Hard Money Diploma · Module 4: How Problems Lead to Solutions

4.0 Introduction

In the previous module you learned that the financial world relies on a system that may not be as strong as it seems. The fiat system, sustained by the constant addition of new paper money, seems to benefit a few at the expense of everyone else.

This module uncovers what the fiat system means for regular people and society. Finally, we explore the story of a group of individuals who noticed these problems and quietly worked to find a solution that could change the future of human society.

4.1 Money Buys Less

Monetary Inflation and Its Effect

Monetary inflation is an increase in the money supply in an economy. When more money is created, each unit of money tends to lose value, reducing purchasing power. As more money circulates, demand for the same amount of goods and services rises, which pushes prices up.

Imagine a small group of friends, Alex, Bob, and Charlie, each with one dollar, and there is one bottle of water for sale. Three people, three dollars, one bottle. Now suppose the government gives each of them an extra dollar. They now have six dollars in total. With more money, they all want to buy the same bottle, so they start competing for it.

Because of this increased demand, they begin offering more than the original price. The competition drives the price of the bottle up. Even though they have more money, each dollar buys less than before. They cannot buy as much as they could previously.

In this example, their purchasing power fell because the money supply increased. They had no control over this change. More money combined with the same amount of goods led to higher prices, making it harder to afford the same things.

This shows how purchasing power can be affected by forces outside our control and why it is important to understand how money systems work.

4.1 Money Buys Less (continued)

Activity: Auction

This is a class exercise where participants learn firsthand how the increase in money supply impacts pricing. The intent is for participants to understand monetary inflation (not price inflation).

Key Points

4.2 The Global Debt Burden and Social Inequality

Impact on Individuals: Loss of Purchasing Power

Jaime is a college student who lives in a small apartment. He works part-time at a coffee shop to pay for his living expenses and tuition. As soon as he began living independently, Jaime became good at managing his own ledger.

At the beginning of 2023, he budgeted $10,000 for his living expenses for the entire year, including rent, food, and other necessities. Jaime's part-time paycheck and everyday costs move his balance up and down across the month, ending near $700. Twelve months later, Jaime notices that his budget is not stretching as far as it used to and that his cost of living has increased significantly over the past year.

His grandfather recalls earning $380 a month as a factory worker in 1956, enough to save up and buy a house in the suburbs. He notes that in 2020, 30 Hershey's chocolate bars cost $26.14, while in 1913 the same bars would have cost only $1. He adds that $1 once bought about 10 bags of pretzels, but in 2020 those same 10 bags cost $9.69, and that a loaf of bread once cost $0.18 and a gallon of gasoline $0.29.

After the conversation, Jaime discovers he needs to budget an additional $1,000 to buy the same basket of goods and services as the previous year. His purchasing power has decreased by $1,000, while his salary only increases very little.

Based on information from the US Bureau of Labor Statistics, prices today are about 30 times higher than they were in 1913. This means that a dollar today can buy only around 3% of what it could buy back then. Nominally Jaime appears to earn much more than his grandfather ever did, but his grandfather's dollars were much more valuable and could buy much more.

In today's world, the significant impact of inflation discourages people from saving money. The fiat system instills a high time-preference, a focus on short-term gains over long-term planning. It is like being on a treadmill, running faster and faster but never really getting ahead.

4.2 The Global Debt Burden and Social Inequality (continued)

The Global Debt Burden

As a result of the fiat system, governments around the world are trapped in a growing web of debt, often called the "global debt spiral." Imagine borrowing more than you could ever repay. This is happening at a massive scale. Governments continue to take on more debt than they can handle, driven by ongoing spending, borrowing, and short-term thinking, pushing many nations closer to financial instability.

As of today, the U.S. federal government has added about $13 trillion in new debt since 2019. Total debt has risen from roughly $23 trillion in late 2019 to around $37 trillion today. Governments worldwide are not slowing down their borrowing.

So what does this mean for individuals and societies already dealing with the effects of the fiat system? The debt spiral is like a snowball rolling downhill, growing larger over time, with little political will to stop it. The consequences, from rising inequality to social unrest, are unlikely to disappear.

4.2 The Global Debt Burden and Social Inequality (continued)

Discussion: Consequences of the Fiat System

4.3 The Quest for a Decentralized Currency

We have observed the progressive capture of money by banks and governments throughout history, leading to the fiat system we know today and its disastrous consequences for society. But the rise of new technologies like encryption and the internet have allowed new ideas to emerge, such as independent digital money, free of government intervention, open and accessible to all. Let's dive into the journey of those leading this revolutionary movement: the Cypherpunks.

The Cypherpunks

The second half of the 20th century saw the rise of powerful new technologies like personal computers and the internet. Some thinkers and programmers realized that these technologies could either increase individual freedom or allow governments and corporations to monitor and control people more easily.

This group became known as the Cypherpunks. They believed that cryptography, the use of mathematical code to secure information, could protect individual freedom in the digital age. One of their key goals was to create a form of digital money that people could use without banks or governments controlling it. Bitcoin was later created as a solution to this problem.

Key figures in the Cypherpunk movement included Eric Hughes, Timothy C. May, and John Gilmore. In 1992, Eric Hughes wrote A Cypherpunk Manifesto, which argued that people should have the right to privacy and control over their digital lives. In 1991, Phil Zimmermann created PGP (Pretty Good Privacy), a tool that allowed people to send encrypted emails so that only the intended recipient could read them. However, one major problem remained unsolved: the world still lacked a decentralized digital currency that people could use freely on the internet.

4.3 The Quest for a Decentralized Currency (continued)

Centralized vs Decentralized Systems

In a centralized system, everything revolves around one main authority, like a tall building in a city. This authority controls how the entire system works. Think of traditional banks as an example, where a small group makes all the decisions.

Problems with Centralized Systems

Think of a decentralized system like a forest. Each tree is a separate part, and the whole forest is the system. Unlike a city with one central point, a decentralized system is more resilient and can keep going even if one part fails.

Benefits of Decentralized Systems

4.3 The Quest for a Decentralized Currency (continued)

Brief History of Digital Currencies

One of the key ideas discussed by the Cypherpunks was digital cash. They believed money should be separated from government control so people could send and receive payments freely and privately online.

Early cryptographer David Chaum created one of the first systems for digital cash using cryptography to make transactions secure and private. However, his system still relied on a central authority to operate, which meant it could fail or censor transactions.

Over the following decades, many Cypherpunks tried to design a form of digital money that did not depend on a central authority. While they introduced important innovations, none of their systems solved all the challenges needed for a secure, decentralized, and widely usable digital currency. These attempts helped reveal what was missing. Later, someone built on these ideas and finally created a working system for decentralized digital currency.

Wrap-Up and Check for Understanding