How can a country ensure its national currency is used by its citizens?

External question — Economics Stack Exchange Author: Keavon Original post: https://economics.stackexchange.com/questions/16110 License: CC BY-SA 3.0 — https://creativecommons.org/licenses/by-sa/3.0/ Adaptation: HTML converted to plain text; contact email addresses removed. I am wondering how countries are able to force everyone to use its own currency, instead of some external currency (like the U.S. dollar or Bitcoin or cookies or something else not under government control). If businesses and citizens decide that they do not like the national currency (perhaps it is too turbulent or some other reason), and instead decide that they would like to "barter" a third-party currency for goods and services rather than "buying" those goods and services with the national currency, then the country would lose control of its own currency. This does happen at a small scale, where small businesses may accept a cryptocurrency instead of the local currency. What different methods can a country employ to ensure that it does not lose control of its currency because its citizens switch to an unofficial alternate currency not controlled by the government? If this situation does occur, how can a government still collect taxes on the exchange of this alternate money for goods and services? If I wanted to pay someone to mow my lawn in cookies instead of currency, the government could not tax this. If every business and citizen began treating cookies as the main form of payment, the government would lose all tax revenue. How can it stop this from happening? If the answer involves creating a law that says "10% of all cookies (or bitcoins or something else) must be given to the government", then what prevents that currency from swiftly changing its name? Perhaps cookies become brownies, which do not fall under the law. Or bitcoins become a different cryptocurrency, or just change their name. This would become a game of cat-and-mouse between the laws and the currency. It seems like accepting alternate, nontaxable unofficial currencies, would become economically beneficial for both companies and individuals. Yet established governments in the world do not have this problem. How?

External answer — Economics Stack Exchange Author: Commissar Vasili Karlovic Original post: https://economics.stackexchange.com/a/16113 License: CC BY-SA 3.0 — https://creativecommons.org/licenses/by-sa/3.0/ Adaptation: HTML converted to plain text; contact email addresses removed. First of all, please check the properties of money and keep them in mind. Indeed money is a convention, but nobody forces you to use it. For example, prisoners use ciggarettes as a medium of exchange. But let's assume you are the absolute ruler of a country and you want your people to use your currency. You can either do it by force or you have to give incentives to your citizens. The most important function of a new currency is to hold its value. If let's say my new currency holds value against yen, dollar or euro, then there's no reason for not using it. It's convenient and stable. How to do this? Via monetary and fiscal policy, using gold standard or by giving it prefix value against another stable currency. For example, a bunch of eastern european countries have a prefixed exchange like Bulgaria (check Bulgarian lev in wikipedia).

External answer — Economics Stack Exchange Author: TheSaint321 Original post: https://economics.stackexchange.com/a/16116 License: CC BY-SA 3.0 — https://creativecommons.org/licenses/by-sa/3.0/ Adaptation: HTML converted to plain text; contact email addresses removed. Legally what you are describing is bartering, i.e: exchanging goods or services for other goods or services. According to the U.S IRS bartering counts as taxable income and must be reported on tax forms for the fair market value of the product as income. ( https://www.irs.gov/uac/four-things-to-know-about-bartering-1 ). While in practice some kid mowing his neighbors lawn who gets paid in cookies probably can get away with tax avoidance in the same way that waiters can get away with not reporting their cash tips as income if the entire system shifted over to bartering rather than using USD you better believe the IRS would step up their enforcement. Basically, it doesn't matter what is being exchanged for goods and services for tax purposes. What matters is the fairmarket value of the exchange. So if I give you 1 bitcoin for doing my taxes then the gov't will tax you the same as if I paid you in the fair market value for bitcoins ($1127.90 at present rates) (Edit: This obviously only applies to the U.S but I imagine most countries have similar regulations to get around this exact loophole)

External answer — Economics Stack Exchange Author: Torp Original post: https://economics.stackexchange.com/a/20495 License: CC BY-SA 3.0 — https://creativecommons.org/licenses/by-sa/3.0/ Adaptation: HTML converted to plain text; contact email addresses removed. Actually quite a few countries with a non stable / non trusted currency use a foreign one. It's not even so obvious some times, like when bills are in the local currency but their value is actually based on say the euro exchange rate at the day of billing.

External answer — Economics Stack Exchange Author: Nico Damascus Original post: https://economics.stackexchange.com/a/61191 License: CC BY-SA 4.0 — https://creativecommons.org/licenses/by-sa/4.0/ Adaptation: HTML converted to plain text; contact email addresses removed. It is not necessary for a country to force its citizens to use a single currency. People will use currencies even without coercion. As Robert Nozick describes in Anarchy, State, and Utopia: Within a barter system, there is great inconvenience and cost to searching for someone who has what you want and wants what you have, even at a marketplace , which, we should note, needn’t become a marketplace by everyone’s expressly agreeing to deal there. People will exchange their goods for something they know to be more generally wanted than what they have. For it will be more likely that they can exchange this for what they want. For the same reasons, others will be more willing to take in exchange this more generally desired thing. Thus persons will converge in exchanges on the more marketable goods, being willing to exchange their goods for them ; the more willing, the more they know others who are also willing to do so, in a mutually reinforcing process. (This process will be reinforced and hastened by middlemen seeking to profit in facilitating exchanges, who themselves will often find it most expedient to offer more marketable goods in exchange.) For obvious reasons, the goods they converge on, via their individual decisions, will have certain properties: initial independent value (else they wouldn’t begin as more marketable), physically enduring, non-perishable, divisible, portable, and so forth. No express agreement and no social contract fixing a medium of exchange is necessary. There is a certain lovely quality to explanations of this sort. They show how some overall pattern or design, which one would have thought had to be produced by an individual’s or group’s successful attempt to realize the pattern, instead was produced and maintained by a process that in no way had the overall pattern or design “in mind.” After Adam Smith, we shall call such explanations invisible-hand explanations . (“Every individual intends only his own gain, and he is in this, as in so many other cases, led by an invisible hand to promote an end which was no part of his intention.”)... Of course, this is all quite philosophical, which is the point of Nozick's work: Fundamental explanations of a realm are explanations of the realm in other terms; they make no use of any of the notions of the realm. Only via such explanations can we explain and hence understand everything about a realm; the less our explanations use notions constituting what is to be explained, the more ( ceteris paribus ) we understand. Consider now complicated patterns which one would have thought could arise only through intelligent design, only through some attempt to realize the pattern. One might attempt straightforwardly to explain such patterns in terms of the desires, wants, beliefs, and so on, of individuals, directed toward realizing the pattern. But within such explanations will appear descriptions of the pattern, at least within quotation marks , as objects of belief and desire. The explanation itself will say that some individuals desire to bring about something with (some of) the pattern-features, that some individuals believe that the only (or the best, or the . . .) way to bring about the realization of the pattern-features is to . . ., and so on. Invisible-hand explanations minimize the use of notions constituting the phenomena to be explained; in contrast to the straightforward explanations, they don’t explain complicated patterns by including the full-blown pattern-notions as objects of people’s desires or beliefs. Invisible-hand explanations of phenomena thus yield greater understanding than do explanations of them as brought about by design as the object of people’s intentions. It therefore is no surprise that they are more satisfying. An invisible-hand explanation explains what looks to be the product of someone’s intentional design as not being brought about by anyone’s intentions. We might call the opposite sort of explanation a “hidden-hand explanation.” A hidden-hand explanation explains what looks to be merely a disconnected set of facts that (certainly) is not the product of intentional design, as the product of an individual’s or group’s intentional design(s). But, to apply more economic rigour, you may wish to read Kiyotaki and Wright's 1989 paper, On Money as a Medium of Exchange and their later 1993 paper, A Search-Theoretic Approach to Monetary Economics . The mathematics here is quite simple and ingenious, and corresponds well with what Nozick alluded to, namely, about— Search costs The double coincidence of wants An equilibrium means of exchange The adoption of fiat money Social welfare