While in Switzerland we do have some weapons, it is not like Swiss franc is backed by our army, which is purely defensive.
And, in fact, here you can pay municipal and cantonal taxes with cryptocurrencies.
And, in fact, here you can pay municipal and cantonal taxes with cryptocurrencies.
A sort of "just so" story about this would go something like (with much credit to David Graeber):
"Way back when, some Assyrian king got the great idea to, instead of giving their soldiers food and drink, give their soldiers tokens. They would then demand a certain number of those tokens per head from their subjects. Suddenly the tokens have value, and the subjects are put to work selling goods and services to the army."
I'm not an expert on this theory, but there are potential oddities, similar to your points:
* This would suggest the value of the currency is closely tied to the total taxation. (Why, for example, is the Swiss Franc highly valued by investors outside of Switzerland?) I guess you could validate or invalidate this by looking at whether the ratio of M2 to annual tax revenue is somewhat fixed (across currencies) or quite fluid?
* This fails to explain currencies which retain value after they are no longer in use by a central government (as with the Somali shilling, as noted in the Wikipedia article) or, indeed, Bitcoin.
Personally, my sense is that chartalism is correct as an explanation for one way to bootstrap a currency, but clearly (as Bitcoin shows) is not the only way to bootstrap a currency, and once you create a level of reliable demand, you no longer need it (hence the Somali shilling or, perhaps, the high valuation of the CHF outside of Swiss taxpayers).
If someone nuked the USA and burn down the entire USA army and economy, the dollar wouldn't have much value.
The USA army protects the states. Switzerland, as per parent's post, has defense agreements with other countries. The likelihood of Switzerland being attacked or destroyed is also very low. What would the international community think of a country attacking Switzerland?
If I started my own country in the middle of the ocean and started issuing my own currency it would be worthless. Maybe if I do some trade deals and a defense agreement with some other country it would start having some value.
The difference with BTC is that there is no-one defending BTC with weapons. It can all be banned tomorrow if global governments think it would be good to do so. Similarly, I can spin my own fork of BTC and achieve similar technology advance as BTC.
If you started your own currency it would be worthless because of the lack of demand for it.
Right now Bitcoin has a market cap of about 800bn USD, which (coincidentally) is about the same value as the CHF M1. (M2 is a little over a trillion USD.) These are crude indicators that there's substantial aggregate demand for both assets.
What's interesting is how Bitcoin got to that point. Quite a few years ago, it wasn't worth much at all, and you could only use it to pay people who were ideologically motivated to accept it—your crazy coworker who'd let you pay him back for beers in BTC, for example.
Then you add in the people who will use it for practical reasons (they're criminals, they are underbanked, they want payments under the table), the people who will use it for reasons of mass delusion (they think they'll get rich), and suddenly you have substantial aggregate demand—enough that you can reasonably assume a BTC will be worth something in the future (though highly unstable demand still).
This seems to be (to my knowledge) an uncharted path to creating a "recognized" currency.
But as to your point about fiat: if the US government were nuked, you'd have massive economic disruption for other reasons. But this isn't per se why the USD is valuable (anymore?).
Not necessarily, if you were using it within your own country, the use case for most currencies. A fiat currency is little more than a promissory note or IOU (think about how I could go to a bank and exchange my dollar for a dollar's worth of gold during the gold-backed fiat period). In fact, less than 200 years ago many banks were able to issue their own currencies as promissory notes in many US states and were valid, but only with those banks.
The idea of an all-powerful national currency that bans all others is relatively new from a global perspective and even today, there are parts of the world where small communities have and still do issue their own local currencies in order to facilitate local trade.
Pump the breaks. Have you read the Wikipedia page about the Somali Shilling?
https://en.wikipedia.org/wiki/Somali_shilling
> Following the breakdown in central authority that accompanied the civil war beginning in the early 1990s, the value of the Somali shilling plunged. The Central Bank of Somalia, the nation's monetary authority, also shut down operations. Rival producers of the local currency, including autonomous regional entities such as the Puntland territory, subsequently emerged. These currencies included the Na shilling, which failed to gain widespread acceptance, and the Balweyn I and II, forgeries of pre-1991 bank notes. Competition for seigniorage drove the value down to about $0.04 per ShSo (1000) note, approximately the commodity cost. Consumers also refused to accept bills larger than the 1991 denominations, which helped to stop devaluation from spiraling further upwards. The pre-1991 notes and subsequent forgeries were treated as the same currency. It took large bundles to make cash purchases, and the United States dollar was often used for larger transactions.
Essentially, it's not like the economy of Somalia remained at a status quo when central banks and government went absent. The civil war of the 1990's essentially ripped the nation apart in autonomous region, local economies, black markets,... with many different competing currencies, forgeries of the Shilling and little to no rule of law depending on where you were.
As of late, this is changing as power is centralized again and instilled in a legitimate government:
> In the late 2000s, Somalia's newly established Transitional Federal Government revived the defunct Central Bank of Somalia. The monetary authority assumed the task of both formulating and implementing monetary policy.[6] Owing to a lack of confidence in the Somali shilling, the U.S. dollar was widely accepted as a medium of exchange alongside the Somali shilling. Dollarization notwithstanding, the large issuance of the Somali shilling increasingly fueled price hikes, especially for low-value transactions. The new Central Bank of Somalia expects this inflationary environment to come to an end as soon as the Central Bank assumes full control of monetary policy and replaces the presently circulating currency introduced by the private sector.
> With a significant improvement in local security, Somali expatriates began returning to the country for investment opportunities. Coupled with modest foreign investment, the inflow of funds helped the Somali shilling increase considerably in value. By March 2014, the currency had appreciated by almost 60% against the U.S. dollar over the previous 12 months. The Somali shilling was the strongest among the 175 global currencies traded by Bloomberg, rising close to 50 percentage points higher than the next most robust global currency over the same period.
Also, the acceptance of a currency in a community is backed by the fact that you can take a dispute to a court of law which carries the legitimacy to enforce the rule of law. That is, if you are indebted and you want to repay a debt using legal tender, you have the assurance that the debt will be extinguished at least in the eyes of an authority. Or, more to the point, there's assurance that the authority will protect you from creditors seeking further satisfaction from you.
I certainly agree with what you wrote. But I think the point still stands that this is hardly black and white—the shilling did supposedly stay in circulation, right?
The argument about taxes and legal tender certainly show ways to increase demand for a currency, but they appear to be somewhat unnecessary, as with BTC.
We may in fact be agreeing. My premise is that chartalism is an interesting idea which can help color questions of why a given currency becomes accepted, but ultimately isn't literally true—other mechanisms of increasing demand for a currency may also be effective.