On August 6, 1915, His Majesty’s Government issued this appeal:
With this obscure and largely forgotten announcement, the Bank of England effectively began the global monetary system’s move away from a gold standard, in which all government and bank obligations were redeemable in physical gold. At the time, gold coins and bars were still used worldwide, but they were of limited use for international trade, which necessitated resorting to the clearance mechanisms of international banks. Chief among all banks at the time, the Bank of England’s network spanned the globe, and its pound sterling had, for centuries, acquired the reputation of being as good as gold.
Instead of the predictable and reliable stability naturally provided by gold, the new global monetary standard was built around government rules, hence its name. The Latin word fiat means “let it be done” and, in English, has been adopted to mean a formal decree, authorization or rule. It is an apt term for the current monetary standard, as what distinguishes it most is that it substitutes government dictates for the judgment of the market. Value on fiat’s base layer is not based on a freely traded physical commodity, but instead is dictated by authority, which can control its issuance, supply, clearance, and settlement and even confiscate it at any time it sees fit.
With the move to fiat, peaceful exchange on the market no longer determined the value and choice of money. Instead, it was the victors of world wars and the gyrations of international geopolitics that would dictate the choice and value of the medium that constitutes one half of every market transaction. While the 1915 Bank of England announcement, and others like it at the time, were assumed to be temporary emergency measures necessary to fight the Great War, today, more than a century later, the Bank of England is yet to resume the promised redemption of its notes in gold. Temporary arrangements restricting note convertibility into gold have turned into the permanent financial infrastructure of the fiat system that took off over the next century. Never again would the world’s predominant monetary systems be based on currencies fully redeemable in gold.
The above decree might be considered the equivalent of Satoshi Nakamoto’s email to the cryptography mailing list announcing . But, unlike Nakamoto, the U.K. government provided no software, white paper, nor any kind of technical specification as to how such a monetary system could be made practical and workable. Unlike the cold precision of Satoshi’s impersonal and dispassionate tone, it relied on appeal to authority, and emotional manipulation of its subjects’ sense of patriotism. Whereas Satoshi was able to launch the Bitcoin network in operational form a few months after its initial announcement, it took two world wars, dozens of monetary conferences, multiple financial crises, and three generations of governments, bankers, and economists struggling to ultimately bring about a fully operable implementation of the fiat standard in 1971.
Fifty years after taking its final form, and one century after its genesis, an assessment of the fiat system is now both possible and necessary. Its longevity makes it unreasonable to keep dismissing the fiat system as an irredeemable fraud on the brink of collapse, as many of its detractors have done for decades. Many people at the end of their life today have never used anything but fiat money, and neither did their parents. This cannot be written off as an unexplained fluke, and economists should be able to explain how this system functions and survives, despite its many obvious flaws. There are, after all, plenty of markets around the world that are massively distorted by government interventions, but they nonetheless continue to survive. It is no endorsement of these interventions to attempt to explain how they persist.