In a small European town on the shores of the Mediterranean, as every Tuesday, Carlos left school at midday and walked to his grandfather’s house. He usually had lunch with him once a week and the two of them greatly enjoyed the conversation. Carlos was a bright teenager with a great curiosity about how the world worked, and his questions were exactly the kind his grandfather liked to answer. Always getting to the root, always to the essence.
— Grandpa!
— Hello Carlos, how was your morning at school?
— Good. I have something to tell you.
— Go ahead.
— Today, our history teacher told us that fifty years ago, in addition to bitcoin there was another type of money. The euro or something like that, I think he said. And that each country also had its own different currency.
— That’s right, each country had its own currency and in much of Europe we had the euro. When I was born, it had just been created, as the monetary union of some European countries.
— So, when you were young, did you use euros?
— Of course! In Europe, everyone used euros back then.
— It’s funny that different places used different money, don’t you think? What happened when you traveled to another country? Did you have to get the money used in that other country?
— Exactly.
— Hmm, how strange!
— Ha, ha, ha.
— Ah, and there’s that other thing the teacher told us, though I don’t believe it.
— Which one.
— He said that banks had the ability to create euros out of nothing. He said it involved no mining of any kind. That all you had to do was type the amount you wanted to create into a computer screen.
— Yes, that’s true too.
— But, Grandpa, that can’t be possible. I’m sure it wasn’t like that.
— Why do you think that?
— Because it makes no sense.
— I see, but why do you think it makes no sense?
— If there’s no cost to producing it, they could produce an infinite amount. The idea that money can be created out of nothing is…
— Is what?
— Ridiculous! That’s the word --- it’s a ridiculous idea. It would give infinite power to those who could create it.
— Ah yes, on that I agree with you.
— So?
— It happened anyway, Carlos. Humans do ridiculous things. The twentieth century is full of human stupidity and horror. Why do you think it never happened?
— Because it’s absurd any way you look at it. Why would anyone work in exchange for something a bank can create infinitely at no cost? It makes no sense. Imagine I stop the first person I meet on the street and offer them work, but instead of paying them a number of sats, I tell them I’ll pay them with some papers I make myself where I write in the amount. And those papers are just what they are --- not promises to pay sats or anything else. What’s the probability they’d accept? Zero! Exactly zero. They’d probably feel offended, thinking I’m treating them as if they were stupid.
The grandfather burst out laughing as he took the pizza out of the oven. He was having a wonderful time with the conversation. He had lived through those years when “absurd” ideas were accepted by the vast majority and nobody seemed to notice they were absurd.
— Why are you laughing, Grandpa? It makes no sense to me to work for something if I’m going to be paid in units that other people can create without effort. Why would it make sense for anyone?
— I’m laughing because sixty years ago I was saying those same things to everyone around me, but very few listened. Your reasoning is perfectly valid, Carlos. It makes no sense, yet it happened anyway. Money is what enables indirect exchange --- what solves the problems of barter. Essentially, you accept something as money if you believe that with it you’ll be able to buy other things you want in the future. The inertia was so strong that ending the fiat system took more than thirty years from 2009.
— But then, do you really think it was the way the teacher told us? Some people can be stupid, but certainly not everyone.
— I don’t just think so, Carlos --- I’m sure of it. I spent half my life under the fiat system. It’s not a matter of being stupid. Before 2009 everyone used the fiat system, even the most brilliant people in the world. There simply was no alternative. Money was completely tied to the State. People simply accepted that money had to be issued by the State.
— But, but…
— Ha, ha, ha. It seems strange to you, doesn’t it?
— Wasn’t there bitcoin at the start of the century?
— No. It was invented in 2009. Or discovered, if you prefer.
— So, before 2009, the different countries of the world had their own currencies and the State created money out of nothing, as much as it wanted.
— That’s how it was.
— I still can’t understand how people accepted living in those conditions.
— I suppose it must seem strange to someone who was born into a bitcoinized world, but I lived forty years under the fiat system.
Carlos’s head was spinning. As he struggled to imagine that strange world, his mind ran into another difficulty.
— How did people save back then?
— I like that you ask me that, Carlos.
— Seriously, Grandpa. If you saved in euros and banks were creating more euros, your savings necessarily had to lose value. You can’t convince me otherwise.
— I’m not going to convince you otherwise. You’re right, Carlos.
— So?
— So what?
— How did they save? Was it not possible to save? Did they not want to save?
— Those are harder questions.
— Why?
— There were people who wanted to save, to plan for the future, of course. A low time preference is the key to advancing societies. But saving in euros was not the ideal way, for precisely the reason you just mentioned. As more euros were created, the purchasing power of euros evaporated. That was, of course, the cause of price inflation.
— So is it true that prices used to rise?
— Yes, continuously.
— Every year?
— Yes. At first the European Central Bank had an inflation target of 2% per year. A few years later they changed it to 4% when…
Carlos interrupted him, not letting him finish the sentence.
— Wait, wait! Why would a central bank have a goal of raising prices? I’m sorry but that makes no sense. A central bank whose goal is to make savings worth 2% less every year? That’s completely ridiculous, Grandpa. No government wants to harm the population. That is not its goal.
— (Smiling)…I’m enjoying every minute of this conversation.
— I’m very curious about those days, but there are many things that simply don’t fit.
— You can’t imagine a time like that because of all the things that make no sense. They made no sense then either, and yet they were accepted. What would you think if I told you that nearly one hundred percent of the population believed that a little inflation was necessary for a healthy economy?
— Ha, ha, ha. Now it’s me who’s laughing.
— But I’m serious. Trust me. In the days of the fiat system, at the end of the last century and the start of this one, the prevailing economic theory said that without inflation nobody would spend and the economy would collapse.
— Are you serious? I can’t believe it.
— Yes, completely serious.
— Wow. That’s the most stupid theory I’ve ever heard. Everyone has to eat, everyone wants to spend their holidays in nice places, play sports, go out to dinner with friends, go to parties, go to the theatre, the cinema, football, a thousand places. Everyone wants to enjoy life. And for almost all of those things, you have to spend money.
— Of course. That’s a fact, there’s no doubt about it. But I can assure you that idea was the prevailing belief in the old days. And that theory was what was studied in economics schools all over the world. It was Keynesianism, named after its creator, Keynes, a twentieth-century economist.
— And everyone took it for granted.
— Exactly. When I was your age, nobody asked where money came from, or how it really worked. When Europe gave our country ten billion euros, everyone thought: how wonderful, great! But nobody asked where that money came from, who paid for it. The money was simply created, so it was not at all wonderful --- it was theft from savers. Today money is something taught in school, and you understand it well from childhood, but back then it was not studied in school.
— Didn’t you study money in school?
— No, nothing at all.
— How strange! Why wasn’t it studied, if money is such an important part of society?
— I don’t think it was coincidental. I think it was deliberate. Money was simply used but not studied. As a result, the vast majority of society took it for granted that prices always had to rise and also that for money to work, the State had to issue it. People accepted it as if it were a law of nature.
— What do you mean, a law of nature? What do you mean by that?
— All right, tell me: how many of your classmates have questioned why gravitational force and electric force decrease with the square of the distance? Why exactly the square and not the cube, or any other number?
— Nobody.
— Exactly. Nobody asks those things. We all learn in school that both forces decrease with the square of the distance and that this is one of the laws of nature that we simply have to accept. In fact, it makes no sense to ask why it’s the square. In the same way, people back then accepted that prices always had to rise.
— But it’s obvious that prices are not a law of nature.
— I’m not saying they believed it was a law of nature, just that they “accepted” it as if it were. They didn’t ask themselves why prices always rose.
— Hmm…I understand. But I still find everything quite confusing. It’s very hard to imagine that such an absurd idea was so widespread. As technology advances, fewer and fewer hours of work are needed to produce the same quantity of any product, so logic would suggest that prices should go down.
— Your reasoning is correct, Carlos. Some prices might rise momentarily, but always due to events such as a sudden reduction in supply for a specific reason. But not in a constant and generalized way. However, you have to realize that you have a very big advantage over those people.
— What is it?
— You see it with complete clarity now because not only do you reason well about it but you also see it around you. So what you reason and what you see fit perfectly together. But at the start of the century, what everyone experienced was that prices always rose. More or less quickly, but always upward. So the reasoning you just made simply didn’t fit with what they saw around them. That’s why very few people were able to reason that prices should fall over time and at the same time ask themselves why, contrary to what they should do, they always rose.
— I suppose Satoshi was one of those few.
— Yes, Satoshi was very aware of all the problems with fiat money. Proof of this is his famous quote: “the root problem with conventional currency is all the trust that’s required to make it work. The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust”. In fact, the race to discover a form of decentralized electronic money had begun much earlier. There were more people who saw the problems, but most thought the goal of decentralized electronic money was a pipe dream.
— That’s why they gave Satoshi the Nobel Prizes for Economics and Peace. When was it, 2010?
— Ha, ha, ha.
— 2015?
— It was in 2038.
— Why so late? It was clear it was an invention that would improve the lives of billions of people. The teacher told us that when bitcoin didn’t exist, some countries had a kind of king, a single person in charge of everything.
— Yes, and not just some small countries. More than half of the world’s population lived under totalitarian regimes.
— And bitcoin helped put an end to all of them.
— That’s right. Bitcoin helped the individual become sovereign. Bitcoin took power from the State and gave it to the people, to each individual. It improved all democracies with greater privacy and greater freedom and put an end to dictatorships. Totalitarian regimes either adopted bitcoin and necessarily transitioned to democracies, or they simply collapsed.
— So?
— It took time, Carlos. Although it was obvious to some of us, it was not obvious to the vast majority of the population. I was lucky that my father explained bitcoin to me when I was your age, and bitcoin was still in its first decade. During those years, all kinds of bad things were said about bitcoin.
— Bad things? Like what?
— Oh, a lot of things. For example, that it was a tool for terrorists, or that it was bad for the environment, or even that it was a Ponzi scheme.
— A tool for terrorists? Seriously? Why would anyone want to spread that nonsense? Today violence is less than one percent of what it was at the start of the century!
Carlos was restless, gesturing with his hands, with a great expression of disbelief on his face.
— There was a reason - said the grandfather with a slight gesture of sadness as he pronounced these words - The fiat system was not bad for everyone.
— What?
— Imagine for a moment that people used as money something you could create at no cost. Would you work, or would you simply create money whenever you needed it?
— Oh, I see. For those who controlled the money-printing machine, the fiat system was a way to get rich without having to work.
— And also for those “close enough” to it.
— Close?
— Politically close. In those days everything depended on whether you were well connected politically. The Cantillon effect. You’ll probably study it in class when you discuss the fiat system, in History of Money.
— I understand. I picture a society divided into masters and slaves.
— More or less. All societies were tremendously dysfunctional. Incentives were misaligned, resources poorly allocated and wasted, and on top of that, consumerism was enormous. The most powerful countries in the world were continuously involved in proxy wars. A humanitarian and environmental disaster.
— So ordinary people --- the slaves --- would need to work an awful lot. Is it true that people worked five days a week?
— Yes, that’s right. And eight hours a day.
— Wow. It’s really hard to imagine such a horrible system. Continuous wars, massive inequality, consumerism, an enormous impact on nature, and on top of all that, half the population living under totalitarian regimes without freedom, just fifty years ago…And not for lack of technology --- all of it due to the fiat system.
— You’ve just made a good summary of the situation from half a century ago, Carlos. It really wasn’t due to a lack of technology. The internet was already over forty years old, everyone had a mobile phone, and artificial intelligence was being born. All the horror was due to the perverse incentives of the fiat system.
— I suppose it was exciting to live through the revolution during those years.
— It was indeed. And witnessing that the countries that first adopted bitcoin were the ones that gained the most advantage. El Salvador was the first.
— This year we’re going on holiday there. Dad wants to visit the volcanoes and the Great Museum of Satoshi.
— In 2020 it was one of the poorest countries in the world and one of the most dangerous too. It had one of the highest murder rates per hundred thousand inhabitants in the world. They adopted bitcoin as legal tender in 2021, amid threats from the International Monetary Fund, a very powerful institution of the fiat system at the time. By 2030 it was one of the richest countries in the Americas and by 2040 it had become one of the great financial centers of the world. Sometimes I feel nostalgic for those years, for the excitement that some of us felt. The world had changed profoundly and only a few of us knew it. We were working as hard as we could to accelerate it. It was a moral duty.
— A moral duty?
— Yes, Carlos, a moral duty. That’s how I felt, and how my father felt too.
As he spoke those words, remembering his father, a powerful emotion came over the grandfather and his eyes grew moist. Carlos felt something almost like a pain in his chest at seeing his grandfather so moved. After a long pause he broke the silence in an attempt to ease the moment.
— But it wasn’t your duty, Grandpa.
— Well…Suppose you were there right now, but knowing everything you know today: how we live nowadays, what our civilization is like. Imagine yourself there, living in that society but with your current knowledge — wouldn’t you feel the need to do everything possible to accelerate the transition from that society to the one we have today?
— Oh! Now I understand.
Another moment of silence interrupted the dialogue. Carlos was excited, his eyes shining, his mind racing at full speed. His desire to know had no end. He had so many questions!
— Grandpa!
— Yes.
— I’d love for you to tell me all those stories. I want to know everything.
— (Smiling). We have time, Carlos, and I’d love to. Many things happened in those thirty years. Maybe next time I can tell you the story of the Blocksize War.
— The Blocksize War…that sounds very interesting.
— It happened between 2015 and 2017, when still very few people understood bitcoin, and it was the first real test of decentralization. A test that bitcoin passed brilliantly --- a test that set in stone the future of humanity forever. But we’ll continue another day, Carlos. You have to go now, if you don’t want to be late for your piano lesson.
— Wow, it’s already two o’clock! Goodbye, Grandpa. I love listening to you!
With a smile, the grandfather waved goodbye. His heart beat full of joy.