Fiat Follies

I used to see a bumper sticker that read “Don’t Steal. The Government Hates Competition.” Apparently, that goes for currency as well. Alternatives to government-issued money are emerging, making the powers-that-be nervous.

For some background, remember that in the US, we have to accept our legal tender, the dollar, in service of debt. If I owe you money and offer to pay my debt* in paper money, you have to accept it or the debt is cancelled. Courts will settle it in dollars, even if the contract was in gold, for example.

Why would the government require that? What harm is done when you and I choose to exchange goods and services on whatever basis we choose? The short answer is that it benefits the people at the very top of the econo-political food chain. By manipulating the money supply, politicians and crony capitalists are able to spend money they do not have. I will cover the details in a future blog, but for now, let’s look at some emerging alternatives to our paper currency.

One of the oldest alternatives is barter. Barter, which existed long before money, is the act of exchanging goods and services with no medium of exchange. I give you a haircut; you give me a basket of fruit. The IRS considers this taxable income and expects you to report it at “fair market value.” The Internet has made this easier to do (barter, that is, not reporting it) and deals with this issue in its guidelines. In other words, you and I may not choose to use money, but the government will still take money from us for doing so.

More interesting examples have emerged in recent years. For example, Linden Dollars (LD), the currency of Second Life virtual world is one example. Keep in mind that LD are fictional–they are not “real” money. They are used to buy virtual stuff in a virtual world. People buy LD with regular money and use it to operate in a world that exists only in 0’s and 1’s in a computer-simulated environment.

Those of you with your thinking caps on just realized that if regular money can be converted into LD, it can be converted back to regular money. Yes, it can. That prompted the European Union to attempt to try to extract a Value Added Tax (VAT) on transactions in this virtual world. The interesting thing is not whether the EU gets away with taxing it, but how difficult the Internet has made it for any government to control the economic activities of its citizens. For we libertarians, that is a good thing.

Same with Bitcoin, now targeted by Chuck Schumer. Only in this case, Bitcoins can be used as regular money. To buy stuff. Real stuff. It is the world’s first successful digital currency as far as I can tell. Since the currency itself is hard to trace, drug dealers like it. In fact, that is Schumer’s beef–that Silk Road drug dealers can send drugs straight to peoples’ homes without fear of getting caught. This is not true. While a clever computer user could mask his/her IP identity somewhat, the drugs still have to travel via a delivery service. Eventually, anyone buying in this way runs the risk of having drugs traced to the delivery point. But then, drug users and dealers have never ranked as the sharpest knives in the drawer. Clever, yes. Smart, no.

Something closer to home? In a symbolic slap at the US government, the State of Utah has made gold and silver coins issued by the Federal Government legal tender in their State. To boot, they eliminated state capital gains and sales tax on the sale of such. Now, no one in his/her right mind is going to spend a $50 denominated gold coin worth $1500 on the market for a tank of gas, but the very fact that other states are considering this move suggests a growing distrust in the dollar as a stable currency.

All in all, this makes for an interesting development. Many people do not trust our government with the authority to force us to use its currency. Since money is ultimately what people agree it is, irrespective of the government, will another medium emerge that displaces that green stuff in our wallet as trustworthy currency? A lot of powerful people will be very unhappy when that happens. How far will they go to protect their scam?

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*This does not imply that vendors are required to accept paper money for goods and services. My research so far indicates that they are not.

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About Terry Noel

I am an Associate Professor of Management and Quantitative Methods at Illinois State University. My specialty is entrepreneurship.
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