My Econ 101 understanding is that the value of USD is not primarily due to taxes, i.e. if the government stopped collecting taxes (or started forcing people to pay taxes in gold or Euros) the value of the dollar would not tank. Instead, we're in a Nash equilibrium where we're all accepting dollars as a means of exchange and it would be costly and have little benefit for individuals to defect. The intrinsic value of the dollar is roughly set by the value of all good and services exchanged in a given time period divided by the number of dollars in circulation.
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.
You are talking about slightly different things. A lot of the reason why fiat money has value is obviously circular logic: You can use it to buy money at the store, because the store needs to pay its suppliers in the same currency, who needs to pay its employees in the same currency, who are happy (more or less) to work for the same currency because they can use it to buy the things that they need.
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.
OK, I kind of agree. I think "circular logic" is a very bad term here, because it suggests a mistake in logical reasoning, when in fact you just mean that the Nash equilibrium is only meta stable. Similarly, "induction base case" is bad because it again suggests reasoning, but I think here you recognize that and put it in quotes to show that it's just an analogy (and a neat one at that).
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.
"[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.
> 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).
correct in a sense- the US dollar is backed by the full faith and credit of the US Government, nothing more. Would I still have that faith in the US $ if the government did not collect taxes / did not seem like a stable entity? Probably not, but your point is still valid
Um, no. The US dollar is backed by US law guaranteeing that it must be accepted as payment for all debts and by US law requiring taxes to be paid in USD. All of which, as the parent post points out, is dwarfed by the backing provided by all the merchants, banks, and consumers in the world who are using USD today. The corner grocery store in Pottsville, PA backs the USD by accepting it as payment for frozen pizza and toothpaste. The drug dealer in Venezuela backs the USD by accepting payment in $100 USD bills. These are the most important backing for the USD (the "Nash equilibrium" that the parent post mentioned.
And that kind of backing is what the community is TRYING to build for BTC.
> The US dollar is backed by US law guaranteeing that it must be accepted as payment for all debts
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.
Precisely. It means that if you sue me for ANY reason (including failure to live up to my end of a contract) the state will allow me to pay in dollars.
> The US dollar is backed by US law guaranteeing that it must be accepted as payment for all debts
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'.
> it can be used for such purposes, not that it must be accepted
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.
Generally speaking, if I say that and you take me to court to get my car, the court will award you damages, which I can pay with some cash. The alternative, where the court orders me to give you my car, is called "specific performance" and is very rare.
> the US dollar is backed by the full faith and credit of the US Government
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.
Not true. The fact that you're somewhat informed on these matters is working against you here.
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.
First, I think the interesting question is just about fiat currencies, not the US in particular. The global reserve currency aspect is a secondary effect. Let's concentrate on a generic fiat currency issued by a government.
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?
That situation is not rather unique at all. Most developed nations issue debt in a currency controlled by their central bank, with the notable exception of the Eurozone.
Japan, South Korea, Taiwan, Singapore, England, Russia, Canada, Australia, Switzerland, Iceland, Israel, Sweden, Norway, Denmark, New Zealand, and arguably PRC, Brazil, Argentina, Turkey, India, Mexico, Indonesia, Qatar, and Chile, are all developed nations not in the US or Eurozone.
You are, however, correct that most of these countries issue their debt in US dollars ("sovereign debt") rather than their national currencies.
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.