Market Responses to Currency Failures

There are disturbances in the fiat currency force, which have people pursuing alternative currencies and means of settling payments.

June 17, 2019

By: Bobby Casey, Managing Director GWP


The government operates on a similar model as that in the Wizard of Oz. It requires that everyone subscribe to the singular way of one central power. Everyone under that jurisdiction recognizes the authority of the leaders to make and enforce rules. Everyone accepts the legitimacy of their currency.

This general understanding and subsequent compliance of the masses makes it so the average ratio of police to civilian can be roughly 1 to 500. This is why most countries have central banks with one centrally controlled currency. And this is why you can have a grossly understaffed IRS that still manages to capture over 80% of taxes owed despite its inability to enforce tax codes.

Things fall apart when credence in that arrangement begins to wane.

If the assumed purpose of police is to keep citizens safe, but an overwhelming number of people are being harassed and incarcerated for victimless offenses, then the legitimacy of the police is compromised.

If the purpose of a central bank was to stabilize the economy, and mitigate any harsh turns, but all it has actually done is debase the currency and used its monopoly to impose capital controls, then the necessity of that institution becomes suspect.

When the interests they purport to serve are neglected for other special interests, including their own, the arrangement is shaken. Like any relationship, you cannot rebound from certain betrayals.

The “Blue Dollar” in Argentina

Between 2011 and 2016, the Argentinian government controlled the exchange rate between their peso and the US dollar. Because this was an artificial value assessment, Americans could get a much better exchange on the street known as the “Blue Dollar”.

A savvy traveler could fetch anywhere from 50% to 100% more pesos per dollar in these “illegal” exchanges. The elimination of that fixed exchange rate when Mauricio Macri took office more or less did away with the “blue” market, although some vestiges still remain.

When Argentinians couldn’t even buy US dollars under the old regime, they bought them under the black market. Now that the Argentinian peso floats freely in the market without restrictions, travelers are getting fair market value.

The Italian Lira & Mini T-Bills

As of February 2002, the Italian lira was no longer considered legal tender. The country officially switched to the Euro. Yet there are liras still in active circulation.

Giuseppe Arbore, a deputy in the Guardia di Finanza, which investigates financial crimes testified that criminal organizations still use the lira:

‘When a banknote is accepted by an organization internally, even if it is outside the law as a legal value, it can settle transactions. We are obviously talking about illicit organizations.’

This speaks to the inherent purpose of money itself. Provided all parties accept the legitimacy of the currency being used — be it sacks of flour or in this case lira — then business can continue.

Regardless of the illegality of the mafia’s exploits, their use of the lira is a very practical free market response to the controls on the euro. A response not too different from what lead to the advent of cryptocurrencies.

The testimony of Arbore was prompted by discussions of Italy possibly offering a mini T-bill to pay state creditors. It has not even been introduced into official channels to codify such a thing. It was just an idea defined by the following:

  • Mini T-bills would be an IOU from the government.
  • They would yield no interest and have no due date.
  • They would be guaranteed by the state and would be accepted by the government for the payment of taxes.
  • There would be no obligation for third parties to accept them.

If it were to operate as a parallel currency, then it would be a violation of EU terms, a step toward exiting the EU, or abandoning the euro altogether. Alternatively, it operates within the euro and adds to their debt. Either way, this is not a good idea.


What can any government do to prevent groups of people from ascribing value to something and deeming it a currency? People already trade in favors all the time. Full industries have sectors within them that run on trade.

Before crypto, there was gold. Gold is still here, obviously, but that was the known hedge against the dollar. The beauty of crypto is the privacy and decentralized structure of blockchain. There are a finite number of any crypto currency, which has people breaking Bitcoin down into Satoshis (0.00000001).

More assurances and stability has been offered by cryptocurrencies than fiat currencies as the basic agreement has been abandoned by central banks.

Gary Alford is the IRS agent who helped bring down Silk Road’s Ross Ulbricht. He heads a team that pursues cryptocurrency cases and seems very eager to catch those not paying their “fair share”. The IRS sees cryptocurrency as “property”, not a currency. So when it appreciates, those are capital gains that should be reported, however that’s not what’s happening:

Although the law requires cryptocurrency investors to report gains, not many comply. Alford cited an IRS summons to Coinbase in November 2017 that showed ‘more than 14,000 Coinbase users have either bought, sold, sent or received at least $20,000 worth of bitcoin in a given year,’ but only about 800 taxpayers reported gains.

Prior to all the IRS and FinCen guidance, Bitcoin existed. People pleaded for it to be legitimized, insisting it’s a workable form of alternative currency. The government listened, and all these regulations emerged.

Perhaps the Italian mafia is on to something: don’t ask for permission to use a currency. Just use it and go about your business quietly.

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