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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?

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    $\begingroup$ en.wikipedia.org/wiki/Currency_of_Ecuador $\endgroup$ – Giskard Apr 5 '17 at 8:23
  • $\begingroup$ I don't follow. Why is it any harder for a country to tax an exchange of cookies than an exchange of its local currency? They can simply insist that tax on the fair market value of all bartered items be paid in local currency (as, for example, the United States already does). $\endgroup$ – David Schwartz Apr 5 '17 at 8:26
  • $\begingroup$ @DavidSchwartz However the government loses control of the currency (it cannot affect things such as minting and inflation rates), since that is left up to an external authority. Your second sentence sounds like a basis for an answer to my question, particularly the requirement that it be paid in the local currency. I would encourage you to expand upon that concept in an answer! $\endgroup$ – Keavon Apr 5 '17 at 8:37
  • $\begingroup$ @denesp The case with Ecuador was something I had in mind when asking this question, which is why I mentioned the use of the U.S. dollar as an example of an alternate currency. How does Ecuador still manage tax revenue if people are not using their currency? Although already caused by mismanagement of inflation rates, how does the Ecuadorian government manage control over their inflation rates and minting rates when their currency is irrelevant in the eyes of its people? $\endgroup$ – Keavon Apr 5 '17 at 8:42
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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).

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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)

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  • $\begingroup$ This answer does a good job explaining how the government can tax other forms of payment (to ensure it still gets tax revenue), but does not fully explain how the government can keep its citizens using its local currency (to maintain control over its currency's value and economy). From what I gathered, it seems that a government can require that taxes on these bartered transactions can be collected in only the local currency, which means residents need this currency to pay taxes, giving value to the currency. If that is indeed the primary reason, I would suggest including that in your answer. $\endgroup$ – Keavon Apr 5 '17 at 18:55
  • $\begingroup$ There really isn't anything that stops citizens from using another country's currency except for 1) it is by far easier to obtain currency printed in your host's country, and 2) due to transaction costs you lose some value by converting it to your national currency. There are scenarios however where what you are describing has occurred and a country has begun using the currency of another in place of the central bank issued currency. Ecuador for example used the Sucre up until 2000 when they started officially using U.S dollars due to the volatility of their national currency. $\endgroup$ – TheSaint321 Apr 5 '17 at 19:12
  • $\begingroup$ The question wasn't really about barter, but about using foreign currency in transactions inside a country. $\endgroup$ – Torp Feb 8 '18 at 17:08
  • $\begingroup$ My point wasn't that using foreign currency to pay for goods/services is the exact same as bartering. My point was that at least in the US they will tax any income you receive even if the income isn't in U.S. dollars. If the income is sheep they will tax the sheep, the same applies to bitcoin or any foreign currency. You can't simply say "Well I earned 0 US dollars but 100k UK Pounds so my income is 0 and I don't owe any taxes" That's not how it works. $\endgroup$ – TheSaint321 Feb 12 '18 at 15:11
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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.

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