"The great man does not think beforehand of his words that they may be sincere, nor of his actions that they may be resolute -- he simply speaks and does what is right." ~ Mencius
A Dual-Currency Community
Column by Paul Bonneau.
Exclusive to STR
When a fiat currency goes into heavy inflation, the tendency of users of that currency is to convert it into something else that has a more stable value, so their holdings don’t evaporate into thin air. People will either buy gold or silver, or convert to another more stable fiat currency, or if those options aren’t available, will simply buy food or other things they can use in barter.
I was doing a bit of idle speculation about how an anarchist community would deal with this problem, and hit on an idea that might work pretty well and could cushion the community against the economic shocks that are on the horizon. The idea is to use a statist tool, legal tender, to our own advantage.
Imagine in forming the community, that to join, one would have to sign on to a list of contractual agreements (I imagine any anarchist community would have something like this). One item in the list is an agreement that one will always agree to take bitcoins in payment (using at worst the current exchange rate) for any good or service. Thus, the community would have the government-mandated legal tender of the dollar, and the legal tender of bitcoin explicitly agreed to by all members of the community. Either could be used.
What would happen? First, everyone would have to implement a bitcoin infrastructure since they have agreed to take it in payment. They’d get wallets installed in their computers, figure out what exchanges to use, and in general develop the expertise for using it.
At first, however, few bitcoin transactions would take place. The dollar is simply more convenient. When inflation starts to get heavy, though, that convenience will start to disappear as the need to convert dollars into something else becomes important.
At some point people, instead of taking payment in dollars and converting a few into bitcoins now and then, will start demanding payment in bitcoins, and maybe converting a few into dollars when necessary.
“Now wait a minute,” you might say, “isn’t it required that people accept dollars as payment?” Not according to the U.S. Treasury: This statute means that all United States money as identified above are a valid and legal offer of payment for debts when tendered to a creditor. There is, however, no Federal statute mandating that a private business, a person or an organization must accept currency or coins as for payment for goods and/or services. One can offer payment of dollars for any debt, but one is not required to receive them.
Notice above I specified “using at worst the current exchange rate”? To demonstrate by example, imagine the current exchange rate is one bitcoin equals 5 dollars. The vendor is selling some object for one bitcoin. He can charge no less than 5 dollars for the object. The point is that as inflation sets in, even the current exchange rate does not compensate for the inconvenience of having to get out of the dollar quickly before its value evaporates. A vendor may want to charge 7 dollars for that one-bitcoin object rather than 5, to compensate for that inconvenience. As inflation kicks into high gear, the premium may rise very high, and some will simply stop taking dollars at all.
Does Gresham's Law cause problems? It states, "Bad money drives out good if their exchange rate is set by law." I don’t think it causes problems; the exchange rate is set by the market. Before inflation, there will be a balance, neither one driving out the other. After inflation, particularly as local vendors add a premium to purchases using dollars, there will actually be a tendency to drive out the bad currency, the dollar. People will spend any dollars they receive within the community for purchases outside the community, where no premium is charged for payment in dollars. But then for hyperinflation, the premium really is charged even if it’s not explicit--vendors everywhere start anticipating inflation and compensating for it.
Keep in mind that bitcoins will likely start deflating at the same time dollars are inflating, since people will be looking a lot harder for alternatives. The demand for bitcoins will go up.
OK, then the question must arise, “Why bother?”
The point is that when inflation starts happening, people start looking around for alternatives, but often it is too late. It takes time to bring an alternative infrastructure online. When the dollar bites the dirt, there likely won’t be any more stable fiat currencies that are widely traded in your community. Even for plain old gold and silver, it will take some time to get used to payment with them. The point is to avoid most of the shocks that people will be experiencing elsewhere--to avoid having empty bellies, to put it bluntly.
Of course, the community agreement might also specify that some percentage of wealth must be in silver and gold (how to enforce that is a question...). Also, there are other possibilities besides bitcoin; you just want a currency not controlled by government or the banks.
So, what to do if we aren’t joining such a community? It’s tougher, because even if you want to get into bitcoins to avoid these shocks, the vendors you interact with are mostly not using them. I don’t know the answer to this question. I just thought I’d kick this idea around, that’s all. If any such communities are currently being formed, this might be a good requirement to consider having for them.