Chris Mayer — Peter Thiel Explains What Backs the U.S. Dollar

…Thiel gave the right answer, in clear terms, to his own question, and consequently, why Bitcoin is no threat to the U.S. dollar: 

“You will not be able to pay your taxes in Bitcoin. You have to pay them in dollars. If you don’t pay them with dollars, there will be people who will show up with guns to make you pay them.” 

Coercion is what holds the U.S. dollar system together. “Tax-driven money” is the phrase that economists use to describe the theory. It applies to all sovereign currencies — such as the yen, the euro and China’s renminbi. 

This does not mean that people accept dollars only because they have to pay taxes. It means that the existence of taxes is sufficient to create demand for a currency.

The idea that taxes drive money is not new. German economist G.F. Knapp wrote a book about it in 1905. British diplomat Alfred Mitchell-Innes independently arrived at the same set of ideas in a pair of brilliant papers in 1913 and 1914. You can find elements of the approach at least as far back as Adam Smith.

So Peter Thiel is a Chartalist. Who knew?

Continues with Randy Wray's exposition of money creation.

Daily Reckoning
Peter Thiel Explains What Backs the U.S. Dollar
Chris Mayer