So far, the debate on bitcoin and whether it can replace gold or other currencies as a medium of exchange or store of value has been very contentious.
For a currency to be a medium of exchange, a significant majority of people should believe that it will be accepted by all or a large number of people in a given economy, and to be a store of value, it should not be extremely volatile. It seems that in the absence of credible central government sanctions backing bitcoin or other virtual currencies, it is very unlikely they would replace currencies. And since bitcoin lacks any intrinsic value, the likelihood that the gold would be replaced by it is nil.
As we know, with the advent of the fiat money, the only reason that A is willing to accept a piece of paper as a banknote/legal tender is that B is willing to accept it from A and C is willing to accept it from A and B, ad infinitum. This means that in a given economy, everybody believes that everybody else believes that banknotes have some sort of credibility attached to them so that everybody in the economy will accept those notes. However, if one day, everybody loses his faith in the currency, the currency will lose its value entirely. Since the faith in a currency is of a dynamic and variable nature, it can be changed or lost by vicissitudes of the state of affairs in a given society.
Here is where the use of force and credibility originating from state’s monopoly on the legitimate use of physical force or violence would come in handy. Machiavelli, writing in the 16th century on prophets and conquerors, and the reasons for their great achievements, notes:
For a currency to be a medium of exchange, a significant majority of people should believe that it will be accepted by all or a large number of people in a given economy, and to be a store of value, it should not be extremely volatile. It seems that in the absence of credible central government sanctions backing bitcoin or other virtual currencies, it is very unlikely they would replace currencies. And since bitcoin lacks any intrinsic value, the likelihood that the gold would be replaced by it is nil.
As we know, with the advent of the fiat money, the only reason that A is willing to accept a piece of paper as a banknote/legal tender is that B is willing to accept it from A and C is willing to accept it from A and B, ad infinitum. This means that in a given economy, everybody believes that everybody else believes that banknotes have some sort of credibility attached to them so that everybody in the economy will accept those notes. However, if one day, everybody loses his faith in the currency, the currency will lose its value entirely. Since the faith in a currency is of a dynamic and variable nature, it can be changed or lost by vicissitudes of the state of affairs in a given society.
Here is where the use of force and credibility originating from state’s monopoly on the legitimate use of physical force or violence would come in handy. Machiavelli, writing in the 16th century on prophets and conquerors, and the reasons for their great achievements, notes:
“the nature of the people is variable, and whilst it is easy to persuade them, it is difficult to fix them in that persuasion. And thus it is necessary to take such measures that, when they believe no longer, it may be possible to make them believe by force.”
Like people's belief, their faith in a given currency is subject to change. Although people are willing to accept the virtual currencies right now, and they have come to believe that there are enough people with whom they can exchange virtual currencies, no one knows whether these virtual currencies would survive without the backing of the state if an exogenous shock, that can lead to loss of faith in the currency, occurs.
Therefore, to fix the people's belief in a given currency, every now and then, the use of state's monopoly on the use of force that backs up the currency is necessary. And without the use of such a credible force, it is less likely that a currency can survive the winds of time.
Therefore, to fix the people's belief in a given currency, every now and then, the use of state's monopoly on the use of force that backs up the currency is necessary. And without the use of such a credible force, it is less likely that a currency can survive the winds of time.
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