Serious question: Is that really a fair criticism of BTC? Because afterall, our beloved US currency is fiat based, and often subject to whims of geopolitical games.
That said, the tax part does add a bit of stability in the form of an additional friction to any hypothetical plan for everyone in the US to coordinate to start exchanging gold or Euros in lieu of dollars.
Huh? What does this mean? This phrase can be applied to government bond ("The US gov't promises to pay you back") or to FDIC insurance ("The US gov't promises to refund your money if your bank closes"). But it doesn't have any meaning for dollars, unless it were to mean that the gov't would exchange it for gold, which of course is false.
If the US Gov't stopped collecting taxes -- or had some other substantial liquidity crisis -- the very real issue is debt service. Since the USD is the global reserve currency, we are in the rather unique situation of having our debt denominated in our own currency under control of our own central bank. This is where the "full faith and credit" of the USA enters the discussion of our currency. If we had issues servicing our public debt, the government has the option of devaluing our currency. In other words, inflating away our debt. In such a scenario, the value of USD plunges against foreign currencies, and there would be a massive effort by everybody with substantial USD holdings to sell.
This, among other reasons, is why Keynes envisioned a super-national reserve currency traded among central banks. If the US public debt was denominated in Bancor, the option of inflating it away wouldn't exist.
Yes, every country CAN issue national debt. But issuing sovereign debt is more common largely because investors prefer it.
Either way, I didn't mean to sound misleading by calling it "rather unique." Thanks for helping me clarify.
You are, however, correct that most of these countries issue their debt in US dollars ("sovereign debt") rather than their national currencies.
So you're saying that "full faith and credit" just means "The gov't promises not to crazily inflate the money by printing lots of it". Fine. (That doesn't explain what process determines the street value, it just acknowledges that the government can destroy it.)
I don't really see how the rest of what you are talking about applies to my comment. Are you claiming that fiat currencies are impossible in countries without debt?
It means, "The government will accept it for tax payment," and for the payment of various other debts and fees.
And that kind of backing is what the community is TRYING to build for BTC.
I believe this doesn't stop people from creating special obligations through contracts that are denominated in other currencies. It more means that if I run over your mailbox and a judge orders me to compensate you, I can use dollars.
If you're referring to the 'legal tender for all debts public and private' clause on the notes themselves, that means that it can be used for such purposes, not that it must be accepted. If we agree that I'll do your deck and you'll give me your car, you can't just say 'I want to keep my car, here's some cash instead'.
Before the contract is agreed to, the parties can make any arrangement they want, including agreeing to pay in bitcoins. But if one party fails to deliver and they wind up in court, then the court (as kragen pointed out) will almost never require them to deliver the item, the court will instead require that the victim be compensated and will allow dollars to be used to compensate them.
Now, if bitcoins were worth $250 each at the time the deck got painted and are only worth $160 each by the time the court case completes, there is a fairly good chance that the court will demand the $250 price be used to determine what the compensation should be.
The vast volume of why the value is there is clearly because of such thinking, so you are right.
But the parent post is also right, because circular logic tends to be awfully inadequate at explaining things. This is where taxation comes in, because it serves as the "induction base case", so to speak. Taxation is what sets the wheel in motion initially; the additional momentum then builds gradually, but the continued existence of the base case is what gives it stability.
Take taxation away, and the wheel will still continue because loan repayment acts as a "secondary base case". But once that secondary base case disappears as well, it is just a matter of time until collapse - kind of like the cartoon characters that keep running over the edge of the cliff, until they look down and notice gravity.
So if you want to understand why money has value in the first place, the parent comment gives the better answer. But that doesn't mean your reply is wrong, either.
But I disagree that you need taxation as a bootstrap to get you to the equilibrium. Indeed, in the actual history of the US it was the backing by gold that established the dollar; initial taxation was minimal. Now that backing has been removed, and the dollar still functions. Then, I infer, you would argue that taxation has replaced gold-backing as the stabilizer.
Your penultimate paragraph is an interesting suggestion, but I'm not convinced. Could you point me toward some place where it was fleshed out? I can easily imagine a world where people keep writing new contracts denominated in dollars, whose street value is set by the process that I described. Where is the motivation for people to defect? One answer is that a new currency (like Bitcoin) comes along that has special properties that make it useful enough for people to absorb transaction costs and to start exchanging alongside the original fiat currency. Then things could unravel. And indeed, taxation could suppress this by providing additional friction like I mentioned in my original comment. But in the absence of such a new currency I don't expect the dollar to spontaneously start to unravel on its own simply because there are no taxes. People would continue to need a medium of exchange and the dollar is very good.
Go just a bit past Econ 101, and you'll discover that economists do not universally agree on these things. That being said, here is one popular view:
https://en.wikipedia.org/wiki/Modern_monetary_theory
From wiki:
"[Knapp] argued the state could create pure paper money and make it exchangeable by recognising it as legal tender, with the criterion for the money of a state being "that which is accepted at the public pay offices"."
Or in other words, taxes, torts, and other laws give money its value.
i think legitimacy is more correct than value - value is a result of what people demand in exchange for their goods/services. Legitimacy is the trust that people have on the currency (ie, the trust that others woudl also accept the currency).
And to some extent it is currently based on the ability of the United States to protect its interests overseas, the trading of oil in the US dollar and significant trade partners accepting the US dollar as a means of exchange for goods shipped to the US.
And that works as long as significant portion of the world continues to believe in all of the above, if that should ever stop I hope I won't be there to watch the carnage. That's the kind of 'interesting times' that one would hope to avoid.
There for, the US gov't (or more correctly, the Fed reserve) can print their way out of debt that they owe to third parties, until those third parties all wise up. But then you got 11 air craft carriers paroling the world, untold number of submarines and missiles, massive air force etc, and if the US gets a whiff that you are no longer denominating your goods (e.g., oil) in USD, you might find yourself being called the axis of evil.