the Consumer Price Index (CPI).
This index aims to represent the “rate of inflation” through a standardized collection of goods. However, CPI intentionally overlooks high-value assets such as real estate, stocks, and fine art. Why? Because their inclusion would unveil a truth that government agents would prefer to conceal: Inflation is consistently more widespread than those in power acknowledge. Gauging inflation through CPI is an attempt to obscure the when-you-really-think-about-it evident truth about it: The rise in prices is invariably proportional to the growth of the money supply in the long run. The introduction of new currency perpetually results in a reduction of that currency’s purchasing power compared to its potential value.
Price inflation is not a consequence of greedy producers or supply-chain disruptions. It is ultimately the byproduct of monetary expansion. As more currency is generated, its purchasing power diminishes. Those nearest to the origin of new currency benefit (banks, asset owners, and government-affiliated companies), while the less affluent and wage earners suffer the most from rising prices.
The impacts are delayed and challenging to trace directly, which is why inflation is frequently referred to as the most insidious form of theft. It undermines savings, exacerbates inequality, and amplifies financial volatility. Ironically, even the affluent would fare better under a stable monetary system. In the long term, inflation is detrimental to everyone, including those who seem to gain from it in the short run.
The Origins of Currency
If currency’s worth derives from what it can purchase, and if that value is perpetually assessed against prior prices, how did currency initially acquire its significance? To address this, we must explore the barter system.
The item that evolved into currency must have possessed nonmonetary worth before its transition into currency. Its purchasing power must initially have been dictated by the demand for another use. Once it began to fulfill a secondary role (as a medium of exchange), its demand grew, and so did its value. The good now served two distinct functions for the owner: providing utility on one hand and acting as a medium of exchange on the other. The necessity of the latter use tends to overshadow the former over time.
This encapsulates the essence of Mises’ Regression Theorem, which elucidates how currency arises naturally in markets and consistently maintains a link to historical valuations. It is not a contrivance of the state but rather a spontaneous outgrowth of voluntary trade.
Gold became currency because it satisfied the criteria of being effective currency: It was durable,
“““html
divisible, identifiable, portable, and rare. Its application in adornments and industry still provides it with utility today. For centuries, banknotes served as simple vouchers exchangeable for gold. The lightweight and compact nature of banknotes offered an ideal solution to gold’s transport issue. Regrettably, the issuers of these vouchers soon discovered they could distribute more gold certificates (banknotes) than their reserves could support. This modus operandi persists in modern times.
Once the connection between gold and banknotes was fully severed, governments and central banks gained the liberty to create currency ex nihilo, resulting in the contemporary unbacked fiat systems. Under fiat systems, politically connected banks can receive bailouts, even in the event of failure. The outcome is moral peril, skewed risk indicators, and systemic vulnerability, all financed by the stealthy appropriation of savings through inflation.
Money’s temporal relation to historical prices is crucial for the market mechanism. Without it, individual economic assessments would be unattainable. The Money Regression Theorem, detailed in the preceding section, is a praxeological insight frequently overlooked in debates about currency. It clarifies why money is not merely a fictitious construct of bureaucratic wizardry but has a genuine connection to a moment when an individual’s wish to exchange resources for a particular purpose brought it into existence in the free market.
Money emerges from voluntary trade, not a political creation, a collective delusion, or a social agreement. Any commodity with a sufficiently limited supply could function as currency, provided it fulfills all the other necessary criteria for an appropriate medium of exchange. Anything enduring, portable, divisible, uniform, and acceptable will suffice.
If the Mona Lisa had been infinitely divisible, its fragments could have functioned as money, but only if there existed a straightforward method to confirm their origin from the Mona Lisa rather than being counterfeit.
Regarding the Mona Lisa, there’s a tale about some of the most renowned artists of the twentieth century that perfectly exemplifies how an increase in the supply of a monetary good influences its perceived worth. These artists realized they could leverage their fame to profit in a unique manner. They discovered that their autographs held value and could pay their dining bills simply by signing them. Salvador Dali supposedly even signed the wrecked car he had crashed, thereby magically transforming it into a valuable art piece. However, eventually, these strategies ceased to be effective. The more signed bills, posters, and car wrecks appeared, the less valuable each additional signature became, aptly illustrating the law of diminishing returns. By increasing quantity, they diminished quality.
The World’s Largest Pyramid Scheme
Fiat currencies operate under analogous logic. Amplifying the money supply devalues each existing unit. While the initial recipients of new money gain, the rest of society suffers. Inflation is not merely a technical concern but also a moral issue. It distorts economic calculations, favors debt over savings, and robs those least capable of defending themselves against it. Viewed in this way, fiat currency represents the world’s largest pyramid scheme, enriching the elite at the expense of the masses.
We accept flawed currency because it is what we have inherited, not because it serves our interests best. Nevertheless, when a sufficient number of individuals recognize that sound money (currency that cannot be counterfeited) is superior for the market and humanity, we may stop accepting counterfeit gold vouchers that cannot sustain us and begin creating a world where value is real, genuine, and earned.
Sound money emerges through voluntary choice, not political mandate. Any item that meets the foundational criteria of money can function as currency, but only sound money enables civilization to thrive over the long term. Money is not merely an economic instrument but a moral institution. When money is corrupted, everything reliant on it — savings, price incentives, and trust — becomes distorted. Yet when money is genuine, the market can coordinate production, signal scarcity, reward frugality, and safeguard the vulnerable.
Ultimately, money is more than just a medium of exchange. It is a protector of time, a record of trust, and the most universal language of human collaboration. Corrupt that, and you don’t merely damage the economy; you undermine civilization itself.
“Man is a short-sighted being, sees but a very little way ahead, and as his passions are rarely his best allies, so his particular affections are generally his worst advisors.”
Counterfeiting: Modern Money and the Fiat Illusion
Now that we’ve examined how a tradeable good becomes currency in the open market and how low-time-preference thinking fosters progress and decreasing prices, we can delve into how money functions today. You may have encountered negative interest rates and
pondered how they reconcile with the fundamental principle that time preference is always positive. Or perhaps you’ve witnessed rising consumer prices, with media outlets attributing blame to everything except monetary expansion.
The reality of contemporary currency is a challenging truth to accept because once you comprehend the extent of the problem, the outlook begins to appear quite grim. Human beings cannot resist the temptation to enrich themselves by exploiting others through the act of printing money. The only means to avert this, it seems, would be to extricate us from the process altogether, or, at the very least, detach currency from governmental control. Nobel Prize-winning economist Friedrich Hayek believed this could only be accomplished in “some sly, roundabout way.”
The United Kingdom was the first nation to diminish the connection between national currencies and gold. Prior to World War I, nearly all currencies were redeemable in gold, a standard that had developed over millennia as gold became the most tradeable commodity on the planet. However, by 1971, convertibility was entirely abandoned when U.S. President Richard Nixon infamously declared he would “temporarily suspend the convertibility of the dollar into gold” and unilaterally severed the last tie between the two. He undertook this action (at least in part) to finance the Vietnam War and maintain his political influence.
We won’t explore every aspect of fiat currency here, but here’s what is crucial: State-issued currency today is not backed by anything tangible but entirely generated as debt. Fiat currency pretends to be money, but unlike true money (which emerges from voluntary transactions), fiat is a mechanism of debt and control.
Every new dollar, euro, or yuan comes into being when a major bank provides a loan. That currency is anticipated to be repaid with interest. And since that interest is never created alongside the principal, there is never sufficient money in circulation to repay all debts. In fact, additional debt is required to sustain the system. Contemporary central banks further manipulate the money supply through mechanisms such as bailouts, which prevent inefficient banks from failing, and quantitative easing, which only adds more fuel to the fire.
Quantitative easing occurs when a central bank acquires government bonds by generating new money, effectively exchanging IOUs for freshly minted currency. A bond represents a commitment by the government to return the borrowed funds with interest. That assurance is backed by the state’s authority to tax present and future citizens while you and your successors are
“““html
compelled to manage escalating costs. The outcome is a subtle, ongoing extraction of wealth from industrious individuals via inflation and debt bondage.
Currency issuance persists under the guise of Keynesian economics — the theory that supports the majority of contemporary governmental strategies. Keynesians assert that expenditure propels an economy ahead and that if the private sector fails to maintain spending, the government must intervene. Each dollar expended, they contend, contributes one dollar’s value to the economy; however, this perspective overlooks the truth of value dilution due to inflation. It’s Bastiat’s Broken Window Fallacy reiterated. Adding zeros yields precisely zero worth.
If money printing could genuinely boost wealth, we would all possess super yachts by now. Wealth is generated through production, strategic planning, and voluntary trade, not by increasing the quantity of figures on a central bank’s balance sheet. True advancement arises from individuals engaging with one another and their future selves by gathering capital, postponing gratification, and investing in what lies ahead.
Fiat Currency’s Ultimate Destination
Producing more currency does not expedite the market process, but rather misrepresents and hinders it. Literally. Slow and foolish ensues. Continuously diminishing purchasing power complicates financial calculations and delays long-term strategizing.
All fiat currencies eventually face demise. Some collapse through hyperinflation. Others are forsaken or integrated into more extensive frameworks (like smaller national currencies being supplanted by the euro). Yet before their demise, fiat currencies fulfill a concealed role — they facilitate the transfer of wealth from those who generate value to those who have political connections.
This encapsulates the essence of the Cantillon effect, named after 18th-century economist Richard Cantillon. When new money infiltrates the economy, its initial recipients gain the most — they can purchase goods before prices escalate. Those distanced from the source (ordinary workers and savers) bear the burden. Being impoverished in a fiat system is extraordinarily costly.
Nonetheless, politicians, central bankers, and mainstream economists persist in claiming that a “healthy” inflation rate is essential. They ought to know better. Inflation does not nurture affluence. At best, it reallocates purchasing power. At worst, it undermines the very foundation of society by eroding trust in currency, savings, and collaboration. The profusion of affordable goods in our modern world was realized in spite of taxes, borders, inflation, and bureaucracy — not as a result of them.
The Good, the Bad, and the Ugly
When unobstructed, we recognize that the market process tends to deliver superior goods at reduced prices for more people. That embodies true progress. Curiously, praxeology is not merely a tool for critique but a framework for appreciation. Many individuals develop cynicism once they realize how profound the dysfunction runs, but praxeology provides clarity: It reveals that productive people are the genuine catalysts of human advancement. Not governments. Once you grasp this notion, even the most routine forms of labor gain added significance. The supermarket cashier, the cleaning personnel, and the taxi driver all play a role in a system that fulfills human needs through voluntary cooperation and value creation. They are civilization.
Markets produce goods. Governments, conversely, tend to produce detriments. Catallactic competition, where enterprises endeavor to better serve customers, is the engine of innovation. Political competition, wherein parties vie for state control, rewards manipulation, not merit. The most adaptable thrive in markets. The most unscrupulous prosper in politics.
Praxeology aids your understanding of human motivations. It instructs you to observe what people do, not merely what they proclaim. More critically, it encourages you to reflect on what could have been, not solely what exists. That is the unseen realm, the alternative paths erased by intervention.
Fear, Uncertainty and Doubt
Human psychology is inclined toward fear. We evolved to endure threats, not to admire blooms. Consequently, alarmism travels faster than optimism. The proposed remedy to every “crisis” — whether concerning terrorism, pandemics, or climate change — is invariably the same: greater political control.
Those who examine human action understand the rationale. For every individual actor, the result always justifies the means. The issue is that this truth applies to power-seekers as well. They exchange security for freedom, but history demonstrates that fear-driven compromises seldom yield rewards. When you comprehend these dynamics, the world clarifies. The din diminishes.
You turn off the television. You reclaim your time. And you recognize that amassing capital and liberating your time are not selfish pursuits. They form the foundation for aiding others.
Investing in yourself — in your skills, savings, and relationships — enlarges the pie for all. You engage in the division of labor. You create value. And you do so voluntarily. The most radical action you can undertake in a fractured system is to construct something superior outside of it.
Every time you utilize a fiat currency, you compensate its issuers with your time. If you can evade using them entirely, you contribute to ushering in a world with diminished theft and deception. It may not be straightforward, but endeavors worth pursuing rarely are.
Knut Svanholm is a Bitcoin educator, author, armchair philosopher, and podcaster. This is an excerpt from his revised book Praxeology: The Invisible Hand that Feeds You, published by Lemniscate Media, May 27, 2025.
BM Big Reads are weekly, in-depth articles on some current subject relevant to Bitcoin and Bitcoiners. Opinions expressed are those of the authors and do not necessarily represent those of BTC Inc or Bitcoin magazine. If you have a submission you believe fits the model, feel free to connect at editor[at]bitcoinmagazine.com.
Source link
“`
